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Differences in Forms of Franchising Area Development, Subfranchising, &

Area Representation

Presented By: Bret Lowell

DLA Piper US LLP

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Overview

• Forms of Multiple Unit Franchising• Disclosure Issues• Choice of Multiple Unit Techniques• Drawbacks of Multiple Unit Franchising• Benefits of Multiple Unit Franchising

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Techniques

• Area Development• Subfranchising• Area Representation

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Single Unit

FF’’oror

SingleSingle--Unit FranchiseeUnit Franchisee

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• Benefits of Single Unit– Franchisee is Easy to Manage and Lead– Franchisee Unlikely to Impact Entire System

• Drawbacks of Single Unit– Slow Growth– Many Franchisees to Work With– Franchisees Less Sophisticated– Franchisees Weaker Financially– Franchisees Costly to Manage and Supervise

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FF’’oror

DD’’or or (F(F’’ee)ee)

D/AD/AFA 1FA 1 FA 2FA 2 FA 3FA 3

Area Development

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Benefits of Area Development

• Fewer Franchisees In the System• No Need to Approve New Applicants• Large Up Front Fees• Schedule for Development• Each Location has Single Agreement• Franchisees Generally Sophisticated• Reduced Per Unit Support Costs

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Drawbacks of Area Development

• Relying on Financial Resources of One Developer

– Negotiation of Favorable Agreement– Lock-in of Franchise Agreement Terms– Powerful Negotiator– Potential for Loss of Large Market

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Subfranchising (2 party)

FF’’oror

Sub FSub F’’oror

Sub FSub F’’eeee

FA 1 FA 2 FA 3

SFA

Sub FSub F’’eeee Sub FSub F’’eeee

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Subfranchising (3 party)

FF’’oror

Sub FSub F’’ororSFA

SubSubFF’’eeee

SubSubFF’’eeee

SubSubFF’’eeee

SubSubFF’’eeee

FA 1 FA 2 FA 3 FA 4

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Benefits of Subfranchising

• Not Responsible for Day to Day• Large Up Front Fee• Schedule for Unit Openings• Subfranchisor Provides Training, Inspection,

Collections, Etc.• Lower Costs

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Drawbacks of Subfranchising

• Registration of UFOC• Double Disclosure• Virtually No Control Over Unit Franchisees• Level of Performance

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Area Representative

FF’’oror

Area RepArea RepARA ($?)ARA ($?)

FA 1FA 1 FA 2FA 2

FF’’eeeeFF’’eeee

Solic

it * Service

* Not sell; not negotiate

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Franchise Brokerage

FF’’oror

BrokerBrokerFBA

FA 1 FA 2

FF’’eeeeFF’’eeee

Solic

it *

Solicit *

* Not sell; not negotiate

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Benefits of Area Representatives

• Not Relying on Financial Resources of One Area Developer

• Rapid Growth Possible• Retain Control• Area Rep Provides Site Selection, Training,

Field Support• Manageable Registration & Disclosure

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Drawbacks of Area Representatives

• Potential Liability• Less Control Over the Day-to-Day Operations• Broker Issues

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Questions...

• Disclosure to Whom?

• How Many UFOC?

• Which Entity in UFOC?

• Who Handles Registration?

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FF’’oror

DD’’or or (F(F’’ee)ee)

D/AD/AFA 1FA 1 FA 2FA 2 FA 3FA 3

Area Development

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Questions...

• Disclosure to Whom?• How Many UFOC?• Which Entity in UFOC?• Who Handles Registration?

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Subfranchising (2 party)

FF’’oror

Sub FSub F’’oror

Sub FSub F’’eeee

FA 1 FA 2 FA 3

SFA

Sub FSub F’’eeee Sub FSub F’’eeee

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Questions...

• Disclosure to Whom?• How Many UFOC?• Which Entity in UFOC?• Who Handles Registration?

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Area Representative

FF’’oror

Area RepArea RepARA ($?)ARA ($?)

FA 1FA 1 FA 2FA 2

FF’’eeeeFF’’eeee

Solic

it * Service

* Not sell; not negotiate

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Questions...

• Disclosure to Whom?• How Many UFOC?• Which Entity in UFOC?• Who Handles Registration?

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Franchise Brokerage

FF’’oror

BrokerBrokerFBA

FA 1 FA 2

FF’’eeeeFF’’eeee

Solic

it *

Solicit *

* Not sell; not negotiate

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Disclosure Issues

• Area Development Agreement– Typically Include in Main UFOC– Key Disclosures

• Item 1 Description of the Area Development Opportunity• Item 5 Area Development Fee• Item 12 Territory and Schedule• Item 17 Cross-default to ADA (one-way)• Item 22 Copy of ADA

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Disclosure Issues• Subfranchise Agreements

– Not Practical to Include in Main UFOC– Key Disclosure (to Subfranchisor)

• Item 1 The Franchisor• Item 5 Subfranchise Fee• Item 6 Ongoing Fees (Royalty Split)• Item 11 Franchisor’s Obligations• Item 20 List of Subfranchisor Statistics

– Key Disclosure (to Subfranchisees)• Item 1 Description of Subfranchisor• Item 2 Subfranchisor Information• Item 11 Subfranchisor Responsibilities• Item 21 Subfranchisor Financial Statements

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Disclosure Issues• Area Representative Agreements

– Optional To Include in Main UFOC (If $ paid)• Item 1 Description of the Area Rep Opportunity• Item 5 Initial Fees Paid by Area Rep• Item 7 Initial Investment of Area Rep• Item 9 Franchisee Obligations• Item 11 Franchisor Obligations• Item 12 Territorial; Rights of Area Rep• Item 20 Area Rep Statistics• Item 22 Copy of Area Rep Agreement

– Disclosure to Franchisees• Area Rep as “Broker”

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Conversion from Single-Unit to Multi-Unit

• Overlay of Additional Agreement (ADA, SFA, or ARA)

• Registration and Disclosure• Exceptions for Sales to Existing Franchisees• Then-current F/A May Differ from Existing F/A

– Reconcile in Favor of Old– Reconcile in Favor of New– No Reconciliation

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Selection Criteria

TechniqueTechnique

TimeTime TerritoryTerritory

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Resources

• Financial• Personnel• Physical Facilities• Local Credibility• Regional Knowledge• Legal Capability

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Objectives

• Rapid Expansion• Low Risk• System Control• Cash Flow

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Analysis of Multi-Unit Alternatives

ObjectiveObjective Single UnitSingle Unit Area Dev.Area Dev. SubSub--Fran.Fran. Area Rep.Area Rep.

RapidRapid ExpansionExpansion Low Moderate High Moderate

RiskRisk Low Moderate High Moderate

System System ControlControl High Moderate Low High

Cash FlowCash Flow Low Moderate High Moderate

CumulativeCumulative OO OO OO + 1+ 1

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Disadvantages• Financial

– Giving it all away

• Loss of Control (large & powerful/difficult to manage & lead/bargaining power)– Sales – Operations

• Substantial System Impact• Registration/Disclosure• Complex Agreements• Vicarious Liability

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Advantages• Accelerated Pace• Another’s Resources

– Financial– Human

• Local Presence– Credibility– Knowledge (conditions and competition)

• Risk Sharing• Sources of Ideas• Cash Flow

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