Legal Issues In Franchising
William A. [email protected]
QUESTIONS FOR FRANCHISORS
Franchising Or Other Capital?• Franchising• Loans for Expansion• Project Investors • Company Investors:
Friends, Angels, Private Eqity
• Public Investors
Franchising Laws: FederalFederal Trade Commission:
a. Franchise Disclosure Document Rules
b.Franchisee and Customer Complaints
c. Truth In Advertising Rules
Franchising Laws: StateIllinois:
1. Attorney General: Regulates Disclosures (FDD OK)Takes Customer/Franchisee Complaints
2. Secretary of State: Regulates Franchise Brokers
Franchise System Needs• System Name• Artwork for logo and ads
and all system elements• Franchisee recruitment• Franchise disclosure
documents and other legal reports, securities disclosures, taxes
• Supplier contracts, terms• Real estate program• Operator training and
systems documentation
ISSUES FOR FRANCHISEES
The Franchise Disclosure Document (FDD)
Big Items:
Item 1: Franchisor backgroundItem 3: Material Litigation (and check personal and organizational judgment and credit)Item 5, 6, and 7: Franchisee upfront, ongoing fees and costsItem 20: Locations and Expansion Plans
FDD May Not Have• Earnings Claims• Unsuccessful Franchisee
Sites• Supplier and Other
Site/Contract Requirements
• New Advertising and Other Change Authority
• Old Name Franchisor Failed Systems
Your Best SourceOther Franchisees!
All current operators must be listed in FDD: CALL THEM!
YOUR FRANCHISE BUSINESS
Multiple Options For Entry• Buy An Existing Franchise• Buy Multiple Existing
Franchise Sites (If System Allows)
• Start A New Location• Take Over A Region And
Recruit Operators For Sites
• Start Your Own System
Best Success Predictor
Sweat Equity
Nothing replaces industry experience: Get Some, Or Get A Partner Who Has Experience
Your Franchise Business Plan• Visible Site• Franchise With High Net
Profit Potential• Franchise Type You Are
Qualified To Manage• Adequate Capital To Start
And Run Until Profitable• Sustainable Competitive
Advantages• Good Franchisor Support• High Quality Supplies
From Franchisor System
LEGAL ISSUES IN FRANCHISE SETUP
Franchisee Entity Selection
The Issues:
• Pass-Through Tax? Other Tax?
• Who Manages?• Who Controls?• What Investor Rights?• Who Can Bind The Entity?
(Agency)• What incentive programs
needed?
Site Issues• Lease or Buy?• If Lease, what rent,
buildout, uses, hours, signage, costs?
• If buy, need investors?• Build or lease: zoning,
building code, permits required?
• Traffic, site access issues, other infrastructure, sewerage and other fees/taxes/needs
Supplier Issues• Franchisor specifies, but
you and your credit pays• What if supplies are bad,
deliveries fail?• What about menu or other
product additions? (Franchisor may control)
Employee Issues• Healthcare mandates• EEO Mandates: customers
served, persons hired: avoid inappropriate hiring process
• Payroll issues (overtime, tax withholding, reports)
• Other HR/Benefits (yours or system)
• Frequent Employee Replacement/Retraining
• Shrinkage• Site Security
Partner Issues• Equipment
Providers/Reliability (Franchisor specifies, but you pay and deal with when break down)
• Cooks and Other Prima Donnas
• Money Split And Other Arguments
• Divorce, Retirement, Resignation, Bankruptcy, Death
FRANCHISE LITIGATION
Franchisor vs Franchisee• “7-Eleven Exploiting
Franchisees”: CA Huffington Post, August 1, 2013
• Stratus Building Solutions and related Camino Real Ventures accused of fraud, violations of state business opportunity laws (TX), 2013
• Play N Trade Video game franchise, market losses
Franchisor Controls Court• Mandatory Arbitration,
Franchisor picks Arbitrator
• Mandatory Venue In Franchisor Location
• Limited Franchisee Remedies (Only Fees Back?)
• No Guarantees of Supplier Services, Franchisee Income
Franchisee vs Supplier• Mandatory use of
Suppliers• Franchisor writes supply
contracts• Franchisees must
arbitrate or litigate within contract requirements, system elements
• UCC still applies, requires good faith and fair dealing
Franchisee vs Employee• Average “wrongful
termination” federal judgment, IL, over $600,000
• Age, national origin, race, religion, sexual orientation all protected categories for hiring, discipline, firing
• Sexual harassment and hostile workplace liability
Franchisee vs Public• Slip and Fall Liability• Dram Shop Liability• Product or Service Caused
Injury Liability• Credit and Collections
Issues
Franchisee vs Landlord• Landlord services
problems (snow/ice removal, garbage pickup)
• Landlord signage and buildout not done
• Rent escalators and passthroughs (energy costs, property taxes, cleaning, major building repairs)
Succession Planning• Buy-Sell to operator or
partners or family• Estate planning and other
capital gains reduction options
• Finding A Buyer: brokerage and other finder agreements
• Pricing The Exit• Term Sheets, Due
Diligence, and Sales Agreement/Closing
• Post-Closing Services and Disputes
ANY QUESTIONS?
William A. PriceAttorney at [email protected]/Fax 1-800-630-4780P.O. Box 1425, Warrenville, IL 60555