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29 09, 2018

Why do I have to sign a Personal Guaranty?!

By |2018-09-29T20:01:10+00:00September 29th, 2018|Categories: Legal|Comments Off on Why do I have to sign a Personal Guaranty?!

Signing a guaranty

Why do I have to sign a Personal Guaranty?!

By Jonathan Barber

When you consider buying into a franchise, you receive hundreds of pages of disclosures and contracts. Most likely, there is a personal guaranty somewhere in that huge PDF. It’s important to understand what a personal guaranty is and why most franchisors require that you sign one.

A personal guaranty is a promise to pay the debt or fulfill the obligation of another if that person or entity fails to do so. In franchise deals, almost every franchisee signs a franchise agreement as an entity. John Doe creates John Doe, LLC and signs the franchise agreement on behalf of John Doe, LLC instead of in his individual capacity. However, the franchisor requires John Doe to sign a personal guaranty. By signing this, John Doe is saying that he will pay any debts or fulfill any  obligations that John Doe, LLC fails to pay or perform. Yes, this grants the franchisor access to John Doe’s personal assets in the event his franchise venture goes south. This concept is scary to most franchisees, but it’s important to think about this from the other side of the deal.

If a franchisor didn’t require a franchisee to sign a personal guaranty, that franchisee could virtually do whatever he wants and exit the system upon a whim. Imagine that John Doe, above, buys into and opens up a childcare franchise. Let’s say that the franchisor didn’t require him to sign a personal guaranty.

Everything’s going great in Year Three of John Doe’s term, but he thinks he could make a ton of money selling craft beer in his community. He decides to start  brewing beer in one of his classrooms and opens up a pub on the back patio of the daycare. John Doe quickly gets a notice of default from the franchisor, because that’s a breach of several portions of his franchise agreement. John Doe transfers all of the assets out of his LLC and sends the franchisor a notice of termination, and continues operating his daycare-brewery.

Now, the franchisor can get a judgment against John Doe, LLC that it can’t execute because John Doe, LLC has no assets! The franchisor can’t go after John Doe individually because he never signed a personal guaranty. Now, the franchisor is stuck with a damaged brand, a terminated franchisee, a host of administrative and legal fees, and probably the cost involved with getting a new franchisee in that territory.

If John Doe had signed a personal guaranty, his feet would be held to the fire. He would then be personally responsible for making sure that he, through John Doe, LLC does not breach the terms of their franchise agreement. It’s amazing how compliant someone can be when his personal assets are at stake

The bottom line: A personal guaranty is a tool for ensuring franchisees have skin in the game. Requiring a personal guaranty to be signed by individual owner of a franchisee entity and his spouse is the industry norm. In the 300+ FDDs I’ve reviewed for prospective franchisees, I’ve never not seen a personal guaranty in a
franchise deal. While it’s something every prospective franchisee needs to consider in his risk analysis, it should not be a surprise or a deal breaker.

And by the way, if anyone wants to start a daycare-brewery franchise, call me!

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the world. Barber also represents emerging and established franchisors. Contact Barber at
JBarber@barberpowerlaw.com or by calling 980-202-5679.

Signing a guaranty

Why do I have to sign a Personal Guaranty?!

By Jonathan Barber

When you consider buying into a franchise, you receive hundreds of pages of disclosures and contracts. Most likely, there is a personal guaranty somewhere in that huge PDF. It’s important to understand what a personal guaranty is and why most franchisors require that you sign one.

A personal guaranty is a promise to pay the debt or fulfill the obligation of another if that person or entity fails to do so. In franchise deals, almost every franchisee signs a franchise agreement as an entity. John Doe creates John Doe, LLC and signs the franchise agreement on behalf of John Doe, LLC instead of in his individual capacity. However, the franchisor requires John Doe to sign a personal guaranty. By signing this, John Doe is saying that he will pay any debts or fulfill any obligations that John Doe, LLC fails to pay or perform. Yes, this grants the franchisor access to John Doe’s personal assets in the event his franchise venture goes south. This concept is scary to most franchisees, but it’s important to think about this from the other side of the deal.

If a franchisor didn’t require a franchisee to sign a personal guaranty, that franchisee could virtually do whatever he wants and exit the system upon a whim. Imagine that John Doe, above, buys into and opens up a childcare franchise. Let’s say that the franchisor didn’t require him to sign a personal guaranty.

Everything’s going great in Year Three of John Doe’s term, but he thinks he could make a ton of money selling craft beer in his community. He decides to start brewing beer in one of his classrooms and opens up a pub on the back patio of the daycare. John Doe quickly gets a notice of default from the franchisor, because that’s a breach of several portions of his franchise agreement. John Doe transfers all of the assets out of his LLC and sends the franchisor a notice of termination, and continues operating his daycare-brewery.

Now, the franchisor can get a judgment against John Doe, LLC that it can’t execute because John Doe, LLC has no assets! The franchisor can’t go after John Doe individually because he never signed a personal guaranty. Now, the franchisor is stuck with a damaged brand, a terminated franchisee, a host of administrative and legal fees, and probably the cost involved with getting a new franchisee in that territory.

If John Doe had signed a personal guaranty, his feet would be held to the fire. He would then be personally responsible for making sure that he, through John Doe, LLC does not breach the terms of their franchise agreement. It’s amazing how compliant someone can be when his personal assets are at stake

The bottom line: A personal guaranty is a tool for ensuring franchisees have skin in the game. Requiring a personal guaranty to be signed by individual owner of a franchisee entity and his spouse is the industry norm. In the 300+ FDDs I’ve reviewed for prospective franchisees, I’ve never not seen a personal guaranty in a
franchise deal. While it’s something every prospective franchisee needs to consider in his risk analysis, it should not be a surprise or a deal breaker.

And by the way, if anyone wants to start a daycare-brewery franchise, call me!

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the world. Barber also represents emerging and established franchisors. Contact Barber at
JBarber@barberpowerlaw.com or by calling 980-202-5679.

29 09, 2018

Part 3: Breaking Down the FDD

By |2018-09-29T21:01:43+00:00September 29th, 2018|Categories: Legal|Comments Off on Part 3: Breaking Down the FDD

Woman in Doorway of Shop

SPECIAL SECTION: PART 3

Breaking Down the FDD

Items 9 & 15: Franchisee’s Obligations

by Nicole Micklich

Last month’s edition opened with the idea that buying into a franchise system means accepting the notion that if you play by the rules, you get the benefits of brand awareness and franchisor support. Those rules are set out in the FDD and the franchise agreement. They become binding obligations of the franchisee when the franchise agreement is signed.

Item 9 of the FDD should contain a disclosure of all the “principal obligations of the franchisee under the franchise and other agreements” once the franchise agreement is executed. Item 15 must describe how much direct involvement the franchisee is required to have in the operation of the franchise business.

Item 9: Franchisee’s Obligations

Item 9 must provide prospective franchisees with detailed directions toward where to find the franchisee’s obligations in the franchise agreement. Franchisors must follow the FTC Rule and create a detailed table that refers to the sections in the franchise agreement that the franchisee should read to understand the franchisee’s specific obligations. The table should lead the franchisee to detailed information about the franchisee’s obligations.

If an obligation is contained in an ancillary agreement, the franchisor should direct prospects to the specific provision of the ancillary agreement. An ancillary agreement might be a covenant not to compete, an obligation that should be included in the table. Obligations imposed on the franchisee that are not listed in the FTC Rule must be included, as well, under the heading “Other”.

The table should include where to find requirements about transfers and renewals. Even though at the start of a relationship it might be hard to think about the end, prospective franchisees are about to make an enormous investment, they must consider exit options to protect that investment.

Prospective franchisees should use the table and review the contract provisions detailing the franchisee’s obligations. If a prospective franchisee does not understand those provisions, it is important to develop that understanding before signing the franchise agreement. To learn more, ask a franchise attorney.

Item 15: Obligation to Participate in the Actual Operation of the Franchise Business

Item 15 explains the role that the franchisee must have in the business operation. For example, some franchisors allow the franchisee to be an absentee owner, someone who owns the franchise without taking an active role in its management. Most though require the franchisee to have some active role in the franchised business. Item 15 should explain how much involvement the franchisor requires, and whether the franchisor requires the franchisee to provide on-site supervision of the business. Item 15 is especially important for prospective franchisees who intend to continue to work in a current job while starting-up their new franchised business.

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

Franchisors must follow the FTC Rule and create a detailed table that refers to the sections in the franchise agreement that the franchisee should read to understand the franchisee’s specific obligations. The table should lead the franchisee to detailed information about the franchisee’s obligations. The table must list 25 obligations in a form mandated by the FTC Rule. The top of it may look something like this:

FDD Chart
Woman in Doorway of Shop

SPECIAL SECTION: PART 3

Breaking Down the FDD

Items 9 & 15: Franchisee’s Obligations

by Nicole Micklich

Last month’s edition opened with the idea that buying into a franchise system means accepting the notion that if you play by the rules, you get the benefits of brand awareness and franchisor support. Those rules are set out in the FDD and the franchise agreement. They become binding obligations of the franchisee when the franchise agreement is signed.

Item 9 of the FDD should contain a disclosure of all the “principal obligations of the franchisee under the franchise and other agreements” once the franchise agreement is executed. Item 15 must describe how much direct involvement the franchisee is required to have in the operation of the franchise business.

Item 9: Franchisee’s Obligations

Item 9 must provide prospective franchisees with detailed directions toward where to find the franchisee’s obligations in the franchise agreement. Franchisors must follow the FTC Rule and create a detailed table that refers to the sections in the franchise agreement that the franchisee should read to understand the franchisee’s specific obligations. The table should lead the franchisee to detailed information about the franchisee’s obligations.

If an obligation is contained in an ancillary agreement, the franchisor should direct prospects to the specific provision of the ancillary agreement. An ancillary agreement might be a covenant not to compete, an obligation that should be included in the table. Obligations imposed on the franchisee that are not listed in the FTC Rule must be included, as well, under the heading “Other”.

The table should include where to find requirements about transfers and renewals. Even though at the start of a relationship it might be hard to think about the end, prospective franchisees are about to make an enormous investment, they must consider exit options to protect that investment.

Prospective franchisees should use the table and review the contract provisions detailing the franchisee’s obligations. If a prospective franchisee does not understand those provisions, it is important to develop that understanding before signing the franchise agreement. To learn more, ask a franchise attorney.

Item 15: Obligation to Participate in the Actual Operation of the Franchise Business

Item 15 explains the role that the franchisee must have in the business operation. For example, some franchisors allow the franchisee to be an absentee owner, someone who owns the franchise without taking an active role in its management. Most though require the franchisee to have some active role in the franchised business. Item 15 should explain how much involvement the franchisor requires, and whether the franchisor requires the franchisee to provide on-site supervision of the business. Item 15 is especially important for prospective franchisees who intend to continue to work in a current job while starting-up their new franchised business.

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

Franchisors must follow the FTC Rule and create a detailed table that refers to the sections in the franchise agreement that the franchisee should read to understand the franchisee’s specific obligations. The table should lead the franchisee to detailed information about the franchisee’s obligations. The table must list 25 obligations in a form mandated by the FTC Rule. The top of it may look something like this:

30 08, 2018

Part 2: Breaking Down the FDD

By |2018-08-31T00:16:58+00:00August 30th, 2018|Categories: Legal|Comments Off on Part 2: Breaking Down the FDD

Woman using tablet

SPECIAL SECTION: PART 2

Breaking Down the FDD

Item 8: Restrictions on Sources of Products and Services.

by Nicole Micklich

Part of buying into a franchise system is accepting the notion that if you play by the rules, you get the benefits of brand awareness and franchisor support. Item 8 of the FDD discusses suppliers and lays out sourcing restrictions for products and materials, which is especially important in food-based concepts.

Item 8 can be very revealing, so it’s important to understand. The franchisor may negotiate arrangements with approved vendors, and these arrangements may result in some franchisees paying more for certain items than if they bought the same items elsewhere. For example, a franchisor may designate only one approved supplier for cleaning products. The franchisor’s arrangement with the supplier results in advertising contributions to the franchisor, which the franchisor can allocate to any market. This arrangement obviously works well for the franchisor—but it may have seemingly little benefit for a franchisee.

A franchisee, in a market that does not receive those advertising dollars, might prefer a brand of cleanser that costs half the price of the approved brand. But using a different product can put the franchisee out of compliance. And, as a franchisee, you stand to benefit from the brand awareness developed by the franchisor.

Item 16: Restrictions on What the Franchisee May Sell

This item should disclose any restrictions or conditions relating to what a franchisee sells. It may say, “We require you to offer and sell only those goods and services that we have approved. You must offer all goods and services we designate as required for all franchisees.” This means every franchisee must offer all the required products or services. On the other hand, Item 16 may reveal that franchisees in certain regions may offer different products, because regional preferences may vary.

Sometimes a system has additional goods or services that are optional for qualified franchisees. Item 16 might inform that optional services can be offered by franchisees in compliance with certain obligations. For example, an auto service concept might allow qualified franchisees to offer rustproofing services to customers. Only franchisees who are in compliance and have undergone specific training required by the franchisor may be permitted to offer rustproofing services. If these kinds of optional services can lead to increased
profitability, they’re worth knowing about.

Item 16 should also explain whether the franchisor has the right to change the types of good or services the franchisee can sell, and if there are any restrictions on that right. FDDs often indicate that there are no limits on the franchisor’s right to add, modify, or delete products and services that franchisees are required to offer. The FDD may say, “We reserve the right add additional required goods and services in the future and to withdraw goods and services we previously authorized.” And would add, “There are no limits on our right to do so.” However, sometimes there is a restriction or possible exception, and in that instance, the FDD could say, “There are no limits on our right to do so, except that the investment required of a franchisee for equipment, supplies, and initial inventory will not exceed $15,000 per year.” Or, “There are no limits on our right to do so, but we may make limited exceptions based on special circumstances, although we are not required to do so.” When franchisors change the types of goods or services the franchisees can sell, it can be costly for franchisees.

It’s important for prospective franchisees to understand the franchisor’s rights and limitations. For instance, a franchisor might disclose: “We have the right to designate additional required goods and services and to withdraw any previous approvals. There are no limitations on our right to do so.” Or, a franchisor might state: “We have the right to add additional required services. There are no limits on our right to do so, except that the investment required of a franchisee for equipment, supplies, and initial inventory will not exceed $15,000 per year.” Prospective franchisees should consider whether the franchisor can change requirements during the term of the franchise agreement.

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

Woman using tablet

SPECIAL SECTION: PART 2

Breaking Down the FDD

Item 8: Restrictions on Sources of Products and Services.

by Nicole Micklich

Part of buying into a franchise system is accepting the notion that if you play by the rules, you get the benefits of brand awareness and franchisor support. Item 8 of the FDD discusses suppliers and lays out sourcing restrictions for products and materials, which is especially important in food-based concepts.

Item 8 can be very revealing, so it’s important to understand. The franchisor may negotiate arrangements with approved vendors, and these arrangements may result in some franchisees paying more for certain items than if they bought the same items elsewhere. For example, a franchisor may designate only one approved supplier for cleaning products. The franchisor’s arrangement with the supplier results in advertising contributions to the franchisor, which the franchisor can allocate to any market. This arrangement obviously works well for the franchisor—but it may have seemingly little benefit for a franchisee.

A franchisee, in a market that does not receive those advertising dollars, might prefer a brand of cleanser that costs half the price of the approved brand. But using a different product can put the franchisee out of compliance. And, as a franchisee, you stand to benefit from the brand awareness developed by the franchisor.

Item 16: Restrictions on What the Franchisee May Sell

This item should disclose any restrictions or conditions relating to what a franchisee sells. It may say, “We require you to offer and sell only those goods and services that we have approved. You must offer all goods and services we designate as required for all franchisees.” This means every franchisee must offer all the required products or services. On the other hand, Item 16 may reveal that franchisees in certain regions may offer different products, because regional preferences may vary.

Sometimes a system has additional goods or services that are optional for qualified franchisees. Item 16 might inform that optional services can be offered by franchisees in compliance with certain obligations. For example, an auto service concept might allow qualified franchisees to offer rustproofing services to customers. Only franchisees who are in compliance and have undergone specific training required by the franchisor may be permitted to offer rustproofing services. If these kinds of optional services can lead to increased
profitability, they’re worth knowing about.

Item 16 should also explain whether the franchisor has the right to change the types of good or services the franchisee can sell, and if there are any restrictions on that right. FDDs often indicate that there are no limits on the franchisor’s right to add, modify, or delete products and services that franchisees are required to offer. The FDD may say, “We reserve the right add additional required goods and services in the future and to withdraw goods and services we previously authorized.” And would add, “There are no limits on our right to do so.” However, sometimes there is a restriction or possible exception, and in that instance, the FDD could say, “There are no limits on our right to do so, except that the investment required of a franchisee for equipment, supplies, and initial inventory will not exceed $15,000 per year.” Or, “There are no limits on our right to do so, but we may make limited exceptions based on special circumstances, although we are not required to do so.” When franchisors change the types of goods or services the franchisees can sell, it can be costly for franchisees.

It’s important for prospective franchisees to understand the franchisor’s rights and limitations. For instance, a franchisor might disclose: “We have the right to designate additional required goods and services and to withdraw any previous approvals. There are no limitations on our right to do so.” Or, a franchisor might state: “We have the right to add additional required services. There are no limits on our right to do so, except that the investment required of a franchisee for equipment, supplies, and initial inventory will not exceed $15,000 per year.” Prospective franchisees should consider whether the franchisor can change requirements during the term of the franchise agreement.

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

21 08, 2018

Legal Issues Restaurant Franchisees Face

By |2018-08-21T14:17:32+00:00August 21st, 2018|Categories: Legal|Comments Off on Legal Issues Restaurant Franchisees Face

Opening a Restaurant

Legal Issues Restaurant Franchisees Face

By Jason Power

Owning a restaurant can be a fun way to make money. Like any other business though, a restaurant franchise comes with its own set of legal issues that you, as the owner, must manage. Before you open your restaurant, talk with both a franchise attorney and an attorney who is well versed in the local laws in your state and those laws relating to restaurants. Here are five legal issues that restaurant owners typically encounter.

Business Structure

Your business structure—the actual place where your business is run—is important whether you are opening a restaurant franchise or any other type of business. When choosing your type of business structure, you should always talk with an attorney and accountant. An attorney can assist with setting up your business entity and making sure all the proper documentation is filed and signed by all owners. An accountant can help you navigate state and IRS regulations to determine if one business structure has a more advantageous tax status for you.

Permits and Licenses

When preparing to open your restaurant, research the laws of your city, country, or state. Any or all of these local governing bodies may require permits or licenses, which include a food-service permit, alcohol license, business license, and food-safety permit. It can take several weeks to get approved for licenses, so you should apply for these as soon as possible.

Employees

Employees can be one of the most frustrating issues with your restaurant, so you must be careful when hiring staff. All states have laws relating to employee wages and overtime, hours, and general working conditions. These laws, specifically those relating to employee wages, are why many fast-food restaurants are beginning to have customers use touch-screen computers for ordering, instead of paying higher wages for employees.

When working with employees, you must consult with your attorney and an insurance agent. The Affordable Care Act requires that you, as the employer, offer health benefits if you have more than 50 full-time workers or pay high penalties.

In addition to these concerns, you also need to ask each employee before you hire them whether they have any non-competition clauses with a former employer. If you hire an employee who is restricted by a non-competition agreement with a former employer, you could be liable to the former employer if they bring a lawsuit.

Uniformity

Because your restaurant is part of a franchise system, you will be required to follow the franchisor’s systems and procedures. This means that you will need to build your restaurant to the franchisor’s design standards. You will also need to use the franchisor’s menu, suppliers, recipes, etc. These systems and procedures imposed by the franchisor are designed to give customers a similar experience, no matter which franchised location they visit.

Customer Data Security

Everyday there are stories about a restaurant or retail chain with a data breach. This can be devastating for customers who have their credit-card information stolen, and it can cripple any business who is the victim of this breach. When speaking with the franchisor and your credit-card processing vendors, you need to understand PCI compliance and ensure your point-of-sale system is safe with proper encryption. Additionally, you would benefit from talking with your insurance agent about additional insurance coverage for data breaches.

Jason Power exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the country. Power also represents emerging and established franchisors. Contact him at jpower@barberpowerlaw.com or by calling 980-202-5679. Visit www.barberpowerlaw.com.

Opening a Restaurant

Legal Issues Restaurant Franchisees Face

By Jason Power

Owning a restaurant can be a fun way to make money. Like any other business though, a restaurant franchise comes with its own set of legal issues that you, as the owner, must manage. Before you open your restaurant, talk with both a franchise attorney and an attorney who is well versed in the local laws in your state and those laws relating to restaurants. Here are five legal issues that restaurant owners typically encounter.

Business Structure

Your business structure—the actual place where your business is run—is important whether you are opening a restaurant franchise or any other type of business. When choosing your type of business structure, you should always talk with an attorney and accountant. An attorney can assist with setting up your business entity and making sure all the proper documentation is filed and signed by all owners. An accountant can help you navigate state and IRS regulations to determine if one business structure has a more advantageous tax status for you.

Permits and Licenses

When preparing to open your restaurant, research the laws of your city, country, or state. Any or all of these local governing bodies may require permits or licenses, which include a food-service permit, alcohol license, business license, and food-safety permit. It can take several weeks to get approved for licenses, so you should apply for these as soon as possible.

Employees

Employees can be one of the most frustrating issues with your restaurant, so you must be careful when hiring staff. All states have laws relating to employee wages and overtime, hours, and general working conditions. These laws, specifically those relating to employee wages, are why many fast-food restaurants are beginning to have customers use touch-screen computers for ordering, instead of paying higher wages for employees.

When working with employees, you must consult with your attorney and an insurance agent. The Affordable Care Act requires that you, as the employer, offer health benefits if you have more than 50 full-time workers or pay high penalties.

In addition to these concerns, you also need to ask each employee before you hire them whether they have any non-competition clauses with a former employer. If you hire an employee who is restricted by a non-competition agreement with a former employer, you could be liable to the former employer if they bring a lawsuit.

Uniformity

Because your restaurant is part of a franchise system, you will be required to follow the franchisor’s systems and procedures. This means that you will need to build your restaurant to the franchisor’s design standards. You will also need to use the franchisor’s menu, suppliers, recipes, etc. These systems and procedures imposed by the franchisor are designed to give customers a similar experience, no matter which franchised location they visit.

Customer Data Security

Everyday there are stories about a restaurant or retail chain with a data breach. This can be devastating for customers who have their credit-card information stolen, and it can cripple any business who is the victim of this breach. When speaking with the franchisor and your credit-card processing vendors, you need to understand PCI compliance and ensure your point-of-sale system is safe with proper encryption. Additionally, you would benefit from talking with your insurance agent about additional insurance coverage for data breaches.

Jason Power exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the country. Power also represents emerging and established franchisors. Contact him at jpower@barberpowerlaw.com or by calling 980-202-5679. Visit www.barberpowerlaw.com.

21 08, 2018

Exploring Franchise Opportunities

By |2018-08-21T14:21:01+00:00August 21st, 2018|Categories: Franchising 101|Comments Off on Exploring Franchise Opportunities

Business meeting

Exploring Franchise Opportunities:

Get the Answers YOU Need!

By Paul Segreto

Potential franchise buyers know before making a final decision, they need to obtain information from other franchisees and also, their possible franchisors. But what information do they need to get?

Generally, I recommend using the Franchise Disclosure Document (FDD) as a guide. Read through it and ask a potential franchisor very specific questions about each item listed. It’s a can’t-miss road map. Here’s a start.

What is the history of the franchise concept?
What is the founder’s vision? Who is on the executive and support teams? What experience do they bring to the table? If a franchisor hasn’t worked at a location, how has he learned about daily operations? Has he owned a business before? It’s important to understand how these individuals relate to franchisees.

How high could expenses go?
All expenses should be clearly defined. It’s imperative to gain a complete understanding of the range of expenses—and why they are what they are. Inquire about assistance for everything from advertising to site selection to your grand opening.
What is the temperament of the franchise group nationally and within your market? Of course, I recommend speaking with franchisees, too. Make sure to ask them about costs, problems, profits, and trends. Discuss competition with both the franchisor and franchisees.

Ask about exit strategies.
At some point, you may want to exit the system or you may have to exit. If you have to exit, is there support if you’re in trouble? Ask about transfer fees and the process of selling your business. Understand the franchisor’s approval process. What happened to each franchisee listed under terminated or closed franchises on the FDD? What happened to their locations? Have they continued operation under a new franchisee or corporate? Is the location still available?

Ask yourself if you would consider a long-term relationship with this brand and its leadership.

After this process is complete and you’ve reviewed your notes, trust your gut instinct! Take your time and think things through until you’re 100 percent sure of your decision. Make sure you have all your support mechanisms in place, including friends and family. Do not kid yourself. Do not lie to yourself. And, do not justify any negatives. Being honest with yourself will help you make the right decision.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at paul@franchisefoundry.com.

Business meeting

Exploring Franchise Opportunities:

Get the Answers YOU Need!

By Paul Segreto

Potential franchise buyers know before making a final decision, they need to obtain information from other franchisees and also, their possible franchisors. But what information do they need to get?

Generally, I recommend using the Franchise Disclosure Document (FDD) as a guide. Read through it and ask a potential franchisor very specific questions about each item listed. It’s a can’t-miss road map. Here’s a start.

What is the history of the franchise concept?
What is the founder’s vision? Who is on the executive and support teams? What experience do they bring to the table? If a franchisor hasn’t worked at a location, how has he learned about daily operations? Has he owned a business before? It’s important to understand how these individuals relate to franchisees.

How high could expenses go?
All expenses should be clearly defined. It’s imperative to gain a complete understanding of the range of expenses—and why they are what they are. Inquire about assistance for everything from advertising to site selection to your grand opening.
What is the temperament of the franchise group nationally and within your market? Of course, I recommend speaking with franchisees, too. Make sure to ask them about costs, problems, profits, and trends. Discuss competition with both the franchisor and franchisees.

Ask about exit strategies.
At some point, you may want to exit the system or you may have to exit. If you have to exit, is there support if you’re in trouble? Ask about transfer fees and the process of selling your business. Understand the franchisor’s approval process. What happened to each franchisee listed under terminated or closed franchises on the FDD? What happened to their locations? Have they continued operation under a new franchisee or corporate? Is the location still available?

Ask yourself if you would consider a long-term relationship with this brand and its leadership.

After this process is complete and you’ve reviewed your notes, trust your gut instinct! Take your time and think things through until you’re 100 percent sure of your decision. Make sure you have all your support mechanisms in place, including friends and family. Do not kid yourself. Do not lie to yourself. And, do not justify any negatives. Being honest with yourself will help you make the right decision.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at paul@franchisefoundry.com.

31 07, 2018

Words
to Know

By |2018-08-21T13:56:24+00:00July 31st, 2018|Categories: Franchising 101|Comments Off on Words
to Know

Reading Dictionary

Words to Know

Important terms that potential franchisees should know.

By Susan Scotts

Absentee ownership: The potential to manage and own a franchise without active involvement in the day-to-day operations. The franchisee will purchase the franchise unit but will hire someone else to manage and run the unit.

Owner-operator: The franchisee will run the franchise unit him or herself and be hands-on during day-to-day tasks.

Advertising fee: The amount that is paid, annually or monthly, by the franchisee to the franchisor to cover some of the costs relating to advertising. These are sometimes calculated as a percentage of gross sales.

Discovery day: The opportunity to visit a franchise’s corporate headquarters in order to meet the management and support team and learn more about the franchise. Not all franchisors require them or offer them.

Franchise Disclosure Document (FDD): The Federal Trade Commission mandates that franchisors provide detailed of information about the franchisor. This information, which includes the buy-in costs and initial start-up expenses, is packaged in a 150-page document known as the Franchise Disclosure Document. It is commonly referred to as the FDD.

Franchise: The authorization of a right or brand name to a person to sell or distribute the company’s goods or services. Franchisee: The person or entity that purchases and is granted a franchise.

Franchise agreement: The actual contract which includes the responsibilities of the franchisor and franchisee. This document is signed by both parties.

Franchise fee: The initial up-front fee a franchisee pays for the right to purchase a franchise and use the trademark and business system. This is typically paid at the signing of the franchise agreement.

Franchisor: The franchise company and owner of a franchise system’s trademark brand that provides usage rights to a franchisee.

Federal Trade Commission (FTC): A federal agency assigned to regulate franchises. This agency protects America’s consumers and assists in protecting them against false, deceptive, or unfair trade or advertising practices.

International Franchise Association (IFA): Founded in 1960, this membership organization includes franchisors, franchisees, and suppliers.

Initial investment/start-up costs: The initial investment that the franchisee makes in becoming a franchisee during the start-up period. These costs can include the franchisee fee, lease improvements, asset costs, inventory, deposits, working capital, and other costs required to establish the business.

Net worth: Total assets minus total liabilities of an individual. A franchisor may require a minimum net worth prior to approval as a franchisee.

Receipt acknowledgement: In franchising, the receipt to be signed by potential franchisee as proof of the date of receiving of the FDD.

Renewal: Franchise agreement lengths vary and expire after anywhere from five to 20 years. After the initial agreement, the contract may be renewed but not always under the same original conditions. A renewal fee may be less than the original franchise fee.

Royalty fee: The share or percentage of gross sales paid by the franchisee to the franchisor on a recurring basis from the franchisee’s generated sales.

Small Business Administration (SBA): The SBA connects entrepreneurs with lenders and funding to help them plan, start, and grow their businesses.

With three decades of experience, Susan Scotts, of The Entrepreneur’s Source®, can help you determine if a franchise may be the best way to achieve your personal income, lifestyle, wealth, and equity goals. For more information, call 561-859-9110 or visit www.SScotts.EsourceCoach.com.

Reading Dictionary

Words to Know

Important terms that potential franchisees should know.

By Susan Scotts

Absentee ownership: The potential to manage and own a franchise without active involvement in the day-to-day operations. The franchisee will purchase the franchise unit but will hire someone else to manage and run the unit.

Owner-operator: The franchisee will run the franchise unit him or herself and be hands-on during day-to-day tasks.

Advertising fee: The amount that is paid, annually or monthly, by the franchisee to the franchisor to cover some of the costs relating to advertising. These are sometimes calculated as a percentage of gross sales.

Discovery day: The opportunity to visit a franchise’s corporate headquarters in order to meet the management and support team and learn more about the franchise. Not all franchisors require them or offer them.

Franchise Disclosure Document (FDD): The Federal Trade Commission mandates that franchisors provide detailed of information about the franchisor. This information, which includes the buy-in costs and initial start-up expenses, is packaged in a 150-page document known as the Franchise Disclosure Document. It is commonly referred to as the FDD.

Franchise: The authorization of a right or brand name to a person to sell or distribute the company’s goods or services. Franchisee: The person or entity that purchases and is granted a franchise.

Franchise agreement: The actual contract which includes the responsibilities of the franchisor and franchisee. This document is signed by both parties.

Franchise fee: The initial up-front fee a franchisee pays for the right to purchase a franchise and use the trademark and business system. This is typically paid at the signing of the franchise agreement.

Franchisor: The franchise company and owner of a franchise system’s trademark brand that provides usage rights to a franchisee.

Federal Trade Commission (FTC): A federal agency assigned to regulate franchises. This agency protects America’s consumers and assists in protecting them against false, deceptive, or unfair trade or advertising practices.

International Franchise Association (IFA): Founded in 1960, this membership organization includes franchisors, franchisees, and suppliers.

Initial investment/start-up costs: The initial investment that the franchisee makes in becoming a franchisee during the start-up period. These costs can include the franchisee fee, lease improvements, asset costs, inventory, deposits, working capital, and other costs required to establish the business.

Net worth: Total assets minus total liabilities of an individual. A franchisor may require a minimum net worth prior to approval as a franchisee.

Receipt acknowledgement: In franchising, the receipt to be signed by potential franchisee as proof of the date of receiving of the FDD.

Renewal: Franchise agreement lengths vary and expire after anywhere from five to 20 years. After the initial agreement, the contract may be renewed but not always under the same original conditions. A renewal fee may be less than the original franchise fee.

Royalty fee: The share or percentage of gross sales paid by the franchisee to the franchisor on a recurring basis from the franchisee’s generated sales.

Small Business Administration (SBA): The SBA connects entrepreneurs with lenders and funding to help them plan, start, and grow their businesses.

With three decades of experience, Susan Scotts, of The Entrepreneur’s Source®, can help you determine if a franchise may be the best way to achieve your personal income, lifestyle, wealth, and equity goals. For more information, call 561-859-9110 or visit www.SScotts.EsourceCoach.com.

31 07, 2018

Part 1: Breaking Down the FDD

By |2018-07-31T18:16:37+00:00July 31st, 2018|Categories: Legal|Comments Off on Part 1: Breaking Down the FDD

Man using calculator

SPECIAL SECTION: PART 1

Breaking Down the FDD

Item 7: Estimated Initial Investment.

You’ve heard it before: Be sure you understand your Franchise Disclosure Document (FDD) before you buy into a franchise. The advice makes sense—after all, the document is there to protect you by listing everything the Federal Trade Commission (FTC) believes you need to know about your franchisor. But given that it’s a 150-page legal document, many prospective franchisees aren’t always clear on the details.

It’s complicated, we get it. So, to help you understand the finer points of the FDD, we’ve enlisted Nicole Micklich, a franchise attorney. In the next six issues of Franchise Dictionary Magazine, she will highlight some common misunderstandings about the document and clarify them. Here, we launch with the topic that everyone needs to be clear on: Money.

Under the FTC Franchise Rule, in Item 7 of the Franchise Disclosure Document, the franchisor must provide an estimate of the likely initial investment costs a franchisee will incur. Don’t confuse Item 7 with Item 5. Item 5 only discloses the initial fees that must be paid to the franchisor or affiliate. Item 7 should be more detailed than Item 5.

Item 7 requires franchisors to use a table to set out a franchisee’s entire estimated initial investment. The table is supposed to disclose all the expenses required by the franchise agreement and all other costs necessary for a franchisee to pen for business, including those that are to be paid to third parties, like rent.

The Rule does not dictate a complete list of the types of fees or expenses that must be shown in the table. The Rule provides suggestions of the typical expenses franchisees will incur. Franchisors should also identify and itemize other specific required payments franchisees must make to start operating.

Item 7 covers the period that ends when the franchisee opens for business. It also requires franchisors to include in the table “Additional Funds” for the time during the “initial period” of operations. The “initial period” can vary depending on brand, and franchisors must disclose the specific initial period used in the FDD.

For each item listed in the Item 7 table, the franchisor must disclose:

  • The amount of the payment
  • The method of payment
  • When the payment is due
  • To whom the payment is to be made

Some of the costs set out in the Item 7 table may be difficult for the franchisor to estimate and the franchisor may use ranges or variables. Franchisors use footnotes to provide more information about the Item 7 expenditures. If the franchisor offers different types of outlets, like restaurants that offer both stand-alone units and units in convenience stores, the franchisor might use more than one table.

As you consider the purchase of your franchise, you and your advisors should carefully and cautiously use Item 7 and other information provided by the franchisor to prepare a financial model for your start-up costs.

The Cost of Franchising

There are numerous costs associated with starting your franchised business, including:

  • The initial franchise fee
  • Training
  • Travel and living, to re-locate or for training, until business becomes profitable
  • Organizing and registering a business entity
  • Banking
  • Obtaining business licenses and permits
  • Negotiating a lease or purchase of real property (franchisor may require a real estate consultant)
  • Security deposits, utility deposits
  • Rent or mortgage payments
  • Insurance, including renter’s, auto, workers’ compensation, commercial general liability, officers and directors
  • Remodeling, leasehold improvements, and decorating
  • Advertising and marketing, both required and optional, and grand opening
  • Payroll, including pre-opening payroll during employee training
  • Equipment
  • Fixtures
  • Vehicle(s), truck(s), trailer(s), and/or vehicle wraps or paint
  • Gasoline/Fuel
  • Signage
  • Bookkeeping
  • Computer hardware
  • Computer software, including POS
  • Telephone system
  • Promotional Items
  • Opening Inventory
  • Cash on hand

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

Man using calculator

SPECIAL SECTION: PART 1

Breaking Down the FDD

Item 7: Estimated Initial Investment.

You’ve heard it before: Be sure you understand your Franchise Disclosure Document (FDD) before you buy into a franchise. The advice makes sense—after all, the document is there to protect you by listing everything the Federal Trade Commission (FTC) believes you need to know about your franchisor. But given that it’s a 150-page legal document, many prospective franchisees aren’t always clear on the details.

It’s complicated, we get it. So, to help you understand the finer points of the FDD, we’ve enlisted Nicole Micklich, a franchise attorney. In the next six issues of Franchise Dictionary Magazine, she will highlight some common misunderstandings about the document and clarify them. Here, we launch with the topic that everyone needs to be clear on: Money.

Under the FTC Franchise Rule, in Item 7 of the Franchise Disclosure Document, the franchisor must provide an estimate of the likely initial investment costs a franchisee will incur. Don’t confuse Item 7 with Item 5. Item 5 only discloses the initial fees that must be paid to the franchisor or affiliate. Item 7 should be more detailed than Item 5.

Item 7 requires franchisors to use a table to set out a franchisee’s entire estimated initial investment. The table is supposed to disclose all the expenses required by the franchise agreement and all other costs necessary for a franchisee to pen for business, including those that are to be paid to third parties, like rent.

The Rule does not dictate a complete list of the types of fees or expenses that must be shown in the table. The Rule provides suggestions of the typical expenses franchisees will incur. Franchisors should also identify and itemize other specific required payments franchisees must make to start operating.

Item 7 covers the period that ends when the franchisee opens for business. It also requires franchisors to include in the table “Additional Funds” for the time during the “initial period” of operations. The “initial period” can vary depending on brand, and franchisors must disclose the specific initial period used in the FDD.

For each item listed in the Item 7 table, the franchisor must disclose:

  • The amount of the payment
  • The method of payment
  • When the payment is due
  • To whom the payment is to be made

Some of the costs set out in the Item 7 table may be difficult for the franchisor to estimate and the franchisor may use ranges or variables. Franchisors use footnotes to provide more information about the Item 7 expenditures. If the franchisor offers different types of outlets, like restaurants that offer both stand-alone units and units in convenience stores, the franchisor might use more than one table.

As you consider the purchase of your franchise, you and your advisors should carefully and cautiously use Item 7 and other information provided by the franchisor to prepare a financial model for your start-up costs.

The Cost of Franchising

There are numerous costs associated with starting your franchised business, including:

  • The initial franchise fee
  • Training
  • Travel and living, to re-locate or for training, until business becomes profitable
  • Organizing and registering a business entity
  • Banking
  • Obtaining business licenses and permits
  • Negotiating a lease or purchase of real property (franchisor may require a real estate consultant)
  • Security deposits, utility deposits
  • Rent or mortgage payments
  • Insurance, including renter’s, auto, workers’ compensation, commercial general liability, officers and directors
  • Remodeling, leasehold improvements, and decorating
  • Advertising and marketing, both required and optional, and grand opening
  • Payroll, including pre-opening payroll during employee training
  • Equipment
  • Fixtures
  • Vehicle(s), truck(s), trailer(s), and/or vehicle wraps or paint
  • Gasoline/Fuel
  • Signage
  • Bookkeeping
  • Computer hardware
  • Computer software, including POS
  • Telephone system
  • Promotional Items
  • Opening Inventory
  • Cash on hand

Nicole Micklich is a franchise attorney with Garcia & Milas. Contact her at (203) 773-3824 or email her at nmicklich@garciamilas.com

27 07, 2018

Protect yourself: Form an Entity

By |2018-07-27T19:00:58+00:00July 27th, 2018|Categories: Legal|Comments Off on Protect yourself: Form an Entity

Signing Legal Documents

Protect Yourself: Form an Entity

By Jonathan Barber

If you’re buying into a franchise, you’re probably about to make one of the biggest investments of your life. You’re likely spending hundreds of thousands of dollars and taking a great leap of faith. Maybe you’re taking out a small business loan or rolling over your retirement funds.

Maybe you’re using your parents’ hard-earned money that you just inherited. Regardless of how much skin you’ve got in the game, you’re heavily invested in this new venture and there is a ton of risk involved. Forming an entity is one way to protect your personal assets and limit your risk.

Limit Your Liability

When John Smith signs a contract in his own name, John Smith is personally liable if things go south in that deal. However, if John Smith forms Smith Holdings, LLC, and signs a contract as Smith Holdings, LLC, he is generally not liable for the obligations of that contract. The limited liability company that John Smith formed is responsible for performing the terms within that contract. This scenario applies directly to franchising. Before you sign your franchise agreement, you could form a business entity such as a corporation or a limited liability company. Then, if you sign that franchise agreement on behalf of your entity, you have greatly limited your personal exposure.

Most franchise agreements require that the franchisee sign a personal guaranty. This isn’t a dealbreaker, it’s an industry standard. A personal guaranty will make you liable even if you sign the franchise agreement on behalf of an entity. Almost all franchisors require this, because they need to ensure their franchisees are all-in with the franchise. If a franchise doesn’t require franchisees to sign a personal guaranty, those franchisees could essentially walk away halfway through their terms with no consequences.

With an entity in place, however, you’re still largely protected. For instance, if a man slips and falls in your store, he most likely won’t be able to take your house and the clothes off your back if you have an entity in place. He could sue your entity for negligence, but as long as you didn’t do anything malicious, he will likely only be able to get to the entity’s assets. Likewise, if your entity enters into contracts with vendors or employees, those parties would really only have claims against your entity—not you individually. The “limited liability” aspect of corporations and LLCs literally limits the liability of an entity’s owner. Some states are different though, and you should consult with a business attorney within your state for further guidance.

By purchasing a franchise, you are putting your business and personal assets on the line, and it’s impossible to completely eliminate your risk. However, you can balance that level of risk against the potential reward your franchise offers. You can also limit your personal risk for non-franchise issues like personal injury and negligence by forming an entity—and the low cost of doing so is worth the personal protection.

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the world. Barber also represents emerging and established franchisors.

Signing Legal Documents

Protect Yourself: Form an Entity

By Jonathan Barber

If you’re buying into a franchise, you’re probably about to make one of the biggest investments of your life. You’re likely spending hundreds of thousands of dollars and taking a great leap of faith. Maybe you’re taking out a small business loan or rolling over your retirement funds.

Maybe you’re using your parents’ hard-earned money that you just inherited. Regardless of how much skin you’ve got in the game, you’re heavily invested in this new venture and there is a ton of risk involved. Forming an entity is one way to protect your personal assets and limit your risk.

Limit Your Liability

When John Smith signs a contract in his own name, John Smith is personally liable if things go south in that deal. However, if John Smith forms Smith Holdings, LLC, and signs a contract as Smith Holdings, LLC, he is generally not liable for the obligations of that contract. The limited liability company that John Smith formed is responsible for performing the terms within that contract. This scenario applies directly to franchising. Before you sign your franchise agreement, you could form a business entity such as a corporation or a limited liability company. Then, if you sign that franchise agreement on behalf of your entity, you have greatly limited your personal exposure.

Most franchise agreements require that the franchisee sign a personal guaranty. This isn’t a dealbreaker, it’s an industry standard. A personal guaranty will make you liable even if you sign the franchise agreement on behalf of an entity. Almost all franchisors require this, because they need to ensure their franchisees are all-in with the franchise. If a franchise doesn’t require franchisees to sign a personal guaranty, those franchisees could essentially walk away halfway through their terms with no consequences.

With an entity in place, however, you’re still largely protected. For instance, if a man slips and falls in your store, he most likely won’t be able to take your house and the clothes off your back if you have an entity in place. He could sue your entity for negligence, but as long as you didn’t do anything malicious, he will likely only be able to get to the entity’s assets. Likewise, if your entity enters into contracts with vendors or employees, those parties would really only have claims against your entity—not you individually. The “limited liability” aspect of corporations and LLCs literally limits the liability of an entity’s owner. Some states are different though, and you should consult with a business attorney within your state for further guidance.

By purchasing a franchise, you are putting your business and personal assets on the line, and it’s impossible to completely eliminate your risk. However, you can balance that level of risk against the potential reward your franchise offers. You can also limit your personal risk for non-franchise issues like personal injury and negligence by forming an entity—and the low cost of doing so is worth the personal protection.

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the world. Barber also represents emerging and established franchisors.

27 07, 2018

Funding Your Dream

By |2018-07-27T18:33:44+00:00July 27th, 2018|Categories: Funding|Comments Off on Funding Your Dream

Business Owner

Funding Your Dream

by Dallas Kerley

Entrepreneurs are dreamers, innovators, and go-getters. They are driven enough to start their own businesses. Many, however, lack the funding needed to open the doors. Or, do they?

There are plenty of ways to fund a franchise. Yes, you can borrow from the bank or find investors; of course, that means you’ll be starting your business in debt. But what if you had a pile of cash that allowed you to start your franchise cash-rich and debt-free? If you have money in a qualified retirement plan, you are cash-rich and can fund your franchise with a process known as Rollovers for Business Start-up (ROBS).

How does ROBS funding work?

A Rollovers for Business Start-up plan lets you use existing qualified retirement account funds, such as a 401(k), 403(b) IRA, or other qualified retirement vehicle, to fund your franchise tax-deferred and penalty-free. Because of the way a ROBS is structured, you can still contribute funds to a tax-advantaged retirement account as your business grows, enabling you to continue to plan for your retirement.

How do I get started?

Using retirement funds for your start-up involves four key steps:

Step 1: Establish a Corporation. In order to be eligible for a ROBS arrangement, you must form a new corporation.

Step 2: Create a New Retirement Plan. The corporation will sponsor a new retirement plan that has provisions allowing investments in the parent corporation stock.

Step 3: Transfer Retirement Funds. Once the plan is established, your existing retirement funds will be rolled over to the new plan. Because the funds are rolling from one qualified plan to another, no taxes are due and there are no withdrawal penalties.

Step 4: Launch the New Business. Once stock is purchased in the new corporation, you now have the cash to invest in your new franchise.

The Advantages

Tax Benefits. Under the ROBS plan, you maintain tax-deferred status and do not face any early withdrawal penalties.

Flexibility. The funds can be used for many different purposes. The money can be used as a cash injection for an SBA loan (Small Business Administration), to pay franchise fees, build or renovate a site, or buy equipment. You can even use the funds to pay yourself a salary. If you don’t need the money, don’t spend it—you aren’t required to use all the funds you’ve transferred.

Ease and Speed. In some cases, you can get access to your funds in as little as 10 days.

Funding isn’t dependent on your credit. Unlike other borrowing options, a ROBS doesn’t impact your personal credit. If you borrow any money for your business, your personal credit may suffer. Plus, if you have issues with your credit, you can still use the ROBS for your franchise.

Peace of Mind. Using your retirement plans means you are not incurring additional personal debt. And you’re spared the headache of negotiating with lenders for funding.

Need help figuring out how to best fund your franchise? Benetrends helps entrepreneurs make their dreams a reality. The ROBS program, known as the Rainmaker Plan®, provides guidance and support, so you can focus on your business. To learn more, visit www.benetrends.com.

Business Owner

Funding Your Dream

by Dallas Kerley

Entrepreneurs are dreamers, innovators, and go-getters. They are driven enough to start their own businesses. Many, however, lack the funding needed to open the doors. Or, do they?

There are plenty of ways to fund a franchise. Yes, you can borrow from the bank or find investors; of course, that means you’ll be starting your business in debt. But what if you had a pile of cash that allowed you to start your franchise cash-rich and debt-free? If you have money in a qualified retirement plan, you are cash-rich and can fund your franchise with a process known as Rollovers for Business Start-up (ROBS).

How does ROBS funding work?

A Rollovers for Business Start-up plan lets you use existing qualified retirement account funds, such as a 401(k), 403(b) IRA, or other qualified retirement vehicle, to fund your franchise tax-deferred and penalty-free. Because of the way a ROBS is structured, you can still contribute funds to a tax-advantaged retirement account as your business grows, enabling you to continue to plan for your retirement.

How do I get started?

Using retirement funds for your start-up involves four key steps:

Step 1: Establish a Corporation. In order to be eligible for a ROBS arrangement, you must form a new corporation.

Step 2: Create a New Retirement Plan. The corporation will sponsor a new retirement plan that has provisions allowing investments in the parent corporation stock.

Step 3: Transfer Retirement Funds. Once the plan is established, your existing retirement funds will be rolled over to the new plan. Because the funds are rolling from one qualified plan to another, no taxes are due and there are no withdrawal penalties.

Step 4: Launch the New Business. Once stock is purchased in the new corporation, you now have the cash to invest in your new franchise.

The Advantages

Tax Benefits. Under the ROBS plan, you maintain tax-deferred status and do not face any early withdrawal penalties.

Flexibility. The funds can be used for many different purposes. The money can be used as a cash injection for an SBA loan (Small Business Administration), to pay franchise fees, build or renovate a site, or buy equipment. You can even use the funds to pay yourself a salary. If you don’t need the money, don’t spend it—you aren’t required to use all the funds you’ve transferred.

Ease and Speed. In some cases, you can get access to your funds in as little as 10 days.

Funding isn’t dependent on your credit. Unlike other borrowing options, a ROBS doesn’t impact your personal credit. If you borrow any money for your business, your personal credit may suffer. Plus, if you have issues with your credit, you can still use the ROBS for your franchise.

Peace of Mind. Using your retirement plans means you are not incurring additional personal debt. And you’re spared the headache of negotiating with lenders for funding.

Need help figuring out how to best fund your franchise? Benetrends helps entrepreneurs make their dreams a reality. The ROBS program, known as the Rainmaker Plan®, provides guidance and support, so you can focus on your business. To learn more, visit www.benetrends.com.

1 06, 2018

Franchise Funding Do’s and Don’ts

By |2018-06-19T23:56:15+00:00June 1st, 2018|Categories: Funding|Comments Off on Franchise Funding Do’s and Don’ts

piggy bank

Franchise Funding Do’s and Don’ts

by Eric Schechterman

Entrepreneurs figure out how much they can afford to spend before finding the right franchise, right? Not exactly. In fact, people often tell me they found the right business, then struggle to figure out how to fund the opportunity—which is completely backwards. Do you look for a house before getting pre-qualified for a mortgage? Of course not! Ensuring you have the right funding in place can be the difference between long-term success and failure. Start off on the right track by following these key guidelines.

Do decide if you want to be a multi-unit owner. Some franchises will only accept you if you are willing to commit to 3 units. If you are interested in owning multiple units, then you’ll need to consider a multiple unit funding strategy from the start since how you fund your first unit affects your ability to fund future units.

Do consider all funding options. Some of the more popular include franchisor-specific financing programs, SBA loans, traditional loans, alternative lending, and home-equity financing. You can even utilize your retirement funds without penalties through a Rollover as Business Startup (ROBS) structure.

Don’t give up if you were rejected by a bank. Many candidates go to their local banks assuming they would be the best places to start securing loans. Then they get turned down once or multiple times and give up. In reality, it could just be the bank isn’t interested in the concept you are pursuing. Find a funding partner who works with multiple lenders—and knows which lenders prefer which concepts—and you can increase your chances of securing the right loan.

Do get pre-qualified. Why wouldn’t you want to find out how much funding you might pre-qualify for in advance? You do this with a home, why not a business? By getting pre-qualified through a funding provider, you can better identify which franchise concepts you can afford. Some pre-qualification programs are even offered free of charge.

Don’t underestimate how much funding you’ll need. One of the leading causes of small business failure is under-capitalization or insufficient funding. Most new business owners need more working capital than they anticipate, so make sure you have enough of a buffer to help with any unexpected operating costs.

Do your homework and get your financial house in order. Both franchisors and lenders have certain minimum criteria when it comes to approving franchisee candidates. For example, some franchises require a minimum net worth and a certain amount in liquid assets.  Do your financial homework in advance—find out your credit score, calculate your net worth, even update your resume—to see if you’re compatible from the get-go.

Don’t wait until the last minute. There are a lot of steps—and a lot of professionals—involved when it comes to funding a franchise, so you want to make sure you leave yourself enough time to get it right. If you don’t start early to shore up funding for your franchise, you might lose out on your dream opportunity.

As part of FranNet of Boston, Eric Schechterman works closely with clients to understand their goals, values, lifestyles, and interests. He coaches them through the franchising process and helps determine if franchising is a good fit. For more information, contact Eric at eschechterman@frannet.com

piggy bank

Franchise Funding Do’s and Don’ts

by Eric Schechterman

Entrepreneurs figure out how much they can afford to spend before finding the right franchise, right? Not exactly. In fact, people often tell me they found the right business, then struggle to figure out how to fund the opportunity—which is completely backwards. Do you look for a house before getting pre-qualified for a mortgage? Of course not! Ensuring you have the right funding in place can be the difference between long-term success and failure. Start off on the right track by following these key guidelines.

Do decide if you want to be a multi-unit owner. Some franchises will only accept you if you are willing to commit to 3 units. If you are interested in owning multiple units, then you’ll need to consider a multiple unit funding strategy from the start since how you fund your first unit affects your ability to fund future units.

Do consider all funding options. Some of the more popular include franchisor-specific financing programs, SBA loans, traditional loans, alternative lending, and home-equity financing. You can even utilize your retirement funds without penalties through a Rollover as Business Startup (ROBS) structure.

Don’t give up if you were rejected by a bank. Many candidates go to their local banks assuming they would be the best places to start securing loans. Then they get turned down once or multiple times and give up. In reality, it could just be the bank isn’t interested in the concept you are pursuing. Find a funding partner who works with multiple lenders—and knows which lenders prefer which concepts—and you can increase your chances of securing the right loan.

Do get pre-qualified. Why wouldn’t you want to find out how much funding you might pre-qualify for in advance? You do this with a home, why not a business? By getting pre-qualified through a funding provider, you can better identify which franchise concepts you can afford. Some pre-qualification programs are even offered free of charge.

Don’t underestimate how much funding you’ll need. One of the leading causes of small business failure is under-capitalization or insufficient funding. Most new business owners need more working capital than they anticipate, so make sure you have enough of a buffer to help with any unexpected operating costs.

Do your homework and get your financial house in order. Both franchisors and lenders have certain minimum criteria when it comes to approving franchisee candidates. For example, some franchises require a minimum net worth and a certain amount in liquid assets.  Do your financial homework in advance—find out your credit score, calculate your net worth, even update your resume—to see if you’re compatible from the get-go.

Don’t wait until the last minute. There are a lot of steps—and a lot of professionals—involved when it comes to funding a franchise, so you want to make sure you leave yourself enough time to get it right. If you don’t start early to shore up funding for your franchise, you might lose out on your dream opportunity.

As part of FranNet of Boston, Eric Schechterman works closely with clients to understand their goals, values, lifestyles, and interests. He coaches them through the franchising process and helps determine if franchising is a good fit. For more information, contact Eric at eschechterman@frannet.com