Legal

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.

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.

1 05, 2018

Understanding the FDD

By |2018-06-28T00:34:31+00:00May 1st, 2018|Categories: Legal|Comments Off on Understanding the FDD

young man on phone

Understanding the FDD

How the Franchise Disclosure Document Works

By Telanda Sidari

One of the most important documents you will run into during a potential franchise purchase is the Franchise Disclosure Document, or as it’s commonly called, the FDD. Granted, the document can be daunting with a lot of legal jargon, but it’s also full of information that lets you know exactly what you’re buying into. In fact, the FDD is the best way to understand the full scope of your business—and the key players involved with it.

What exactly does this document contain? How can you use it to your benefit? Here’s an overview.

How it works
As you may know, the Federal Trade Commission (FTC) oversees franchising guidelines. Back in 1978, the FTC instituted a rule that franchisors had to fully inform potential franchisees about the business they were buying into. The purpose, of course, was to protect potential franchise buyers from sordid franchisor systems.

The FDD is essentially an open book on the business. And though the documents vary in quality, there are 23 points that every document must cover—from the background of the franchisor to hidden fees to bankruptcy to restrictions and financial statements.

The document is usually released at the start of a potential buyer’s research. This way you have plenty of time to review, re-read, and gather questions. If franchisors don’t release the document at the start of your research, they are required to provide the FDD at least 14 calendar days before a contract is signed or any payments are made. The document can arrive in print or via email.

Every year, franchise systems registered with the FTC are required to renew the document with updated information and figures.  A 2018 FDD will show you how much it costs to invest into the system this year, and you’ll get financial returns of locations from 2017.

Speaking of finances, a key component of the FDD is Financial Performance. About 70 percent of franchisors will show financial performance representations, but how they show the information varies. Franchisors can’t provide more than what’s already in the FDD, but they can speak to you about anything listed in the FDD.

If you have questions, go beyond the franchisor. Franchisees can speak to you about how much they make, and will let you know about how the franchise system performs and also what support is like.

Always Enlist an Attorney
While the FDD may seem overwhelming, reading and understanding it is an important step in the franchise-purchasing process. If you understand the document, you can make an informed decision about your franchise purchase. To ensure that you and the franchisor are on the same page, hire a franchise attorney to help translate the document.

The purpose of a franchise attorney is to help explain the document and let you know the ins and outs of the franchise business. However, the attorney isn’t there to change the document.  Compare the FDD to a bank mortgage contract—the contract never changes, but you still have to understand what it says.

The FDD might not have all the answers you’re looking for, but it’s an important part of your research. Take it seriously, understand it, always ask questions, and you’re off to a successful start in your franchise purchase.

Telanda Sidari has 20 years of business experience with almost a decade in the franchising industry— from business ownership to sales. Ms. Sidari has first-hand experience in the emotional steps involved in buying a business. She helps clients navigate the process. For more information, email her at Telanda@TheFranchiseConsultingCompany.com

young man on phone

Understanding the FDD

How the Franchise Disclosure Document Works

By Telanda Sidari

One of the most important documents you will run into during a potential franchise purchase is the Franchise Disclosure Document, or as it’s commonly called, the FDD. Granted, the document can be daunting with a lot of legal jargon, but it’s also full of information that lets you know exactly what you’re buying into. In fact, the FDD is the best way to understand the full scope of your business—and the key players involved with it.

What exactly does this document contain? How can you use it to your benefit? Here’s an overview.

How it works
As you may know, the Federal Trade Commission (FTC) oversees franchising guidelines. Back in 1978, the FTC instituted a rule that franchisors had to fully inform potential franchisees about the business they were buying into. The purpose, of course, was to protect potential franchise buyers from sordid franchisor systems.

The FDD is essentially an open book on the business. And though the documents vary in quality, there are 23 points that every document must cover—from the background of the franchisor to hidden fees to bankruptcy to restrictions and financial statements.

The document is usually released at the start of a potential buyer’s research. This way you have plenty of time to review, re-read, and gather questions. If franchisors don’t release the document at the start of your research, they are required to provide the FDD at least 14 calendar days before a contract is signed or any payments are made. The document can arrive in print or via email.

Every year, franchise systems registered with the FTC are required to renew the document with updated information and figures.  A 2018 FDD will show you how much it costs to invest into the system this year, and you’ll get financial returns of locations from 2017.

Speaking of finances, a key component of the FDD is Financial Performance. About 70 percent of franchisors will show financial performance representations, but how they show the information varies. Franchisors can’t provide more than what’s already in the FDD, but they can speak to you about anything listed in the FDD.

If you have questions, go beyond the franchisor. Franchisees can speak to you about how much they make, and will let you know about how the franchise system performs and also what support is like.

Always Enlist an Attorney
While the FDD may seem overwhelming, reading and understanding it is an important step in the franchise-purchasing process. If you understand the document, you can make an informed decision about your franchise purchase. To ensure that you and the franchisor are on the same page, hire a franchise attorney to help translate the document.

The purpose of a franchise attorney is to help explain the document and let you know the ins and outs of the franchise business. However, the attorney isn’t there to change the document.  Compare the FDD to a bank mortgage contract—the contract never changes, but you still have to understand what it says.

The FDD might not have all the answers you’re looking for, but it’s an important part of your research. Take it seriously, understand it, always ask questions, and you’re off to a successful start in your franchise purchase.

Telanda Sidari has 20 years of business experience with almost a decade in the franchising industry— from business ownership to sales. Ms. Sidari has first-hand experience in the emotional steps involved in buying a business. She helps clients navigate the process. For more information, email her at Telanda@TheFranchiseConsultingCompany.com