Legal Archives | Franchise Dictionary Magazine

2 07, 2019

Before you Buy

Audra2019-07-08T13:21:14-04:00July 2nd, 2019|Tags: Discovery Day, franchise attorney, Franchise Disclosure Document, franchise validation, investing in franchise, local market analysis|

Before you Buy

Follow this checklist for due diligence

by Jason Power

You probably research cars before buying one and read a restaurant’s reviews before making a reservation. So it makes sense to do the same research—your due diligence—before investing in a franchise.

The process should include a study of the local market that exists for the franchise’s products and services, conversations with other franchisees, a review of the Franchise Agreement by a lawyer, and participation in the franchisor’s Discovery Day. Follow this checklist to ensure you’re thorough with your due diligence.

1. Research your market.
Does your market need the product or service? Have you called your future competitors to learn about their prices and customer service? Have you tested their products? These actions are crucial. There are dozens, if not hundreds, of stories about a franchisee introducing a product or service that was rejected by people in the territory and the cost to educate them about it was prohibitive.

2. Talk to other franchisees.
Just as you read reviews for a vehicle or look at the menu of a new restaurant, you should learn from those who came before you. When you speak with current franchisees and those who were recently terminated, ask them: Are you profitable? Does the franchisor help with your problems and questions? How do you deal with competitors? If you could go back, would you buy this franchise again? By asking these questions early in the process, you avoid the potential for catastrophe.

3. Have an attorney review the Franchise Agreement.
Having an attorney who is well-versed in franchise law is a must. But you also have to read the Franchise Disclosure Document, Franchise Agreement, and all exhibits, too. If you do not read the documents and then prepare a list of related questions and concerns for the attorney, he or she can’t fully help you understand your rights, roles, and obligations.

4. Attend Discovery Day.
Discovery Day, or “Meet the Team Day” as some franchisors call it, is when a franchisor invites franchisees who are close to signing to visit a corporate location and learn more about the franchise and typical day-to-day operations. This is one of the greatest opportunities to obtain an in-depth understanding of the business and in many cases it is one of the last opportunities to ask the franchisor questions before signing the Franchise Agreement. At Discovery Day, ask questions such as: What is the franchisor’s growth plan for the next one, three, five, and 10 years? What is the franchisor’s marketing strategy for helping franchisees? How are the company’s franchisees performing, especially those in your general area?

Each prospective franchisee’s due diligence checklist will differ slightly, but if you follow the four steps above, you’ll be well on your way to having all the information you need to make an educated decision.

Jason Power

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. To learn more, contact Power at jason@franchise.law or call 980-202-5679. Visit www.barberpowerlaw.com.

2 06, 2019

Road Show

Audra2019-07-08T13:25:35-04:00June 2nd, 2019|Tags: food truck franchise, food-related franchise, franchise agreement|

Road Show

Thinking of investing in a food truck franchise?
Here’s what you need to know.

by Jonathan Barber

Cost and Model Variations
Some franchises require their franchisees to completely outfit a new food truck to their specifications. This can cause a franchisee’s initial investment to skyrocket well into the $100,000 to $200,000 range. Given the typical operation and sales of an individual food truck, it could take a long time for a franchisee to break even.

Other food-truck concepts may offer their franchisees the ability to choose between a full-size food truck and a trailer. Some concepts may even allow franchisees to purchase and retrofit a used food truck or trailer. This can really be an attractive option to a prospective franchisee shopping for brands on a budget.

All franchisors will probably require the franchisee to submit his or her plans and the final model for approval by the franchisor.

Commissary Costs
Most states, cities, and municipalities require food trucks to be tied to a specific kitchen. This allows the government to know where a food truck is based in the event of a health-related issue. This means food-truck franchisors will require their franchisees to utilize a “commissary” kitchen.

Commissaries have become very popular in cities with lots of food trucks. They have large kitchens that food-truck owners can rent for a monthly fee.

Some food-truck owners will use the kitchens to prepare their food while others simply pay the monthly fee to satisfy the local government’s requirements. Either way, buyers should explore commissary costs before signing their franchise agreement.

Distribution Costs
Just as with any food-related concept, food-truck franchises should have adequate distribution channels in place. Food-truck franchises should try to arrange purchase agreements with national and regional distributors so their franchisees can get food products at reasonable costs. Properly set up, franchisees will benefit from the collective buying power of the entire franchise system.

Insurance
Like any franchise, food trucks must have adequate insurance for general liability. They also need auto insurance. Food trucks will roll up a lot of miles, so franchisees need to examine the mileage provisions of their policies.

Is it for you?
Overall, food truck franchises are hot. They’re typically lower in cost, have loyal social media followings, and they’re scalable. But prospective franchisees need to be aware of the unique requirements.

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of clients world-wide with their FDDs and franchise purchases. Barber also represents emerging and established franchisors. Contact Barber at 980-202-5679 or jonathan@franchise.law.

2 05, 2019

When a Franchisor Goes Dark…

Audra2019-05-03T14:53:02-04:00May 2nd, 2019|Tags: franchise agreement, franchise attorney, Franchise Disclosure Document, franchise registration renewal, franchise validation, franchisor registration states|

When a Franchisor Goes Dark…

by Jason Power

Certain states require that franchisors register their offerings before they can sell a franchise there. Those same states then require the franchisors to file annual renewals in order to continue selling franchises.

So what happens when you’re prepared to buy a franchise but the franchisor’s state registration hasn’t been renewed yet?

First off, be aware that most franchisors are required to update their franchise disclosure documents in the first few months of each year depending on when their fiscal year ends. This means that these registration states are flooded with documents to review—both renewal applications and new FDDs.

Although the employees in these states work tirelessly to review applications, the process takes time. When franchisors do not file their renewal applications early enough, they may have to stop selling franchises, or “go dark,” until their renewal is approved. (Note that going dark is not a negative reflection on the franchise, but it can delay a sale and frustrate everyone involved.)

What can you do when your franchisor goes dark? Don’t panic. This situation can be a great opportunity for you to reflect on the franchise, call more franchisees for validation, talk in more detail with the franchisor, and work with an accountant or franchise attorney to analyze the opportunity. Sometimes the delay may also present an opportunity to negotiate some terms in the franchise agreement.

What to expect
Also know that this is a process and that many franchisors have this issue each year due to delays in gathering information. You should discuss with the franchisor what, if any, changes are being made to the franchise disclosure document and franchise agreement. A franchisor often will increase fees or change the size of territories during these annual updates. If the expected terms are less favorable than what you’ve already been shown, ask the franchisor to give you the more favorable terms.

Once the state approves the renewal application, the franchisor will be required to send you the new franchise disclosure document and franchise agreement. Usually you will be asked to sign a new FDD receipt and wait for the required disclosure period to lapse before you can sign the new franchise agreement, but some states have exceptions to this requirement. For instance, California and New York will allow franchisors to send a copy of the franchise disclosure document as long as they have filed for renewal, include certain disclaimers, and follow other directions required by the states.

This is in no way a comprehensive explanation of the requirements for all registration states. If you are involved in a pending franchise sale with a franchisor that has gone dark, the best thing you can do is talk with the franchisor about its process during this time period and talk with a franchise attorney who can guide you through the few weeks until the franchisor’s application is renewed.

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. For more information contact Power at jason@franchise.law or call 980-202-5679. Visit www.barberpowerlaw.com.

2 05, 2019

Franchising and the E-2 Investor Visa

Audra2019-05-03T15:00:36-04:00May 2nd, 2019|Tags: commerce and navigation treaty, direct participation in the franchise operation, E-2 Investor Visa, five-year business plan, immigration to the United States, investment amount|

Franchising and the E-2 Investor Visa

by Jerry Rieder
Certified Franchise Consultant

What is one of the best ways to secure an E-2 Investor Visa? Franchising. The systems, structure, training, and support that
franchises offer create a winning formula for those seeking to immigrate to the United States. Because franchised businesses have a high success rate, E-2 Visa applications are more likely to be approved and renewed.

Defining an E-2 Investor Visa
The E-2 Investor Visa is a type of U.S. immigration visa available to citizens or nationals of one of 80 countries that have treaties with the United States. The E-2 Investor Visa allows an individual to enter and work in the United States based on an investment he or she will control while inside the United States. The E-2 Investor Visa is good for two to five years based on the country of origin and can be extended indefinitely provided the applicant’s business/franchise remains viable.

The investment must be “substantial” (defined later) as stated in U.S. Citizenship and Immigration Services (USCIS) E-2 investor requirements.

Investment visas are available only to citizens of the specified treaty countries. An E-2 visa allows for the applicant to include immediate family and non-investor employees of the business if those involved are of the same nationality as the investor and are destined for a role in the U.S. business.

How to qualify
Following are the main criteria for obtaining an E-2 Investor Visa.

Covered by treaty: The applicant must prove that there is a valid commerce and navigation treaty between his country of
citizenship and the United States. Next, the investor must prove that the funds that are being used to invest in the enterprise were in the possession and control of a national or nationals of a treaty country and were lawfully acquired.

Investment size: The E-2 visa does not require a minimum investment amount. Instead the investment must be substantial in
relation to the total cost of the business. While this is not defined by the USCIS, the investment is generally recommended to be $100,000 or more.

Investment status: At the time of the application, the foreign national applicant must have either already invested in the
enterprise/franchise or have taken steps toward investment. This may include signing leases or contracts, purchasing equipment, or incorporating a business. The applicant will be required to make the investment without knowing whether the E-2 visa will be granted unless an escrow agreement is utilized with the sole contingency being the approval of the E-2 visa. The funds must be irrevocably committed to the business, however.

Enterprise/franchise is a real, operating, non-marginal commercial enterprise: A marginal business is an operation that may make enough money to support the investor and his or her family but is not necessarily a thriving operation. To prove that the business is a real, operating, nonmarginal commercial enterprise, the applicant must present a five-year plan showing how the business will operate, earn a profit, grow, and contribute to the economy. Generally the business will also need to hire employees in order to meet the interpretation of the marginality requirement from USCIS or the consulate.

Applicant is able to develop and direct the enterprise/franchise: Finally, an applicant must show that the investment is active and that he or she will directly participate in the operation of the commercial enterprise.

With these criteria in mind, the advantages of buying a franchise as the investment vehicle for the E-2 Investor Visa process are evident, particularly when it comes to the last two requirements. A franchise is part of an existing business model that generally has an already established record of success in the United States. An E-2 visa consular officer who will ultimately review the applicant’s case is typically familiar with a franchise and is inclined to treat an investment in a franchise as a real, operating, non-marginal commercial enterprise.

Unlike other types of businesses, a franchise is typically a more traditional investment, with a storefront, inventory, and assets/equipment. The E-2 consular officer evaluating the application will be less inclined to see this as a speculative business, be more likely to approve this type of business, and ultimately the candidate’s E-2 visa.

In addition, because franchising agreements typically require oversight and guidance from the franchisor, it may be easier for foreign nationals to meet the requirement of being in a position to develop and direct the enterprise/franchise.

Jerry Rieder, CFC, has been a franchise consultant since 2012 and is an E-2 Investor Visa expert. He became part of the FranServe Training and Development Team in 2013 and has helped a large number of consultants become successful. He serves as a trainer, a mentor, and also as a facilitator for FranServe’s Power Teams. Contact Jerry at jerry@franserve.com.

3 04, 2019

Special Legal Considerations for Home Services Franchisees

Audra2019-04-03T15:39:03-04:00April 3rd, 2019|Tags: hiring trustworthy employees, home-services franchise, insurance policies, solid franchisee support systems, state licenses, strong brand recognition|

Special Legal Considerations for Home Services Franchisees

By Jonathan Barber

If you plan to operate a home-services franchise, you’ve got some “legal-ish” things to look into. Cleaning, decorating, landscaping, moving and storing, renovating, repairing, and restoration franchisees work in and on customers’ homes, which probably means that specific insurance policies and state licenses will be necessary.

Getting these requirements squared away—as well as hiring trustworthy employees—can take a lot of time and money, which could affect your choice of franchise. Following are some areas you should examine in detail from the very beginning of your decision-making process.

Licensing Requirements

Does your state require a license to perform the tasks involved with a particular franchise? For example, state laws for general contractors vary widely. In some states, anyone who performs work costing a certain amount or more is considered a general contractor and must be licensed to perform that work. If you aren’t licensed, you could face serious consequences, including fines.

The first step in navigating this issue is to ask the franchisor what licensing is required for this particular business. The second step is to look into your state’s licensing requirements. If reading statutes isn’t your thing, find a local attorney who can give you some guidance on whether you need to be licensed. If licensing is required, you should factor the cost of acquiring it and the time involved into your franchise decision. You won’t be making money while you’re waiting on a license.

Insurance Requirements

States also may require certain types and amounts of insurance. Your franchise disclosure document should outline the franchisor’s insurance requirements. The franchise agreement should explain the insurance requirements in further detail.

You should speak with an independent insurance broker in your state to find out whether your state requires additional insurance — beyond what the franchisor specifies—for the type of business you’ll operate.

Employment Contracts

Today, most franchisors will not provide you with sample employment contracts because they try to avoid what’s called “joint-employer liability.” In other words, they don’t want to be considered an employer of your employees so they stay out of your hiring process as much as possible.

Make sure that your employment contracts are buttoned up because liability increases when your employees work at your customers’ homes. It’s best to follow the advice of a local attorney in getting your employment contracts in place.

You also should perform background checks on every employee. Obtain the employee’s written consent before performing a background check. Your customers and their property should be your No. 1 priority. One bad experience could really hurt your home-services franchise.

Choosing Your Franchise

The home-services market may seem to be so loaded with franchises that it’s difficult to select one. But great brands distinguish themselves from the competition by doing just one thing and doing it very well. So I suggest you consider a franchise that operates in a niche area with strong brand recognition and solid systems that are efficient and support you in every way. I’ve always said it’s better to be a Jack-of-one trade and master of it than to be a Jack-of-all-trades and master of none. (That’s why our firm handles only franchise law—no family law, real estate, estate planning, or criminal defense.) Doing one thing, and doing it well, is a terrific formula for success.

2 03, 2019

An add-on franchise can boost the profits of an existing business

Audra2019-06-02T13:46:32-04:00March 2nd, 2019|Tags: addition of extra products or services, complementary franchise, complementary services, leveraging the buying power of the franchise, personal guaranty and confidentiality agreements, take your business to the next level|

An add-on franchise can boost the profits of an existing business

By Jason Power

Many people have been bitten by the entrepreneurial bug and have started businesses rather than buying into a franchise. Many of those same people later realize they’re missing out on a huge opportunity to reach additional customers through the addition of extra products or services. This is where franchising can lend a hand through an add-on franchise.

So what is an add-on franchise and how does it work?

Many businesses are seasonal or offer services that can be easily complemented with related services. In these cases, a business owner can take the existing business model and add extra products or services offered by a franchise system.

Some examples of this model include:

Lawn maintenance companies that add tree-trimming services.
Convenience stores that add gasoline or fast-food options.
Roofing companies that add fire, smoke, water, and mold-remediation services.

These are just a few of the business models that can leverage their existing customer bases by selling additional products or services. By adding the complementary franchise, these business owners can enhance their existing companies by leveraging the buying power of the franchise, its brand recognition, and the support system offered by the franchisor.

What about the pros and cons of adding a franchise to an existing business?

With every business, pros and cons must be considered. The obvious benefit to this add-on model is the new profit center derived from the addition of complementary services along with the reduced workload of creating the new product or service offering from scratch. Although the profit potential is great, the business owner must also consider the costs associated with buying into the franchise model, the restrictions that will be imposed by the franchisor, and the long-term commitment that comes with buying a franchise.

What are the legal considerations?

As with most franchise agreements, the business owner will be expected to sign personal guaranty, non-competition, and confidentiality agreements. These agreements should be reviewed carefully to prevent undue hardship for the business owner’s existing business model. If the business owner leaves the franchise, by mutual agreement or otherwise, the business owner must ensure from the beginning that he or she can continue operating the existing business without interruption.

The franchise add-on model can be a great way to add profit to an existing business by leveraging existing space and current customers. By knowing how the franchise add-on model works, understanding the pros and cons, and speaking with an attorney who focuses on helping franchisees, business owners are equipped to take their businesses to the next level.

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 Power at jason@franchise.law or by calling 980-202-5679. Visit www.barberpowerlaw.com.

1 12, 2018

How Game-Changer Franchises Handle Legal Issues

Audra2019-06-02T13:48:20-04:00December 1st, 2018|Tags: creating opportunities for others, franchise agreement, Franchisee-Friendly Franchise Disclosure Document, game-changer franchises, health of the overall franchise system and its individual franchisees, help franchisees get past hurdles, helping communities, terminating franchise agreement|

How Game-Changer Franchises Handle Legal Issues

By Jonathan Barber

Game-changer franchises are filling niches, raising the bar on service, helping communities, building cult followings, creating opportunities for others, and generally turning heads everywhere. Aside from growing their franchises, game changers are truly interested in their franchisees’ well-being, and so they’re also rethinking how they view—and handle—legal issues.

Instead of dropping the hammer and collecting, game-changer franchisors are electing to help franchisees get past hurdles. Here, we’ll show you a few ways franchisors are changing the game and looking out for their franchisees on the legal front. Incidentally, this strategy is great for business because when the system works together, the brand takes off.

The Franchisee-Friendly Franchise Disclosure Document

We all know that the franchise disclosure document (FDD) is flat-out hard to read. Even though the federal franchise rules require FDDs to be “written in plain English,” lawyers just have a field day typing up run-on sentences chock full of four-syllable words. At the end of the drafting process, the franchisor has a 200-to-300-page document that they don’t fully understand.

Fortunately, there is a growing movement, particularly among younger, more entrepreneurial franchisors, to keep FDDs short, sweet, and to the point. My firm has recently drafted a few that, including the franchise agreement and all exhibits and addendum, come in at (or under) 100 pages. While the FDD and franchise agreement are at the heart of the franchisor/franchisee relationship, there is so much more that goes into running a successful franchise. The FDD shouldn’t be something that scares away prospective franchisees. In fact, it’s the franchisor’s biggest sales piece, and it should be drafted and treated like that.

Handling Franchisee Problems

A “default” occurs when a franchisee breaches the terms of his franchise agreement. Traditionally, when a franchisor caught wind of a franchisee doing something wrong, the franchisor would send a Notice of Default and then, if warranted, terminate that franchisee’s franchise agreement. Now, however, there is a growing trend among newer, younger franchises, in which the franchisor is more willing to work with franchisees to fix things.

A great example of this is when a franchisee gives a franchisor notice that the franchisee will not be able to meet its financial obligations for one reason or another. The franchisee may have cash-flow issues, staffing problems, or even personal things going on that could lead to this problem.

At this point, a franchisor has two options. On one hand, the franchisor could put the franchisee in default and proceed with terminating their franchise agreement once the opportunity arises. Then the franchisor could legally go after the franchisee for past due royalties, liquidated damages, attorney’s fees, and other expenses through the franchisee’s personal guaranty. That could be devastating to an individual franchisee and his family. Nevertheless, this has happened many, many times in just about every franchise system out there.

On the other hand, the franchisor also has the option to work with the franchisee. The franchisor could waive, reduce, or defer royalties for a few months. He may even send some support staff to help the franchisee operate the business more efficiently. The franchisor could even facilitate the sale of the business to another franchisee or someone outside of the system. In certain cases, the franchisor may even opt to buy the business and take it on as a corporate or affiliate location. These options show that the franchisor puts the health of the overall franchise system and its individual franchisees above its own interests.

27 07, 2018

Protect yourself: Form an Entity

Audra2019-06-02T13:49:27-04:00July 27th, 2018|Tags: form a business entity, franchise agreement on behalf of an entity, limit your personal risk, limited liability company, protect your personal assets|

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.

Legal

Before you Buy

Follow this checklist for due diligence

Road Show

Thinking of investing in a food truck franchise? Here’s what you need to know.

When a Franchisor Goes Dark…

Franchising and the E-2 Investor Visa

Special Legal Considerations for Home Services Franchisees

An add-on franchise can boost the profits of an existing business

How Game-Changer Franchises Handle Legal Issues

Protect Yourself: Form an Entity

Limit Your Liability

Thinking of investing in a food truck franchise?
Here’s what you need to know.