Every month I sit down to write a column about the things that are important and impactful to a franchisor from my perspective as a franchise attorney. This month, I decided that nothing says it better than one of my favorite phrases; the devil is in the details. And the details that trip up many franchisors are the state of their franchise agreements. By Tom Spadea
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.
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.
by Diana Capirano
Certified Franchise Consultant
Like other Detroit natives, Anthony, a client of mine, worked at Ford Motor Company. Anthony, like prior generations of employees, had viewed positions at companies like Ford as secure, with a path to retirement. For 25 years, he felt his job was his safety net, but like many of you reading this magazine, he also aspired to own his own business through franchising.
On bad days, Anthony was committed to quitting, but he rationalized there were still goods days where he was content with stable pay, growing retirement savings, and a large pension—Middle America’s dream. Conflicted, he began an on-line franchise search, and in October 2016, one fateful click connected him to me.
Anthony shared his success as a prototype engine technologist and engineering tech for Ford, as well as his passion to restore classic and antique cars. He expressed a desire not only for “financial freedom,” but also the freedom that comes from owning your own business. He wanted a schedule with more time for family and hobbies. After years of designing and restoring cars, Anthony made a brave decision to re-engineer his life and his future.
Bumpy Road Ahead
Anthony’s story is not unique, but it’s highly inspirational. Along with mounting stressors at work, Anthony was caring for elderly parents in poor health, and he had just gone through a very ugly divorce. As a result of a damaging divorce settlement, his credit score plummeted more than 200 points to 560. Ouch! I knew that this would immediately disqualify him with franchisors and it would be impossible to secure a loan. Terrible credit is the “kiss of death” in our world, and his plans for an SBA loan were immediately crushed.
Certainly, this is not the first time I met someone with a disqualifying credit score, but it was the most impactful. Anthony never came off of the throttle. (For those who don’t yet know me, I’m a car enthusiast so pardon the metaphors). Anyhow, my client, a self-proclaimed pessimist and cynic suddenly became fueled with conviction and positivity. His original fears and doubts were now powered with purpose and focus to overcome this major bump in the road. For many, this would have been their jumping off point—a point of acceptance and giving up. Anthony’s innate problem-solving skills now defined his personal strength as he kicked into high gear.
Improving his credit to the targeted 700 score would not be easy, nor would it happen overnight. Still motivated to begin research for some great franchises, he began with the end in mind—freedom. He enlisted a credit-repair company and throughout the next 22 months, Anthony worked resolutely on building back his credit.
Over many months, he met with six franchises and he was transparent about his situation. Wanting to stay in his comfort zone (automotive), I convinced him to break out of that boundary to view other models. Most franchisors will not even engage a client with poor credit, but as they “looked under the hood,” they saw Anthony’s desire, determination, and drive—all qualities needed for a successful franchisee.
Anthony’s next key obstacle was adapting an employer’s mindset. After all, he had been an employee his entire life and a union worker for 25 years. Anxiety set in. Transitioning from receiving a guaranteed paycheck to being an employer who cut paychecks was worrisome.
By finding the right model with FISH Window Cleaning, he realized that a recurring revenue structure would create a more predictable income. Anthony became confident and excited for the freedom of a limitless paycheck. Here’s the best part…days after Anthony returned home from Discovery Day, he received an email that his credit score had reached 700. Finally, after all of that hard work, he was granted his loan and signed his franchise agreement with FISH Window Cleaning.
I hope Anthony’s story inspires you to take a path less followed. Anthony achieved his end goal—freedom, and in my opinion, his journey not only restored his credit, but also his credibility. He emerged just like one of his painstakingly restored cars—a total “classic!”
Diana Capirano, CFC, has an expansive career which includes corporate and franchise sales and development, marketing and operations, merger and acquisitions, structuring and negotiations as well as business ownership. As a highly-respected consultant and mentor, Diana espouses a profound commitment to help prospective business owners and investors understand and navigate the process of deciding on a franchise business. Contact Diana at 941-999-0095, email diana@focusfranchise.com, or visit http://www.focusfranchise.com.
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.
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 JBarber@barberpowerlaw.com. Visit www.barberpowerlaw.com.