Friday, February 24, 2017

Don't Forget about SBA Franchise Registry

The Franchise Registry is an important tool for franchisees and franchisors - eligibility information is available here with a click.

As noted on the Franchise Registry site (powered by FranData): "The Franchise Registry lists franchise systems whose franchisees enjoy the benefits of a streamlined review process for U.S. Small Business Administration (SBA) financing. Loan applications for franchises on the Franchise Registry can be reviewed and processed faster and more efficiently by the SBA and its lenders because the respective franchise agreements do not need to be reviewed in each individual franchisee situation." 

And, for current FDDs and Franchise Agreements it is important to remember that a new Addendum to Franchise Agreements is available. Initially, the new Addendum (one-size fits all) was made mandatory by the Small Business Administration (SBA) but a recent change allows franchisors to use their previously-approved 2015 or 2016 SBA Addendum. You can find the updated policy here. It is important however to let FranData know which option you will use so lenders can be alerted to the choice.

After reviewing the new Addendum and comparing it to some of my clients' previously-approved 2015 or 2016 SBA Addenda, the Addendum seems far simpler with little-to-no downside. But, each franchise system needs to review this choice with franchise counsel.

Good luck with your SBA financing!

Friday, December 30, 2016

Goodbye 2016! Bonus Included for You

Well 2016 was certainly an interesting year ... most of my comments would likely cause some controversy (isn't that what a contrarian lives for?) but I will refrain and say only that 2017 could be even MORE interesting! And, it would be even better if I improve in Fantasy Football and the Eagles have a winning season.

Thank you readers ... for some unexplained reason visits to this blog have increased dramatically over the last few months (have I been discovered?) -- this month alone there were over 7,100 views and all-time visits just topped 19,000! Again thank you.

Some quick news: my ABA Forum on Franchising colleague and VERY good friend, Ken Milner, just reported a "Holiday Present for Franchisors in PA" via the ABA Forum List-Serv. This is another chink in the "joint-employer" stance. The Pennsylvania Supreme Court let a lower court's decision stand that held that a franchisor was NOT a joint employer of an employee of a Saladworks' franchisee, at least in regard to being liable for workers compensation payments. (lower court decision: Saladworks, LLC, et al v. WCAB (Gaudioso), et al, No. 1789 C.D. 2014, decided October 6, 2015) Thanks Ken! As noted in my last post (Joint Employer Controversy ... Trumped?) , perhaps 2017 will see the demise of this ill-begotten theory (at least in the franchise context).

And here is a "Holiday Present" for you -- this year I had the privilege of working with Bethany Appleby (Wiggin & Dana, LLP) in presenting our paper at the ABA Forum on Franchising's Annual Meeting in November - Show Me the Money! Maximizing Monetary Recovery in Franchise Cases. If you are interested in that sort of thing -- here's a copy for you

Wishing you a Successful 2017!

Tuesday, December 13, 2016

Joint Employer Controversy ... Trumped?

Wow ... I admit to falling off the blog wagon of late! No real excuse except ABA Forum on Franchising burn-out (as author/presenter), college football, pro football, and, oh yeah, a number of client-litigation matters!

First, thank you for visiting this blog ... there have been over 14,000 visits since starting this effort in January 2015 and over 4,000 visits last month - maybe I should post LESS frequently!

Many of my posts are stimulated by new franchise cases, striking client-experiences, and hot franchise topics. I think my "stimulation" has been dampened by the Trump-election and the litigation matters mentioned above (they become obsessions!) But let's talk Trump and the joint-employer controversy for a moment ...

I have posted on the joint-employer issue a few times (here and here) and have advocated to "relax" ... let the courts sort it out. In the meantime, franchisors have gone into protective-mode, changing their procedures, agreements, and manuals. Now even the Small Business Administration has gotten into the act - issuing a new mandatory Addendum to Franchise Agreements for franchisors seeking SBA financing for franchisees via the Franchise Registry that includes the following provision: EMPLOYMENT - Franchisor will not directly control (hire, fire or schedule) Franchisee’s employees. (tip of the hat to Edith Wiseman with FRANdata for passing it along) WOW, this certainly smacks of one government-agency feuding with other government-agencies (NLRB and DOL).

So what does this have to do with Trump? Since the election, a number of my ABA Forum on Franchising's colleagues have been commenting on the Forum List-Serv that Trump's election may derail the efforts to hold franchisors jointly liable for their franchisees’ employment law violations; noting that the NLRB will likely become Republican controlled and the leadership at DOL is destined to change as well. By the by, the joint-employer session at this year's Forum's Annual Meeting had one of the largest attendances. (Authors: Joe Fittante, Justin Klein, and Karen Marchiano, with "pinch-hitter" Shelly Spandorf).

So stay tuned ... Trump's election may have a silver-lining for some segments of our world.
PS - Ohio lost its favorite son last week - "Godspeed John Glenn."

Monday, October 24, 2016

Recent Decision - Lost Future Royalties Denied

Tip of the hat to Bruce Schaffer at Franchise Valuations for reporting on this case in his "The Franchise Valuation Reporter." Bruce is colleague from the American Bar Association's Forum on Franchising who focuses his expertise on valuation and damages, cyber crime, expert testimony, and tax nexus.

Our topic for this post is Lost Future Royalties - this has been the subject of my earlier posts: Franchisees - Damages Warning: Lost Future Royalties and Franchise Valuation through Damage Analysis.

The case is Mister Softee, Inc., Mister Softee Sales and Manufacturing, LLC, and Spabo Ice Cream Corp. v. Reza Amanollahi, 2016 WL 5745105D. New Jersey. Civ. No. 2:14-CV-01687(KM)(JBC) - As noted, the case involved a claim for lost future royalties and the decision followed the well-known but controversial decision in Postal Instant Press v. Sealy43 Cal. App. 4th 1704 (1996) Postal Instant Press v. Sealy and cases that adhere to its rationale, hold that a franchisee cannot be liable for lost future royalties when the franchisor ELECTED to terminate the relationship even though the franchisee's act (ex, failure to pay royalties) gives rise to the termination.

After reviewing New York case law, the judge in Mister Softee concluded that summary judgment would be denied on Mister Softee's claim for lost future royalties: "Here, Mister Softee decided to terminate Amano's Franchise Agreements because Amano moved his trucks out of the Manida Street Depot and stopped making payments under the Truck Notes. Mister Softee faced a choice: terminate the Agreements, or remain within the Agreements and sue for the ongoing unpaid royalties. It chose the former."

So mark one up for FRANCHISEES on this controversial topic! (even though Mister Softee brings back many childhood memories while growing up in south Jersey) Thanks Bruce!

If you are planning to attend the American Bar Association's Annual Forum on Franchising in Miami on November 2-4 don't forget to drop into Show Me the Money! Maximizing Monetary Recovery in Franchise Cases, where I will join Bethany Appleby (Wiggin & Dana, LLP) for an informative session.

Wednesday, September 7, 2016

Franchise Disclosure Document - Dissected - Part Four

Now for the wrap-up of this series of posts. (If you missed Part One, Part Two, or Part Three, you can click on the hyperlinked text)

Although we could focus on many of the remaining FDD Items, Item 19 - Financial Performance Representations deserves our attention. Franchisors need to get it right and franchisees need to understand their right to additional information.

Before 2007, this item (under the old UFOC format) was labeled "Earnings Claims" and was much stricter than today's version. To encourage more franchise systems to provide financial performance information, the rules were loosened. Now, the Amended FTC Rule "permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included in the disclosure document." As a result, this disclosure has been given a wide berth.

When we dissect the language, we see that the information can simply be "potential" performance if there is a reasonable basis. Now the FTC Compliance Guide carries a section on the "Reasonableness of a Financial Performance Representation" (p.135) that I will let interested readers review on their own; but I want to focus on another requirement of Item 19.

To make a proper disclosure in compliance with the Rule, in addition to having a reasonable basis, a franchise system must have "written substantiation for the representation at the time the representation is made." However, in the FDD, a statement indicating that "written substantiation for the financial performance representation will be made available to the prospective franchisee upon reasonable request," need only appear. The FTC Compliance Guide notes that written substantiation means that the franchise system must have "supporting data underlying any representation..."

Much more could be said about the Item 19 requirements (see the Amended FTC Rule and the FTC Compliance Guide) but the take-away here is: franchisors must have the underlying data ready to produce and franchise-buyers should ask for it.

Although I must say in my years of practice, I have found that franchise-buyers are hesitant to request the information even when counseled to do so! Why? They don't want to appear uncooperative or distrustful. Maybe franchisors should be more aggressive in offering the data? After all, its supposed to be the reasonable basis on which buyers are encouraged to buy into the system!

The End!

Friday, August 12, 2016

Franchise Disclosure Document Dissected - Part Three

We pick-up our observations about the Franchise Disclosure Document (FDD) with Item 11 - Franchisor's Assistance. If you missed Part One or Part Two, you can click on the hyperlinked text. 

Item 11 is the most comprehensive in the FDD - and an important one for both sides of the franchise equation. Just a few insights here on some of the topics covered in Item 11:

Operations Manual - nearly every franchise system has an operations manual. The manual is the "bible" for the operating system - operational requirements are enforced through the franchise agreement. Item 11 mandates two alternative disclosures regarding the manual: either the Table of Contents must be provided OR the buyer must be given the opportunity to review the manual before purchasing. Few franchisors offer the opportunity for review and only provide the Table of Contents. TOC's are typically generic and offer little insight into the manual. Few franchise-buyers go further and rely on a cursory TOC review. This is an important piece! Franchise-buyers should request access to the manual and serious franchise systems should grant greater access (protected by a non-disclosure) before the sale. Little is gained by looking at the TOC.

Training - another important item is training. Item 11 discloses the Training Program in a Table format, covering the subject, hours in the classroom and on-the-job, and the training location. A generalized description of the program is usually offered and the instructional materials, along with the instructors' experience. Here is the observation: many times franchisors do not fully disclose required information about the instructors. It is not acceptable to simply refer back to Item 2 ("Business Experience" of the main officers). The name of each instructor and their length of experience "in the field" and with the franchise system is required. So franchisors, be proactive and offer the full information; franchise-buyers, make sure you get all the information.

Time Limit to Open - Item 11 discusses the amount of time franchise buyers will have to secure a lease and open the business. Everyone is interested in opening as soon as possible. But, some of the time-frames are too short, too unrealistic. In some markets getting a lease alone can take 6-12 months. This is really a negotiating point for the franchise agreement - seek to expand the deadline. Most franchisors are flexible on this point ... because they realize it may well take more time than they estimate.

Hopefully, one more part upcoming to finish the dissection!

Monday, August 8, 2016

Franchise Disclosure Document Dissected - Part Two

We continue our review of Franchise Disclosure Documents (FDD) from a few insights that have come my way over the years. Insights that may be of value to franchise purchasers and franchise companies alike. If you missed Part One, you can find it here. We will not cover every FDD item but focus on the highlights.

Today let's start with FDD Item 5:
  • Initial Fees - this item covers the amount of money or fees paid directly to the franchise company at the beginning of the process. Typically referred to as the "initial franchise fee," this amount should be clearly indicated in Item 5 and match the corresponding amount or amounts disclosed on the Cover Page. On the Cover Page, the franchise company should have at least two amounts disclosed: the total estimated investment required that corresponds to the Item 7 chart (Estimated Initial Investment) and the amounts that must be paid to the franchisor to get started (Initial Fees), again matching the Item 5 amounts. If there is a development agreement fee or other initial charges due to the franchisor, those amounts must be disclosed and accurately reflected on the Cover Page. If the amounts don't match something is wrong.
  • Estimated Initial Investment - Item 7 is arguably the most important item in the FDD. It is supposed to inform readers of the total expenditure to get started (so it should repeat the Item 5 amounts plus a variety of other expenses) and identify the working capital needed for at least the first three months. Franchisors are wise to  draft this section carefully and review it on an annual basis to ensure accuracy. Although it is an "estimate," grossly understated amounts could lead to disputes when a franchisee's experience is negative and the start-up estimate was below par. Franchise buyers should not stop at the Item 7 estimate. Asking other franchisees about their actual start-up cost and how it compared to estimate, is highly recommended. As an example, sometimes smaller items such as professional fees (attorneys and accountants) are under-estimated. Franchisees need to conduct due diligence on this important item. Finally, if there is a development program, a separate estimate should be provided for that.
  • Financing - If the franchise company offers financing for start-up costs (including inventory and equipment) or assists with securing a loan, it should be explained in Item 10. Here is something I have encountered, especially with new franchise systems: no disclosure or indication of financing is provided in Item 10 but "to make a deal" a franchisor enters into an installment payment arrangement with a franchise purchaser for some of the initial fees or costs. This is financing! And the terms of any financing MUST be explained in Item 10.
More later!