Wednesday, October 2, 2019

I Love Whoppers ... I Hate Burger King

This is not the first time I have ranted on this topic -- in a previous post I vowed "no more Burger King." see Brand Enforcement Redux. That was 2015!

So four years later I am craving, you guessed it, a Whopper. What to do but visit a Burger King ... yes I broke my vow. I think I was brain-washed by all those "Impossible Burger " commercials. And no I do not want a fake Whopper.

I visit my local Burger King late in the lunch hour, eye the drive-thru line, remember the "Hiring Now" post on the brand sign, and opt for dine-in. I should have turned around right then. Glancing to my left, I see five hungry working men fixated on the post-checkout service line. Drooling for my Whopper and seeing the hunger in their eyes, I fight against my better instincts and step up to order.

A busy-manager-type takes my order as he negotiates bagging fries, shouting out pick-up orders, and exhorting the staff. Although doubtful, I figure how bad can it be? This is the self-deception one engages in when craving a Whopper. I order a Whopper with cheese, sandwich only, and cup for water. $6.10! I think wow the prices have really gone up since 2015. I look at my receipt to see if they charged me for water. Nope.

A few more unsuspecting customers wander into the service black hole, as me and the five work men await our lunches. And we wait. Of course, under the circumstances, I expect to wait a bit. But after five minutes and, from the looks on the faces of the working men that suggest a collective jump-the-counter-bull-rush, I start timing the wait.

My wait was 18 minutes! And, as I approach the counter with a "what-the-#%&#" look on my face, the manager-type looks at me and the order board and yells to the back "waiting on a DOUBLE WHOPPER WITH CHEESE." I hesitate, look at my receipt, and realize that DBL meant a double! I explain the error, fearful that any comment will cause further delay. Almost simultaneously a double Whopper with cheese lands on my tray and the manger offers a partial refund. With some quick mental gymnastics, a dollar is placed in my hand. At that point I would have taken a dime!

Whew, at least I didn't have to pay for water.

Need I say more Burger King? See you in 2023.




Thursday, September 26, 2019

SBA Overview and Key Considerations

Once again I have invited Bryan Jasin to be a guest contributor on this SBA topic -  Bryan leads the Franchise Specialty Banking Group at The Huntington National Bank in Columbus, Ohio and serves on the Membership Committee for the International Franchise Association. 


The Small Business Administration manages a lending program to promote business ownership and entrepreneurship in the U.S.  Think of the program as the government sets the rules to make a loan and if that loan goes bad, then the government will provide a guarantee for some of the debt.  This encourages banks to lend into businesses where there may not be historical cash flow, sufficient collateral, or other considerations with the transaction.  My goal today is to provide a high-level view of the three core programs and some key considerations.

The SBA Express Program:  This program is for loan requests up to $350,000 and offers a borrower a faster loan process with fewer collateral and loan requirements.  The SBA does not require full collateral coverage in this program, but any individual bank may require full coverage.  Most borrowers use this program to start a small business, expand a current operation, acquire a business or purchase a piece of real estate or equipment.  The program offers a 50% guarantee on any loan loss to the bank after all collection efforts have been exhausted.

The 7(a) Program:  This program is generally for loan requests from $350,000 to $5,000,000 and generally used for a startup business loans, business acquisition loans and real estate purchase loans.  Maximum terms generally cap out at 10 years or up to 25 years if real estate is involved.  The SBA requires a minimum 10% equity into the transaction, but banks often may require more based on the loan structure, industry, and use of proceeds. This program offers a 75% guarantee. 

The 504 Program:  This program is generally a real estate acquisition and development loan program.  The program requires a 10% equity injection from the borrower, a bank loan up to 50% of the real estate value, then a 40% secondary loan from a corresponding community development corporation (CDC) that is in a second lien position and then often sold to the investor market.  The primary 50% loan cannot exceed $5,000,000 so often this program is used for larger real estate purchases.  The maximum term and amortization is 25 years.  

Key Program insights to remember:

The maximum exposure to any one borrower is $5,000,000.
There are “credit elsewhere” tests to ensure the loans go to borrowers who need the support – if a bank can qualify the loan conventionally, it cannot go to the SBA program.
Most loans over $350,000 require the bank to fully collateralize the loan which means the bank often will take all available personal collateral such as equity in your primary residence or other available collateral

As a former SBA leader once told me, “the SBA program does not make a bad loan a good one, but a good loan a great one!”
Happy Lending!
Bryan Jasin 

Thank you Bryan.

Monday, September 9, 2019

Buying an Existing Franchise

This topic was called to mind because, at the the moment, I am representing two franchise buyers who are looking to acquire existing, established franchises. This is not my first rodeo in this arena. But, these recent clients reminded me of the complexities involved.

At first thought, you might think purchasing an existing franchise location would be simpler than starting from scratch. Well there are pluses and minuses. 

In a straight-up franchise purchase from a franchise company there are only two parties typically involved from the outset: the buyer and the franchise company. Sure, franchise purchases are complicated and should not be pursued without competent legal and accounting assistance. However, you are essentially starting with a clean slate; and you have time to assemble the complimentary pieces (training, leases, vendors, etc.).

When you buy an existing franchise, the players multiply: the selling-franchisee, the selling franchisee's lawyer and accountant, the current landlord, sales brokers, current customers, in-place vendors, lenders, the franchisor, and you, the buyer ... and hopefully your lawyer! More parties = more complications. Coordinating all these people and pieces usually falls on the buyer's shoulders.

As a result, the transaction process is multi-staged, and contingencies abound. Most of these deals are asset-based, meaning the buyer is acquiring the selling franchisee's existing assets, inclusive of the franchise rights. The first step is usually a Letter of Intent (LOI). This outlines the general terms and offering price but typically is not a binding contract. That follows in the form of an Asset Purchase Agreement, providing much more detail and conditions than stated in the LOI.

Assuming an Asset Purchase Agreement (APA) is executed, the fun begins! The APA should, among many other things, indicate that the deal is contingent on approval of the franchisor, the landlord, any lender. Each one of these buckets has its own hoops to jump through. For instance, the franchise company will want to qualify the buyer in the midst of everything else going on and the lender will want to vet the franchise company and the business offered for sale. Landlords want to qualify the new tenant! And you need to review and accept the franchise agreement, the lease, and any loan terms.

So where is the payoff Jim, the pluses? Although it may be less complicated to start from scratch, an existing franchise has existing customers or, at least, should have. Established customers mean instant revenue. The trade-off is that purchasing an existing franchise will generally be more expensive than developing from scratch, since you are acquiring the established goodwill along with the other assets.

A lot more could be written on this but you get the picture! Be careful out there!


Franchise Purchase Financing


To keep me from ranting about the Antonio Brown saga, I have invited Bryan Jasin to be a guest contributor to The Franchise Contrarian today. Bryan leads the Franchise Specialty Banking Group at The Huntington National Bank in Columbus, Ohio and serves on the Membership Committee for the International Franchise Association. On Antonio Brown, I must say one thing: Antonio, you have given me one more reason to hate the New England Patriots!

With that, Bryan take it away:

As a lender in the franchise industry, I have been party to thousands of deals.  I will not claim to have seen it all, but I have seen my fair share, then some.  At Huntington, we’ve seen the traditional start up with husband and wife manning the new venture, the seasoned multi-unit operator opening their 10th or 15th location, as well as silent partners looking for returns with an industry operator.  Sometimes we have seen new businesses grow year over year and then some businesses that never get off the ground. 

The volume of deals have provided a number of insights.  In working on transactions both big and small, there is comfort zone in the process.  Whether it is a million-dollar loan or a multi-million-dollar deal, the lender and franchise buyer must establish a trusting, supportive relationship. Trust breeds comfort.  I always try to remember that when working with a new franchisee, this is the biggest financial investment they are ever going to make. With any investment decision, you want to ensure you work with partners that have been through the loan process.   

What should you look for?  Work with a bank that has experience in your industry and a loan structure based on your experience.  A large ground up construction financing request may play well in one institution and poorly in others.  Are you looking for capital to start your venture? Not every bank has the risk appetite to lend into projected revenues and startups.

So vet your lender just as you would your new franchisor! 

Often your franchisor has relationships with banks that have experience underwriting loans for your brand.  Because the bank probably has closed many loans for other franchisees, the loan process should be efficient and not too difficult. I also encourage you to see how your franchise peers structured their loans to get started or grow.  You can learn who is good, who is not, and some good insights into loan fees and interest rates. 

Lastly, ask lots of questions throughout the process.   Your due diligence can kill a bad deal for you or make a good deal great. 

Thanks Bryan! You can reach Bryan at 614-331-8478 or Bryan.P.Jasin@huntington.com

Monday, September 2, 2019

When is the Best Time to Engage a Franchise Attorney?

Franchise Buyers: Is there a right time to engage a franchise attorney?

Based on my experience, some people wait too long to engage a franchise attorney (Well, at least most of those folks still hire counsel before they buy). I suspect that those who do delay are concerned about incurring legal fees before they select the "right" franchise. That may not always be the case.

I cannot speak for all lawyers who represent franchise buyers but my belief is that most franchise lawyers are happy to conduct a preliminary call BEFORE you are locked into a specific system. Helping buyers, by providing general, early guidance, creates a fair amount of credibility; in essence, reinforcing the idea that you have contacted the right lawyer. Screening the lawyer may be as important as screening the franchise system.

So how can this early connection help? First, counsel may simply outline the best way to work together going forward. That is, offering general guidelines as to when counsel can become effectively involved, offering the chance to ask questions along the way, and steering the potential buyer to resources to build their own "searching skills." Also, by simply directing a franchise buyer to look for the most important items in a Franchise Disclosure Document. A franchise buyer can also determine the fees that will charged once the clock is turned on. All in all, it makes you a more intelligent buyer!

On the resources, for instance, I provide potential buyers with a copy of my e-Book, How to Buy a Franchise. There are many other resources online and in print. Buyers should take advantage of these resources. My website provides a Resource section, that leads to many online guides, including information from the Federal Trade Commission, various franchisee associations, and franchise consultants.

Finally, the franchise attorney you contact may have prior experience in the category you vetting (i.e., daycare centers, home care, fast food, etc.) and may be able to offer early warning signs or guide you to a reliable franchise company.

So make the call, get on the right track, and take advantage of the resources.


Wednesday, August 28, 2019

Want to Own an NFL Franchise?

A few years ago my daughter invited me to play Fantasy Football with her college friends. I scoffed at the thought...and did not sign up. But my wife did! Because she had a conflict on draft day, she asked me sit in and make the picks. Since the draft is web-based and I questioned my computer skills, I protested. But being a dutiful husband I complied...with my daughter's help.

From that first day I was hooked! And, my wife let me "assist" that first season. I was forced to get my own franchise the second year.

Unless you are a billionaire, this is the closest you will come to "owning" an NFL franchise.

The NFL season is right around the corner and there are many ways to play - ESPN Fantasy Football, Yahoo Fantasy Football, and NFL Fantasy. All are free but your league may voluntarily request "entry fees" to fund year-end prize money.

My league uses ESPN Fantasy Football and it is amazingly thorough, user-friendly, and informative.

If you are already an NFL fan, fantasy football will take you to another level. You don't pick a team, you pick offensive players and a defense to form a team. If you are a "franchising fan," jump on board too - there is branding (name your team), uniforms, strategic planning each week, trademarks, personnel management, and so much more.

Take a break from the office and get your own NFL franchise! Go Eagles!

Wednesday, August 21, 2019

Why I Love Mediation and You Should Too!

The majority of franchise agreements that I come across or create these days have a mediation clause. For those of you who have no clue what I'm talking about, when a dispute arises, the disagreeing parties have only a few options: do nothing, file a lawsuit, go to arbitration, or sit down and try to work it out a/k/a MEDIATION.

This is not the first time I have addressed this important topic and you can find earlier posts here. And, full disclosure: I serve as a mediator when selected by the parties or their counsel.

But, here is why I love mediation and you should too! To help your clients or your company resolve disputes before spending a fortune.

Litigation and arbitration can burn up a very large sum of money. Remember it is a battle. The courtroom or the arbitration room is the battleground and counsel are the warriors. Let's not get too carried away here but some of these disputes run from tens of thousands of dollars to over hundreds of thousands of dollars.

Mediation is a process that allows parties to work together, usually with the help of a trained and experienced mediator (often a lawyer but not universally), to settle a dispute before an action is filed and sometimes after. Mediators come in all types (ex. commercial law, domestic disputes) and styles (ex. objective neutrals, aggressive, evaluative). But the hallmark of an effective mediator is keeping the parties engaged, keeping them talking and negotiating. Also, an astute mediator may offer "creative" solutions that the parties did not consider.

So counsel, if you have a long-standing client, wouldn't you want to save them time and money? Wouldn't it be the best advice you can provide under the circumstance? Besides, litigation or arbitration is always on the table but why not think of it as a last resort?

Company officials or franchisees, not only could you save those precious funds, but you may find a solution that preserves the relationship. The earlier you seek resolution, the more latitude you have.

Of course some disputes cannot be resolved through mediation but, even when there is a small chance of resolution, it seems like a wise investment.

And, as any commercial lawyer knows, whether a litigator or transactional lawyer, serving our clients' needs is our top priority.

Wednesday, August 14, 2019

Liquidated Damages - Friend or Foe? (Part Two)

In Part One of this topic, we discussed what Liquidated Damages are, how they may be a "penalty," and the potential risks involved in a franchise setting when there is no cap on damages upon an early termination.

This part, as promised, addresses why some franchise companies may want to use Liquidated Damages to their advantage and why franchisees may want to negotiate for a Liquidated Damages clause (even though it may sound counter-intuitive). Post-termination damages in franchise matters is complex and we will just scratch the surface here. (More detail can be found in this 2016 ABA Forum on Franchising's Annual Meeting article  - Show Me the Money! Maximizing Monetary Recovery in Franchise Cases - authored by Bethany Applebee (Subway's General Counsel) and me).

First, the idea of "legal damages" is to make an injured party whole without injecting speculation into the equation. When a franchise company seeks a wholesale remedy of "lost future royalties" for an extended term (let's say 5 years or more), it may be getting more than necessary. That is, many franchise systems seek to replace a terminated franchisee as soon as possible - akin to replacing a terminated tenant on a lease. And, as is the case with a lease, a franchisor has a duty to mitigate its damages by finding a replacement. The real measure of damages is the period of time it takes to find a replacement; so how do you calculate this in advance without some speculation.

Some excellent franchise-lawyers (Rupert M. Barkoff (recently passed away) and Christopher P. Bussert), posited this in their 2009 article: Can a Franchisor Recover Lost Future Royalties? The Debate Goes On, 12 The Franchise Lawyer 2 (Spring 2009):
In fact, when informally asked what "should" be a "fair" settlement of a lost future royalties dispute, many attorneys suggest that two or three years would be an appropriate level of compensation. These opinions may be anecdotal in nature, but they do demonstrate to some level what is considered reasonable in the franchise community on this issue. In addition, when franchise agreements provide for liquidated damages if the franchisee improperly terminates, two to three years of royalties is often offered (and upheld by courts) as a reasonable compromise.
The Barkoff-Bussert thinking was based on a reasonable time to replace a terminated franchisee. Not only is this a fair approach, on the franchisor-side, it eliminates arguments about speculation, lack of mitigation, and other defenses a terminated franchisee may raise. Thus, franchise companies may want to consider this shortcut to damage calculations... and as a means of keeping franchisees from seeking bankruptcy protection.

And, if a franchise company does not build a Liquidated Damages clause into its franchise agreement, should a franchisee negotiate for one? In states where courts have or may award damages for the FULL remaining term, it seems logical for franchisees to pursue this stop-gap clause. To determine if it is wise for a franchisee to negotiate for a Liquidated Damages clause, seek out an experienced franchise-lawyer in your area, preferably a member of the American Bar Association's Forum on Franchising.



Wednesday, August 7, 2019

Liquidated Damages - Friend or Foe? (Part One)

This topic has only been mentioned tangentially in this blog some time ago -- Franchisees - Damages Warning: Lost Future Royalties (see the last paragraph of that post)

In my experience, Liquidated Damages are most commonly found in construction contracts, where damages can be imposed for delays in completion or other material breaches. But we jump the gun. What are Liquidated Damages and what the heck do they have to do with franchising?

Simply stated, Liquidated Damages is the amount of money that both parties in a contract agree upon if a breach of contract occurs or legal action arises as a result of a contract breach. That is, if there is a breach by one party, instead of arguing about the potential actual damages that may result, the parties agree in advance at the time of the contract is signed  that the damages will be predetermined. Sounds simple enough ...

But, Liquidated Damages has a checkered past and, if applied in a punitive or excessive manner, can be challenged as an unenforceable "penalty," even though the parties "agreed" in advance. Therein lies the rub: agreed? Oftentimes Liquidated Damage provisions are imposed by one party and, when that occurs, the "penalty" argument ensues. Although there is more legal nuance to how Liquidated Damages work, let's turn to how Liquidated Damages are used in franchising.

The post mentioned above Franchisees - Damages Warning: Lost Future Royalties summarizes the hazards that can ensue when a franchise agreement is terminated by a franchisee prematurely (i.e. before the full contractual term is fulfilled) and the franchise company seeks damages in the form of "lost future royalties" and other lost fees the company expected. If there is no Liquidated Damages clause, some franchise companies believe they are entitled to the lost royalties and fees for the entire remaining balance of the contract term (think: a 20-year term with 10 years left to go). This can be a hefty amount! And some courts have granted these types of damages. Very bad for franchisees.

Of course, the higher the amount sought, the greater the likelihood that a franchisee will fight or perhaps seek the shelter of a bankruptcy court. This increases the franchise company's legal fees and may leave the company holding an empty bag. Very bad for a franchise company.

So there are risks on both sides.

Stayed tuned for Part Two of this post where we will discuss how some companies may use Liquidated Damages to their advantage and why franchisees may want to negotiate for a Liquidated Damages clause (even though this may sound counter-intuitive).


Thursday, August 1, 2019

Marijuana - Pot - Cannabis ...the Bud Turns

Some of the MOST popular posts on this blog have concerned franchising and marijuana. (See "Franchising Marijuana" Part OnePart Two, Part Three and Part Four)

Franchise lawyers have been nipping around issues concerning the ultimate franchising of cannabis-related businesses. With the passage of more and more state laws legalizing medical and recreational pot, franchising and marijuana is a hot topic. (Illinois is a recent entrant)

In 2016, an article appeared in the American Bar Association's Franchise Law Journal that I mentioned in this blog: Franchising a Marijuana Business: It's not Quite Mission Impossible. Shannon McCarthy (a partner with Miller Nash Graham & Dunn, LLP in Seattle, Washington) and Dawn Newton (a partner with Donahue Fitzgerald, LLP in Oakland, California) provided a comprehensive treatment of the legal issues and challenges.

This month, Rochelle "Shelley" Spandorf  added to the legal literature with "Cannabis Entrepreneurs: Know the Perils of 'Accidental Franchising."  

Shelley is a franchise-colleague of mine from the American Bar Association’s Forum on Franchising. She is a partner in the Los Angeles office of Davis Wright Tremaine. A certified specialist in franchise and distribution law in California, she has dedicated her legal practice to representing primarily franchisors, suppliers and other brand owners expand through trademark licensing. She is the first woman to chair the American Bar Association’s Forum on Franchising, the nation’s preeminent association of franchise attorneys, and has twice chaired the Franchise Law Committee of the California Lawyers Association.

In other words, Shelley knows what she is talking about! Her article shines a bright spotlight on the subject and it is worth a read. Thanks Shelley!

Wednesday, July 24, 2019

Franchise Purchasers Entitled to Written Substantiation

Hey Franchise Purchasers here's a tip for you.

The Franchise Disclosure Document contains 23 items of information for your benefit and should be provided to you by all franchisors before a sale is consummated.

One important item is Item 19 (Financial Performance Representation) -- under the FTC Rule -- Item 19 "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." (See my prior post for more more background on Item 19 - Franchise Disclosure Document - Dissected - Part Four)

But the tip concerns some "hidden" information you are entitled to receive upon request.

If a franchise company makes a Financial Performance Representation in Item 19 (this used to be called an Earnings Claim) you are entitled to know more: a franchise company must have "written substantiation for the representation at the time the representation is made." The trick is though that the substantiation will be made available only upon reasonable request."  The FTC Compliance Guide notes that written substantiation means that the franchise company must have "supporting data underlying any representation..."

Now in my experience many franchise purchasers are reluctant to ask for this! You should ask for everything you are entitled to receive when making this large of a financial investment. Also, on a few occasions, when I do convince a purchaser to ask for the written substantiation, some franchise companies indicate that they DO NOT have the information. This is a violation of the FTC Rule and a major red flag. Would you buy a franchise from a company that does not comply with the law?

Franchisors: if you make an Item 19 Financial Performance Representation, be sure to inform franchise prospects that they are entitled to receive the "written substantiation for the representation at the time the representation is made" and make certain you are prepared to produce it.

Friday, July 19, 2019

Unintended Consequences - Joint Employment Revisited

The Contrarian is BACK! Sorry for the long absence but life intervenes and my posts require some motivation i.e. something interesting!

Well some of my franchise colleagues have delivered! In a recent article in the American Bar Association's Franchise Law Journal, "Drawing Lines in Franchisor Support--Is It Necessary and Where Are the Lines to Draw in Today's Joint-Employment Environment?," some of franchising's leading lights (Joyce Mazero, Karen Boring Satterlee, Eric H. Karp, Leonard H. MacPhee, Jess A. Dance & William W. Sentell), discuss the unintended consequences from the joint-employer debacle. 


(For some background check out these prior posts: NLRB Decision and Joint Employer Controversy...Trumped? There are updates generally available but we don't have the room here)

Most striking about the article is the reporting from a survey the authors and the International Franchise Association conducted. The results show that a "substantial majority of brands... report reducing or eliminating certain services." What does this have to do with joint employment? Well franchisors are trying to avoid being tagged as the "joint employer" of its franchisees' employees. So the reduction or elimination of  franchisor guidance and services that deal with "employees" is one way to say "Hey, we don't have anything to do with franchisees' employees, that's the franchisees' job!"

Now for the result of the survey (quoting from the article):


• Eighty-six percent of the franchisors and fifty-three percent of the franchisees indicated that training provided to franchisee employees had been reduced or eliminated.

• Sixty-six percent of the franchisors and sixty-seven percent of the franchisees indicated that the franchisor had reduced or eliminated providing operations and performance standard recommendations.

• Eighty percent of the franchisors and fifty-three percent of the franchisees indicated that franchisor-supplied advice/guidance regarding staffing and scheduling had been reduced or eliminated.

• Forty-six percent of the franchisors and fifty percent of the franchisees indicated that franchisor-supplied advice/guidance regarding personnel manuals and human resources had been reduced or eliminated.

• Seventy-three percent of the franchisors and sixty-seven percent of the franchisees indicated that franchisor-supplied advice/guidance regarding compensation to employees had been reduced or eliminated.

• Thirty-three percent of the franchisors and sixty percent of the franchisees indicated that franchisor-supplied advice/guidance regarding employee benefit programs had been reduced or eliminated.

• Fifty-three percent of the franchisors and forty-three percent of the franchisees indicated that franchisor-supplied advice/guidance regarding employee standards/performance or assessments had been reduced or eliminated.

Wow, the "joint employer" advocates caused some changes in the franchise world...but not the ones they intended!