AS THE WORLD TURNS

 It has been a while since I last posted. In fact, it was at the outset of the pandemic, that post was COVID-19 - Captain Obvious! The theme of that post was that franchise systems - franchisors and franchisees - need to cooperate to survive the pandemic. So how is it going?

One of my favorite law professors, who, after 40 years, I still stay in touch with, passed on this article from the Wall Street Journal: The Franchise Relationship That Powers Small Business Is Fraying. You can draw your own conclusion as to whether the headline is accurate... but everyone has to admit that all businesses are under strain at this time and, franchised businesses, are no exception. 

In my practice, I have seen a few potential buyers decide that "the time just isn't right." Perhaps, a solid decision. And, I am aware of a number of franchisor clients who have struggled through the worst of it and developed strategies to survive. My guess is that the restaurant business is most effected. You can share your experiences by commenting on this post. (Please use the normal comment button at the bottom of the post as the image below is just a picture)

Changing topics, I came across another Wall Street Journal article that caught my eye -- Big companies urge Biden, Congress to address climate change. 

How is this relevant to franchising? Well, like the virus, I believe ALL businesses should seriously work on Climate Change matters. What can you do in your system? While we contemplate what 2021 may bring, think about Climate Change -- waste reduction and recycling-sponsored sites come to mind. Is it time for a call to action in your organization?

I hope your business is striving or at least surviving in this time of challenge. Take some time to consider the contributions you can make to improve our future. It is truly a time for reflection.

Wishing all a happy and healthy holiday season!

COVID-19 - Captain Obvious!

If you are sitting at home (working?), you likely need no further reminders about the pandemic.... multiple law firms, accounting firms, banks, and sundry other businesses have provided "public service" announcements just to tell you they care. To be sure this is a transforming moment; the question is: will it be for better or worse? I am going with better but ...

The franchise industry is greatly effected and truly disrupted. Earlier this week, the ABA Forum on Franchising conducted a webinar: "Franchising in the Time of COVID-19: Managing Coronavirus-driven Disruption in Contracts, Supply Chains and More." It was informative and worth reviewing (you can review the materials here). Some topics were obvious and while others insightful.

So franchisors, franchisees, and franchise practitioners find ourselves in uncharted water. The most common refrain is "I have never witnessed anything like this in my lifetime!" When talking with colleagues in NYC, Chicago, and good-old Ohio, the word surreal typically surfaces ... empty cities, crowded grocery stores, closed parks, runs on toilet paper, and cancelled travel. (I was supposed to in Portugal this week) No clue on the toilet paper except perhaps it is used to fight off some of the BS coming from Washington as we ping-pong from one daily report to another.

Whether it is a dire harbinger of economic Armageddon or sound financial responsibility, I read in the Chicago Tribune that McDonald's just borrowed a billion dollars. (read it here)

The Forum presentation covered the most imperative topics (Chinese supply chain disruptions, Force Majeure, royalty waivers, importance of communication, and the like). But, looking back on it, not enough attention was paid to system cooperation. So here are some quick observations from Captain Obvious:

• Should franchisors provide affirmative help to franchisees? YES
• Should franchisees be proactive in communicating with each other and the system officers? YES
• Should franchisors consider royalty deferment or total abatement? YES
• Despite the concern about "joint employment liability," should franchisors offer guidance about the recent emergency employment regulations and employee financial aide passed by federal and state governments? YES
• Should franchisees look for ways to help franchisors? YES

Just like all of us practicing the new social guidelines, franchisees and franchisors (and those of us who support them) are in this together. Cooperate first, argue later.

Let's be careful out there! (Hill Street Blues)

New FDD Cover Pages on 2020 Horizon

The North American Securities Administrators Association (NASAA) represents state and provincial securities regulators in the United States, Canada and Mexico.

So what do these guys have to do with franchising?

Before the Federal Trade Commission (FTC) got in the franchise game, state securities regulators concerned themselves with franchise protections -- for instance, developing the old Uniform Franchise Offering Circular (UFOC). Today, NASAA still  plays a role in franchising, offering its guidance to the 14 registration states (click here registration states) and the FTC. As a practical matter, what is required in the registration states rules the roost, meaning Franchise Disclosure Documents (FDDs) typically incorporate what NASAA and the registration states require.

Starting on January 1, 2020, NASAA guidelines require the use of new Cover Pages (click here new Cover Pages). As a matter of franchise practice, all FDDs will then carry or require the new pages.

In summary, the pages add to the State Cover Sheets portion of the FDD. The new (or revised) pages are:

• How to Use This Franchise Disclosure Document
• What You Need to Know About Franchising Generally
• Special Risk(s) to Consider About This Franchise
• Revisions to the State Effective Dates page

All in all, the additions are positive, "buyer-oriented," and assist in understanding how to use these massive FDDs. The new Cover Pages call out the most basic questions a franchise-buyer may have and tells them where to find it. For instance, "How much can I earn?" directs the buyer to Item 19 along with the following commentary: "Item 19 may give you information about outlet sales costs, profits or losses. You should also try to obtain this information from others, like current and former franchisees. You can find their names and contact information in Item 20 or Exhibit [ ]."

Let's hope franchise-buyers take advantage of this new road map!

Marijuana - Pot - Franchising Update

This pot post has been simmering since I attended the American Bar Association's 42nd Annual  Forum on Franchising in Denver in mid-October. At the Forum, colleagues Mike Drumm and Caroline Bundy Flichter presented "FRANCHISING UNDER THE RADAR IN THE USA AND CANADA: HOW TO ENSURE YOUR CLIENT’S FRANCHISE DREAMS DON’T GO 'UP IN SMOKE.'” This is a pithy title for an overview of the sporadic legalization of "cannabis" in the US and Canada and the prospects for franchising a cannabis business.

That paper and session was quickly followed by the American Bar Association's Forum on Franchising's Franchise Law Journal article by Danielle Hunt and Vanessa Williams-Hall: "A TALE OF TWO COUNTRIES: DOES CANADA'S LEGALIZATION OF CANNABIS GIVE IT THE FIRST MOVER ADVANTAGE IN FRANCHISING?" (Summer 2019) (I would link to these papers but the ABA copyright policies prohibit publication without permission; perhaps the authors may be able to provide a copy for anyone interested)

Both articles cover the now well-known obstacles to franchising a marijuana business, especially in the US  -- for an overview of those issues search this blog for my earlier pot posts by searching "marijuana."

The continuing primary obstacle to move a marijuana franchise business forward in the US is that marijuana remains illegal at the federal level; while a number of states have legalized recreational and medical use.

My question to the presenters at the mid-October session was: are you aware of any pot businesses that have "franchised" across state lines? No, no one is aware that this has been attempted. This is confirmed in the article by Danielle Hunt and Vanessa Williams-Hall: Denver, Colorado-based ONE Cannabis has sold at least five retail outlet franchises in Colorado. Good reason exists for this one-state franchise system; no one wants to be prosecuted under federal law via the Commerce Clause of the U.S. Constitution and the federal Controlled Substances Act.

But, as the Hunt/Williams-Hall article points out, will US companies poised for cannabis franchising flee to Canada to expand their businesses? I suppose time will tell unless the US federal government changes its tune. Likely the calculated loss of precious tax dollars will turn the tide - something that Illinois's governor JB Pritzker seems to have focused on to attack Illinois's financial woes. (Recreational pot use will be legal in the Illini state on January 1, 2020)

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.

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.

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!