Tuesday, March 22, 2016

Franchising Marijuana - Part Four - New Article

Some of the MOST popular posts on this blog have concerned franchising and marijuana. (See Part One, Part Two, and Part Three)

And now, a recent article in the American Bar Association's Franchise Law Journal gives rise to Part Four - Franchising a Marijuana Business: It's not Quite Mission Impossible.

Thanks to 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) we now have the most comprehensive treatment of these subjects to date.

Shannon and Dawn both practice in states where some form of legalization has taken place - California has legalized medical marijuana and Washington has approved recreational use.

Their article is well done and thoroughly researched - and they are both experts in the area. But, despite the title (It's not Quite Mission Impossible), Shannon and Dawn outline so many current obstacles to franchising or licensing a marijuana business that it should have been titled "Mission Impossible 6."

The article pulls together in a much more complete fashion some of the posts that have appeared here  - Give it a read! Thank you Shannon and Dawn!

Franchising a Marijuana Business: It's not Quite Mission Impossible

Friday, March 18, 2016

Franchise Valuation through Damage Analysis

Recently I was invited to co-present at this year's upcoming American Bar Association's Annual Forum on Franchising (it is not until November but we get an early start on the materials that go into it). The general topic: monetary damages in franchise disputes; it got me thinking about my last post (How much is that franchise business worth?)

Why? Well many franchise disputes focus on the termination of the relationship and the damages to which one of the parties may be entitled. Central to this analysis is the value of the loss. But the real question is: which party is suffering the loss, the franchisor or the franchisee? Now this is a complicated area and far too complex to do justice here, but let's just touch on few damage remedies that may, when carried over to the "worth" of franchise, offer some guideposts.

Franchisor Recovery - Lost Profits - Lost Future Royalties: Although case law in this area is not completely settled, when there is a premature termination of a franchise agreement (not the full term), many franchisors seek the balance of the royalty payments due to the end of the contracted term as damages. A number of courts have permitted recovery of these "lost future royalties," especially when the franchisee abandons operation and simply closes. Some courts permit this recovery upon any "material" breach by the franchisee (i.e. failing to pay royalties). In this instance, from the franchisor's perspective, the worth of the franchise is the total amount of royalties to be paid. However, some courts have denied this type of recovery or have limited it, depending on whether the franchisor actually brought about the termination (instead of just suing for the past due royalties) or has not deducted its own service costs during the balance of the term.

Franchisee Recovery - Lost Profits or Fair Market Value: When a franchisee is wrongfully terminated, two approaches may be available: Lost Profits and Fair Market Value. In the most simplistic terms, future Lost Profits for a franchisee is the reasonable amount of profit (revenue less all expenses) the franchisee could expect to earn over the balance of the term based on reliable PAST sales and expenses date; while Fair Market Value is more complicated to calculate, think of it as "market" value - what would an arm's length buyer be willing to pay and a reasonable seller willing to take? Courts have approved both methods when solid evidence is presented. But franchisees cannot recover both and must elect one approach or the other.

So, as you can see, the "value or worth" of a franchised business may be in the eye of the beholder! But keep in mind that there are many NUANCES involved in these approaches - we can't cover them all here - and franchise owners and franchisors need to heed the advice found in the last post (How much is that franchise business worth?)

Tuesday, March 8, 2016

How much is that franchise business worth?

Happy March! The warm weather is just around the corner ... spring and summer are times when homeowners think it may be a good time to list their homes for sale or to jump to that new home. (Is this a real estate blog? ...wait for it ... I'll make the connection to franchising in a minute)

Usually, home buyers and sellers have a good idea of the VALUE of what they are buying or selling due to the very active and public real estate market. But what is the VALUE of that franchise business I want to buy or sell?

Of course the answer depends on whether it is being sold by the franchisor as a new franchise or by a franchisee who is cashing out after establishing and operating the business over a period of years. Either way wouldn't it be helpful to know the "market value"?

Now this type of analysis is above my pay grade but here are a few suggestions (in no particular order):

  • Contact a Business Broker to see if they can help, especially for franchisees planning to list and sell. There are plenty of franchise brokers out there who are eager to give you a listing price;
  • Visit with your Certified Public Accountant, especially if they have been handling your business affairs;
  • Get a copy of the Business Reference Guide - a bit pricey at $155.00 but it has a wealth of information about business valuations, including popular franchises, and provides Rules of Thumb that will at least give you a starting point;
  • Hire an appraiser - check out the Institute of Business Appraisers and the American Society of Appraisers for more information and to find a qualified appraiser;
  • Ask franchisees who recently sold their business or ask a recent buyer from an established former franchisee - they may be listed in Item 20 of the Franchise Disclosure Document if the sale was within the last year before the date of the FDD;
  • Finally, although the franchisor may be reluctant to provide historical re-sale info (due to various franchise laws and regs), you may want to ask anyway and see what you get.
These are just a few ideas - the important point is to get some idea of VALUE before you leap!