Franchisor Representation

Franchising can be an effective business expansion strategy for companies looking to grow domestically and/or internationally. In response to the explosive growth and popularity of the franchise model, a comprehensive set of federal and state laws and regulations were enacted to combat fraudulent, deceptive or abusive practices by unscrupulous franchisors. Generally speaking, franchise laws fall into one of three buckets:

Disclosure

Franchise Disclosure Laws – These laws require that franchisors provide prospective franchisees with a comprehensive disclosure document before the franchisees purchase, or commit to purchase, the franchise.

Registration

Franchise Registration Laws – These laws require that franchisors obtain an effective “registration” of the franchise offering from the appropriate state agency before any franchise offers or sales can be made in the state. Typically, the FDD is filed with the state and assigned to an “examiner” who reviews the FDD for compliance with disclosure laws. Once the examiner “registers” the offering, the franchisor can commence franchise sales activity in the state. There are currently 14 franchise registration states. There is no registration requirement at the federal level, and the FDD is not “filed” with the FTC.

Relationship

Franchise Relationship Laws – These laws are “post-sale” laws that govern the ongoing relationship between a franchisor and its franchisees. In most cases, these laws are designed to prevent a franchisor from engaging in abusive practices due to its dominant economic position. Among other things, relationship laws regulate transfers, terminations, renewals and discriminatory practices.

GETTING STARTED

Are you looking to franchise your business but don’t know how to start? The first step involves conducting a franchise feasibility assessment. In other words, is your business “franchise-able”? While franchising has proven to be a tremendous growth model for countless businesses, it’s not suitable for everyone. There are many threshold questions that must be asked and carefully considered before moving forward with franchising, such as:

Do you have a “system” that you can train others to follow?

If a franchisee follows your system, will the product or service offered by the franchisee meet the same standards of quality that your customers have grown accustomed to?

Are you able to train franchisees within a reasonable period of time, or is extensive training required that could take months to complete?

Is the success of your business tied to your own unique qualities, characteristics, skills, experience, charisma, etc. such that it may be difficult for others to replicate your success?

Is the franchise model financially feasible? After payment of royalties, brand fund fees and other fees necessary for the franchisor to support and manage the system, is the franchisee still making a decent profit?

Do you have the time and resources to effectively run two different businesses (your existing business and the franchise company)?

If you determine franchising is a viable growth model, what will your system look like? There are countless questions that must be answered in order to structure a franchise system:

What fees do I charge?
What support do I provide?
How do I train franchisees?
Where is initial training held?
What technology systems should I require?
What suppliers should I mandate?
What types of rebate relationships are appropriate and how might those revenues offset other fees such as royalties?
What process must a franchisee follow if they wish to purchase an unapproved product or use an unapproved supplier?
How do I determine territories?
What territorial rights and protections do franchisees receive?
How long is the term? How many renewal terms should I offer?
What kind of ongoing training programs are needed?
How much operational control must I exert?
What channels of distribution may franchisees utilize?
In what ways may the franchisor compete with franchisees?
Should I offer area development rights (aka multi-unit rights)?
Should I utilize an area representative or master franchise model to help support and accelerate the growth of my system?

We’ve developed relationships with outside franchise consultants who’ve proven to do tremendous work for our clients. In addition, certain attorneys at our Firm offer limited franchise consulting services. Regardless of whether you choose to engage an outside consultant, you cannot rush through the structuring process. We have the attorneys, and relationships with outside consultants and other franchise suppliers, vendors and professionals, that are necessary in order to (a) evaluate whether your business is suitable for franchising and (b) structure your franchise model.

FRANCHISE DISCLOSURE DOCUMENT

If you’re not familiar with the term “FDD”, you will be! The Franchise Disclosure Document, or FDD, serves as the legal foundation for your franchise system.

When done correctly, the FDD provides prospective franchisees with critical information enabling them to evaluate whether they are the right fit for your system, while at the same time serving as an effective liability shield if the relationship doesn’t work out as the parties initially hoped. The FDD (and the franchise agreement attached to the FDD) must include brand protections and operational controls essential to ensuring the uniformity and quality of the both the goods and services sold by franchisees and the overall customer experience. They must also provide the franchisor with sufficient flexibility to modify and evolve the franchise system in order to adapt to changes in the marketplace and stay ahead of the competition. While these qualities are essential, a good FDD must also be “balanced” and marketable. If too one-sided or draconian, the FDD can become a “deal-killer” leading to a stagnant franchise system with little to no growth. More importantly, a poorly-prepared FDD that does not comply with franchise disclosure laws or is otherwise deficient can be the downfall of any franchise system. It’s simply a liability bomb waiting to go off the moment an unhappy franchisee hires franchise litigation counsel.

Our attorneys have been involved with drafting and/or revising FDDs for well over 1,000 franchise systems. Whether you are a first-time franchisor, or a seasoned franchisor in need of a “tune up”, we have the people and the experience to ensure your FDD is top-notch! We take tremendous pride in the quality of our legal documents. Our attention to detail sets up a apart. You can rest assured your FDD will be concise, easy to understand and legally compliant.

FRANCHISE COMPLIANCE TRAINING

A franchisor with the best FDD on Earth can still find itself in serious trouble if it fails to follow proper sales procedures. The quality of the FDD means little if the franchisor’s sales team lacks the necessary training to ensure compliance with franchise sales laws. If the sales team fails to follow all required procedures, the franchisor could bear significant financial liability and face other regulatory disciplinary measures. Some violations may even result in criminal penalties! Examples of procedural violations include:

failing to comply with the 14-day cooling off period after delivery of the FDD (or state-specific cooling off periods that can vary from the federal requirements)
failing to comply with the 7-day cooling off period after delivery of the complete execution copy of the franchise agreement with all material terms filled in
providing prospects with financial performance information (e.g., earning claims) not included in Item 19 of the FDD
failing to maintain copies of signed Receipt Pages, FDD versions and other documents
failing to comply with the procedural requirements for electronic disclosure;
“steering” prospects to speak with particular franchisees more likely to validate the model or provide positive feedback
selling franchises, or merely engaging in substantive discussions about the franchise opportunity, in a franchise or business opportunity registration state prior to obtaining an effective registration or exemption from registration
failing to obtain a franchise broker registration in certain registration states (e.g., Washington and New York)
collecting money from a franchisee in a registration state subject to a fee deferral condition before the franchisee opens their business
failing to sign required state addenda
failing to file franchise advertising or ensure that it complies with other state regulations on franchise advertising
failing to include required disclaimer language on franchisor’s website to avoid making an inadvertent “offer” in a registration state

To keep our clients out of trouble, we provide a comprehensive franchise compliance training program for all clients new to franchising as well as periodic “refresher training” for our existing clients. Our clients also receive a copy of our comprehensive Franchise Compliance Training Manual (and all updated versions we prepare from time to time), which provides crucial information on a wide range of franchise compliance topics.

It’s crucial that franchisors receive the necessary training to allow them to operate their franchise system in a compliant manner. We take this responsibility very seriously. Once fully trained, many of the rules and regulations will become second nature.

FRANCHISE REGISTRATIONS AND EXEMPTIONS

In many states, a franchisor cannot sell a franchise, or even engage in franchise sales discussions, at any time the franchisor does not have an effective registration (or exemption from registration) in place. These include (a) 14 states with “franchise” registration laws and (b) numerous states with “business opportunity” registration laws.

We help our clients develop, implement and manage a cost-effective registration and exemption strategy to ensure they can lawfully sell franchises in their target states without violating state registration laws. Throughout the years, we have taken examiner comments into effect when drafting and revising our “form” FDDs and franchise agreements. In other words, objections commonly raised by state examiners are “built into” our documents to preempt comment letters and ensure an efficient registration process.

Our paralegals track all state filings and provide clients with up-to-date registration tracking charts that identify the approved states, states where applications are pending, and “do not sell” states.

In some cases, a franchisor can offer and sell a franchise in a registration state using an “exemption” from registration. There are a wide variety of exemptions available, which vary from state to state (and at the federal level). Many exemptions are tied to the sophistication, prior relevant experience and/or financial strength of the franchisor or franchisee. In some cases, the franchisor must file an exemption notice or application for exemption. In other cases, the exemption is “automatically effective” if the criteria is met (i.e., no filing required). Some exemption filings must renewed annually while others are perpetual one-time filings. We help our clients determine an effective registration / exemption strategy allowing them to achieve their sales objectives in the most economical – and least regulated – manner possible.

FRANCHISE NEGOTIATIONS

Our team assists with all aspects of franchise sales negotiations. If a prospective franchisee proposes changes to your standard form of Franchise Agreement, our attorneys will provide their feedback and recommendations regarding the proposed changes, including the business and legal implications should you choose to accept the proposed changes. Our team prepares the Franchise Agreement Amendments and Addenda to document any negotiated changes you accept. Our paralegals assist with franchise closings and ensure that all required documentation is completed correctly.

For existing franchisees, our team prepares the necessary legal documents to effectual various transactions that occur during the life of the franchise relationship. Examples include franchise transfers, renewals, relocations, resales, etc. In addition to preparing the legal documents, we advise our clients on state franchise relationship laws that may be implicated by and impact the transaction.

SUPPLIER AGREEMENTS

As a franchisor, you will likely enter into a wide variety of agreements with third-party suppliers who provide your franchisees with products, technology or services necessary to operate the business. You may also choose to contract with third-party franchise sales organizations or franchise brokers to help you sell franchises. It is very common for suppliers to provide their “form” agreement to the franchisor for execution. However, these agreements commonly lack critical terms necessary for the protection of the system and/or include terms that put the franchisor at a significant disadvantage. Failure to have these agreements reviewed and negotiated by counsel can have disastrous implications. Our team has extensive experience reviewing and negotiating all types of supplier agreements to ensure our clients’ interests are protected.

INTERNATIONAL FRANCHISING

Many of our clients have taken the leap from domestic franchising to international franchising. While there are exceptions, we generally advise against international franchising during the early stages of growth. For clients ready to implement an international franchise expansion strategy, we are ready and able to assist. We have been involved with franchise offerings in approximately 150 countries.

Initially, the franchisor must determine the most appropriate structure and franchise model for international franchising. Will the franchisor engage in direct franchising, similar to its domestic franchise model? Will it enter into master franchise relationships with sophisticated local developers who are capable of launching and growing the brand through a subfranchise offering? Or will the franchisor use a hybrid franchise model, such as an area representative franchise offering (sometimes referred to a regional development). In some cases, franchisors use different models with different countries. For example, they may engage in direct franchising in Canada and Mexico but opt for a master franchise or area representative model in other countries.

Under the master franchise model, the master franchisee prepares its own disclosure document (if required by local law) and directly signs subfranchise agreements with franchisees. In essence, a master franchisee administers the franchise system within the development territory as the “local franchisor”, subject to the terms and conditions of the master franchise agreement and the master franchise brand standards manual. The master franchise model may be very helpful in foreign markets where there are language or cultural barriers that make it difficult for you to franchise directly. It also allows you to delegate a substantial amount of responsibility to the master franchisee. On the flip side, the master franchisee generally keeps more of the revenues and the franchisor gives up a significant amount of control.

Side Note: The franchisor must also take the steps necessary to protect the trademarks in the foreign country. In the US, a trademark rights are tied to actual use. In other words, a person can’t register a trademark with the USPTO that it’s never used in commerce. The same is not always true in foreign countries. In some countries, a person can register the trademarks of popular US brand without ever actually using the trademarks in a business. These “speculators” can hold a US franchisor hostage and demand large payments as a condition to transferring ownership of the trademarks to the franchisor. In some cases, franchisors have ponied up the funds to “buy back” their marks. In other cases, franchisors have elected to create new trademarks when their marks are owned by another party (for example, Burger King elected to operate under the name “Hungry Jack” in Australia).

If the franchisor intends to franchise in numerous foreign countries, we typically prepare a “generic” international disclosure document that includes the various disclosures commonly required by franchise disclosure laws of foreign jurisdictions. Many countries that lack a franchise specific disclosure law have a “civil law” system that implies a covenant of good faith between contracting parties. In the context of franchise sales, this covenant requires pre-sale disclosure of all material information. The “generic” international disclosure document is prepared for use in these civil law countries. For countries with franchise-specific disclosure laws, we use the generic international disclosure document as a ‘template’ that we modify to conform to the country-specific disclosures required by the local franchise law.

In addition to preparing the disclosure documents, we adapt the franchisor’s domestic franchise agreement for international use. This includes adding new terms and conditions that are not commonly found in domestic franchise agreements and significantly modifying existing terms and conditions for use in foreign markets. We also prepare any new agreements necessary to implement the franchisor’s desired franchise model for international expansion (e.g., master franchise agreement, area representative agreement, etc.).

Although we typically prepare the country-specific disclosure document as well as the agreements to be used in the foreign country, we engage local counsel to review the documents for purposes of enforceability and compliance with local laws. This approach ensures consistency among the franchise documentation used in various countries and saves clients significant legal fees that would otherwise be incurred if the clients were to directly engage local counsel to prepare the documents. We also use local counsel to assist with local filings and registrations that may be required and advise on local laws of significance (for example, data privacy/data protection laws, consumer protection laws, laws restricting anticompetitive activities, etc.).

But before we start work on the legal documents, we provide a high-level overview of any significant legal issues a franchisor may encounter when attempting to franchise in a particular country. These preliminary issues may include matters such as:

Whether a franchisor must satisfy any eligibility requirements before it may offer franchises in the country (for example, some countries do not allow a franchisor to offer franchises unless the franchisor satisfies minimum requirements for franchising and/or operational experience)
Whether a disclosure document is required
Whether a franchisor has a continuing obligation of disclosure to franchisees after the franchise agreements are signed
Whether documents must be translated into local language
Whether a US choice of law or choice of venue clause is permitted (in some countries, foreign law must apply and disputes must be resolved in the foreign country)
Whether a franchise registration is required
Whether the parties can enter into a letter intent prior to disclosure with a disclosure document
Whether commercial agency laws may override the franchisor’s contractual right to terminate or require payment of compensation to a terminated franchisee
Whether the fees imposed by the franchisor must be approved by a central bank or other governmental authority
Foreign exchange controls
Withholding taxes
Restrictions on personal guarantees

In some cases, the potential challenges identified in our country-specific overview are enough to deter the franchisor from entering the market or incurring local counsel fees. Without the benefit of the legal overview, a franchisor can spend months investing time and resources (and racking up significant legal fees) to prepare legal documents, conduct due diligence and negotiate deal terms with a prospective local franchise partner, only to find out there is a threshold regulatory issue that renders the entire franchise offering impractical, unlawful or otherwise undesirable.

Over the years, we have developed strong relationships with local franchise counsel in foreign markets across the globe! We leverage these ongoing relationships for the benefit of our clients.

In addition to helping US clients launch franchise operations in foreign markets, we also represent foreign brands seeking to launch a franchise offering within the US.

DISPUTES WITH FRANCHISEES

As with most new businesses, there is definitely a learning curve when it comes to operating a franchise system. The owners and initial management team often make mistakes during the early stages of franchising (and hopefully learn from them). At some point, most franchisors will sign a franchise agreement with the “wrong” franchisee. This may lead to operational defaults, payment defaults, unprofessional behavior or other actions or circumstances that reflect poorly on the brand. When this occurs, our lawyers prepare and send default letters and manage the process of bringing the franchisee back into compliance. If that’s not possible, our attorneys assist with the process of terminating the franchise rights by sending out the default letters, termination notices and preparing termination agreements (when applicable).

In many states, franchise terminations are heavily regulated via franchise relationship laws. Failure to follow these laws may subject the franchisor to financial liability and allow the franchisee to reinstate their franchise rights. We ensure our clients follow all procedural and other requirements necessary to effectuate a lawful franchise termination.

STATE ENFORCEMENT ACTIONS

As part of their regulatory oversight responsibilities, state enforcement agencies periodically conduct investigations to determine whether franchisors violated any franchise laws applicable in their state. These investigations usually begin after a disgruntled franchisee submits a complaint to the state enforcement agency. In some cases, however, a state agency may investigate a franchisor on its own initiative (i.e., based on its own findings or suspicions of wrongdoing) or in response to a complaint filed by a competitor. If a state investigator concludes the franchisor violated the law, the state enforcement action may result in a a number of disciplinary measures imposed on both the franchisor and the individuals involved with the violation.

If you find yourself on the opposite side of a state investigation, our lawyers can help you respond to the investigation and significantly improve your chances of a successful outcome. We will assess and evaluate the allegations, furnish evidence and prepare responses to refute the allegations, identify and submit affirmative defenses, prepare and submit responses to state requests for information and documentation, review and negotiate Consent Orders and/or other disciplinary measures imposed if you did violate the law, and generally advocate on your behalf. Our team includes former state franchise regulators with extensive knowledge and first-hand experience with state investigations. You can rest assured we will leave no stone unturned in our efforts to defend you and your team against any allegations brought by the state.

MERGERS AND ACQUISITIONS

As with other industries, mergers and acquisitions play an important role in the world of franchising. For some clients, acquisitions result in the ownership of a new franchise system. For other clients, acquisitions are liquidity events and the final step of an exit-strategy they’ve dreamed of since day one!

Our Firm represents a number of institutional clients that regularly buy and sell franchise systems as an integral part of their business model. Oftentimes, these clients develop a portfolio comprised of complimentary franchise systems or franchise systems focused on a particular industry. We help these clients from drafting the initial letter of intent through the closing of the acquisition. Once the closing is complete, we typically assume ongoing responsibility for updating the FDDs (or preparing new FDDs), obtaining new franchise registrations and providing other ongoing franchise representation for the newly acquired brand.

From time to time, our clients end up on the other side of an acquisition. Successful franchise systems are highly sought after by private equity groups, competitors or other interested parties looking to acquire franchise systems as part of their business strategy. We help these clients organize and prepare for the acquisition in order to maximize value and ensure they receive a favorable purchase price. We also help them organize a virtual data room, respond to due diligence requests and negotiate the asset purchase agreement or stock purchase agreement.

Our M&A attorneys have extensive experience:

drafting and negotiating LOIs and MOUs
conducting due diligence (on both buyer and seller side) pertaining to operational and legal compliance matters
drafting and negating assets purchase agreements, stock purchase agreements and the ancillary agreements and document involved with an acquisition
advising on corporate structuring issues
advising on ways to manage or mitigate risks associated with non-compliant franchisees, disgruntled franchisees, franchise law violations, etc.
assisting with lease assignments and landlord negotiations
assisting with the assignment and recording of IP transfers

FRANCHISE AVOIDANCE

While many companies eagerly pursue and embrace the franchise model as an effective vehicle to grow their brand, others see franchising as a regulatory headache they’d rather avoid. Most companies can’t choose between a franchise or non-franchise model. Rather, their business model dictates whether a franchise relationship exists. If a franchise relationship exists, the company must comply with franchise laws unless it can utilize an exemption strategy. In other cases, a company can modify its business model in a manner that removes the relationship from the scope of franchise laws. For example, a company may be able to effectively grow through a non-franchised model such as a distributorship, trademark licensing arrangement, business opportunity offering or commissioned sales agent model. Or, perhaps a traditional corporate growth strategy is the best option. As part of our initial representation, we often help clients evaluate different growth models, including franchise avoidance structures, and weigh the advantages and disadvantages of the various options to ensure they make the best decision possible.