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Prospective Franchisee Boot Camp Cummary (Perkins Law, October 2014)


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Richmond, Virginia franchise attorney Eric Perkins is a frequent author and speaker on franchising issues, and in 2014 he organized two "boot camp" workshops to provide those thinking about buying a franchised business an overview of franchising. This presentation is a summary of the topics discussed during the workshop. Additional handouts were provided to workshop attendees and are available upon request.

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Prospective Franchisee Boot Camp Cummary (Perkins Law, October 2014)

  1. 1. ERIC C. PERKINS, ESQ. PERKINS LAW, PLLC 4870 SADLER ROAD SUITE 300 GLEN ALLEN, VA 23060 WWW.ERICPERKINSLAW.COM (804) 205 - 5162 Prospective Franchisee Boot Camp October 24, 2014
  2. 2. Franchise System Experience (Zor or Zee): SMARTBOX Portable Self Storage - sweetFrog Premium Frozen Yogurt - Super Cuts - The Grout Geeks - 9Round - 1-800-GOT JUNK - The Sparkling Image - Jet Black - Anytime Fitness – Zoup! – Michelle Lea Massage Therapy – ComForcare Senior Services– Tropical Smoothie Café – The Entrepreneur’s Source – Apple Spice Junction – Dominic’s of New York – Sparkling Image – The Cleaning Authority – Edible Arrangements – Faces Cosmetics – Wild Birds Unlimited – Copper Penny - Omega Learning Center – LA Boxing – Pure Barre – CKO Kick Boxing – Jump Bunch – Baskin Robbins – Spring-Green Lawn Care – Five Star Painting – Money Mailer – The Alternative Board – Dream Dinners – Salad Creations – Salsarita’s Fresh Cantina – Minuteman Press – etc.
  3. 3. Three Definitions of Franchising Common Sense Definition Definition by Example Legal Definition
  4. 4. Three Great Things About Franchising  You don’t have to reinvent the wheel  You benefit from a built-in support structure  You have special laws to protect you
  5. 5. Three Things About You  Can I afford this?  Can I follow someone else’s rules?  Am I good with people?  Internal leader/manager  External Sales
  6. 6. Three Bad Things About Franchising  Failure is possible  Your long term success is still largely up to you (and other factors beyond your control)  It is not cheap
  7. 7. Three Things to Know About the Legal Side of Franchising  It’s a contract  Federal law regulates franchising  State law regulates franchising
  8. 8. Three Things to Look for in the FA  Exclusive/Protected Territory  Term and Renewal  Transfer Restrictions
  9. 9. Three Reasons Zees Fail  They make emotional decisions, not business decisions  They have unrealistic expectations  They were undercapitalized
  10. 10. Three Reasons Zees Succeed  They do their homework  They budget conservatively  They follow the system
  11. 11. Three Great Sources of Information  International Franchise Association   Blue Mau Mau   Entrepreneur 
  12. 12. Dissecting the FDD  Item 1: The Franchisor and any Parents, Predecessors, and Affiliates WHAT TO WATCH FOR:  Several years of franchising experience
  13. 13. Dissecting the FDD  Item 2: Business Experience WHAT TO WATCH FOR:  Stability in management team and franchising experience
  14. 14. Dissecting the FDD  Item 3: Litigation WHAT TO WATCH FOR:  The volume and type of litigation with which the franchisor is involved
  15. 15. Dissecting the FDD  Item 4: Bankruptcy WHAT TO WATCH FOR:  Check for any bankruptcy filings of the franchisors affiliates, officers, or directors in the last ten years
  16. 16. Dissecting the FDD  Item 5: Initial Fees WHAT TO WATCH FOR:  Initial costs will vary greatly depending on:  Term of the franchise  Services offered by the franchisor  Protected territory
  17. 17. Dissecting the FDD  Item 6: Other Fees WHAT TO WATCH FOR:  Frees the franchisor will collect from the franchisee for itself or third parties on an ongoing basis  Operating royalties  Advertising fund royalties  Lease Negotiation  Site Selection  Permitting fees  Training fees  Audit fees  Transfer fees  Renewal fees
  18. 18. Dissecting the FDD  Item 7: Estimated Initial Investment WHAT TO WATCH FOR:  Budget conservatively, these numbers are notorious for being too optimistic
  19. 19. Dissecting the FDD  Item 8: Restrictions on Sources of Products and Services WHAT TO WATCH FOR:  Does the franchisor make more money from operating its own units or from selling stuff to its franchisees?  Are the purchase terms competitive?
  20. 20. Dissecting the FDD  Item 9: Franchisee’s Obligations WHAT TO WATCH FOR:  Compare and contrast what is written in the FDD and Franchise Agreement versus how franchisees rate their relationship with the franchisor (validation process);  sticklers vs. collaborators
  21. 21. Dissecting the FDD  Item 10: Financing WHAT TO WATCH FOR:  Franchisor leases equipment to franchisees
  22. 22. Dissecting the FDD  Item 11: Franchisor’s Assistance, Advertising, Computer Systems and Training WHAT TO WATCH FOR:  Services franchisor will provide for the franchisee during term of agreement  Franchisor’s initial training and ongoing assistance programs
  23. 23. Dissecting the FDD  Item 12: Territory WHAT TO WATCH FOR:  Exclusions, exemptions, and exceptions to the notion of exclusivity
  24. 24. Dissecting the FDD  Item 13: Trademarks WHAT TO WATCH FOR:  USPTO Registration Status
  25. 25. Dissecting the FDD  Item 14: Patents, Copyrights, and Proprietary Information WHAT TO WATCH FOR:  Copyright protections for operations manuals and computer software  Trade secrets and proprietary information
  26. 26. Dissecting the FDD  Item 15: Obligation to Participate in the Annual Operation of the Franchised Business WHAT TO WATCH FOR:  Active vs. Passive Ownership
  27. 27. Dissecting the FDD  Item 16: Restrictions on What the Franchisee May Sell WHAT TO WATCH FOR:  Necessary to preserve the uniformity, consistency and integrity of the franchise system
  28. 28. Dissecting the FDD  Item 17: Renewal, Termination, Transfer, and Dispute Resolution WHAT TO WATCH FOR:  Franchisees have very limited rights when terminating franchise agreement before expiration date  All disputes must be submitted for mediation or arbitration in franchisor's home state  Fees and Flexibility
  29. 29. Dissecting the FDD  Item 18: Public Figures WHAT TO WATCH FOR:  Relationship must be described in the FDD
  30. 30. Dissecting the FDD  Item 19: Financial Performance Representations WHAT TO WATCH FOR:  Are the numbers validated by the Franchisees?  How will the numbers translate to your market?
  31. 31. Dissecting the FDD  Item 20: Outlets and Franchisee Information WHAT TO WATCH FOR: Trends  Is the system growing or contracting?  What is the closure rate in recent years?
  32. 32. Dissecting the FDD  Item 21: Financial Statements WHAT TO WATCH FOR:  Liquidity/Cash on Hand  Long-Term Debt  Cash Flow  Balance Sheet
  33. 33. Dissecting the FDD  Item 22: Contracts WHAT TO WATCH FOR:  Standard contracts the franchisor requires of the franchisee  Leases  Guarantees  Promissory Notes
  34. 34. QUESTIONS?