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Starting a Franchise | Jones Day | Doing Business 2.0


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Jones Day presented at the Washington, DC Economic Partnership's Doing Business 2.0 seminar on Franchising (3/13/13).

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Starting a Franchise | Jones Day | Doing Business 2.0

  1. 1. Doing Business 2.0 Washington, D.C. March 13, 2013 9:00 a.m. to 10:30 a.m.Understanding Franchising Law: Your ObligationsAs A Franchisor and Your Rights As FranchiseeAndrew J. Sherman, Esq.Jones Day HANDOUT VERSION51 Louisiana Avenue, N.W.Washington, D.C. 20001(202) 879-3686 (phone)
  2. 2. Andrew J. Sherman Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,700 lawyers worldwide. He is the author of 23 books on business growth, capital formation and the leveraging of intellectual property. His twenty-second (22 rd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your Company’s Intellectual Property, (AMACOM) was published in October of 2011. Other recent titles include the best-selling Mergers and Acquisitions from A to Z, third edition was published by AMACOM in 2010. He is also the author of the 2nd edition of the Due Diligence Strategies and Tactics, which was published in the Spring of 2010. His Twenty-third book Essays on Governance, will be published June of 2012. He has appeared as a guest and a commentator on all of the major television networks as well as CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First Business,” and Bloomberg’s “Small Business Weekly.” He has appeared on numerous regional and local television broadcasts as well as national and local radio interviews for National Public Radio (NPR), Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and technology development. He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA) programs at the University of Maryland for 23 years and at Georgetown University for 15 years where he teaches courses on business growth strategy. He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since 1987. In 2003, Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc. magazine named him one of the all-time champions and supporters of entrepreneurship.©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 2 3120672
  3. 3. Current Trends in Franchising • The diversification of industries which deploy the franchising model • The sophistication/role/parity of the franchisee • The globalization of franchising (inbound/outbound) • The impact of technology/Web 2.0 on franchising • Challenges in access to financing (The death of the home-equity Line of Credit (LOC) • The age of transparency and distrust/Role of the disclosure documents©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 3 3120672
  4. 4. Understanding the U.S. Federal and State Franchising Laws • Brief history of federal laws • Maryland and Virginia are both registration states (with full merit review); D.C. is not …. • Obligations of the franchisor • Impact of federal trademark law • “Earnings claims” • Termination statutes©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 4 3120672
  5. 5. Overview of U.S. Franchise Laws • Federal and state “registration / disclosure laws” and regulations governing the offer and sale of franchises • State “relationship laws” governing the post-sale relationship and franchise contract • Federal and state business opportunity laws governing marketing plans not centered around a trademark; broad in scope and, therefore, may cover franchises without a registered mark©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 5 3120672
  6. 6. U.S. Disclosure Regulation Timeline©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 6 3120672
  7. 7. U.S. Disclosure Regulation Timeline©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 7 3120672
  8. 8. What Information is Disclosed in the FDD? (22 SEPARATE ITEMS AND A RECEIPT) Franchisor & History Territorial Protection • Managers • Trademarks • Litigation History of • Patents Franchisor, Managers • Franchisee’s Participation • Bankruptcy History of • Restrictions on What the Franchisor, Managers Franchise May Sell • Initial Fees • Terms of the Relationship • On-Going Fees (Termination; Disputes, etc.) • Initial Investment • Public Figure Involvement • Designated Sources • Financial Performance • Franchisee Obligations Representations • Financing Offered • Franchise Census Data • Franchisor Obligations • Financial Statements (Training and Support • Contract Forms Note: As Franchisor, be ready to gather and articulate this information clearly. As Franchisee, be ready to review and analyze this information Fairly and objectively.©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 8 3120672
  9. 9. Franchise Registration Requirements • FDD registration states with full merit review: California, Hawaii, Illinois, Maryland, Minnesota, New York, North Dakota, Rhode Island, Virginia and Washington. • FDD filing or notice states (generally no FDD review): Indiana, Michigan, South Dakota and Wisconsin. • “Business Opportunity” (Bus-op) laws – State Bus-opp laws apply to franchises in the following states (but exemptions are available through annual or one-time notice filings): Connecticut, Florida, Kentucky, Nebraska, Texas, and Utah • No Filing: Oregon regulates franchise sales but requires no filings.©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 9 3120672
  10. 10. The Mechanics of FDD Disclosure Under the New Laws • The FDD (once registered in ND) must be provided to you the earlier of:  Fourteen (14) days before you make any payment to the franchisor or its affiliates or before any binding agreement is signed (the traditional “first personal meeting” rule has been repealed) • You cannot be pressured to sign the Franchise Agreement (or pay any “deposit”) any sooner • Use outside advisors to help you evaluate the offering documents and to understand your obligations under the FA • Conduct your due diligence / test the premises which support the business model©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 10 3120672
  11. 11. State Relationship Laws Govern the franchise post-sale relationship, i.e., during and after the term of the agreement: •Require good cause for termination and non-renewal •Procedures for notice and opportunity to cure •Ban discrimination between franchisees •Prohibit restricting free association of franchisees or changes in management/ownership •Financing arrangements •Ban rebates •Restrict venue for litigation/arbitration©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 11 3120672
  12. 12. “Good Cause” for Termination/Non-Renewal What generally constitutes “good cause” under State Relationship Laws: • Failure to comply with the terms of the franchise agreement • Abandonment of the franchise • Acts that impair the franchisor’s trademarks or trade name • Insolvency/bankruptcy • Loss of the right to occupy the premises • Failure to pay franchisor moneys due • Fraud or conduct that reflects badly on the franchise system • Failure to follow applicable laws • Imminent danger to the public health or safety • Criminal conviction©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 12 3120672
  13. 13. States with Franchise Relationship Laws©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 13 3120672
  14. 14. Summary (For Prospective Franchisors) • Develop a business and strategic plan and financial model for your franchising system (make sure it is balanced and mutually profitable) • Surround yourself with experienced advisors • Build a secure foundation for the franchising system • Work through carefully the 100’s of business decisions that will be at the heart of your FDD and FA • Develop a profile of your targeted franchise and an effective screening and decision-making process (focus on quality not quantity)©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 14 3120672
  15. 15. Summary (For Prospective Franchisees) • Draft a business plan aligned with your life plans • Alignment between your needs and expectations and the reality and limitations of the franchise system (no rose- colored glasses) (navigate through the “puffery”) • Alignment between your resources/level of commitment and the requirements of the franchisor’s business model • Do what you love, not what you think is “hot” • Do your homework—talk to existing and former franchisees • Understand your target market/customer • Have a long-term outlook and be prepared for a long- term commitment©Copyright 2013. Andrew J. Sherman. All Rights Reserved. 15 3120672