Starting a Franchise | Jones Day | Doing Business 2.0

Doing Business 2.0

Washington, D.C.
March 13, 2013
9:00 a.m. to 10:30 a.m.

Understanding Franchising Law: Your Obligations
As A Franchisor and Your Rights As Franchisee
Andrew J. Sherman, Esq.
Jones Day

HANDOUT VERSION
51 Louisiana Avenue, N.W.
Washington, D.C. 20001
(202) 879-3686 (phone)
ajsherman@jonesday.com

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.
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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

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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

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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

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U.S. Disclosure Regulation Timeline

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U.S. Disclosure Regulation Timeline

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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.
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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.

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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

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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

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“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
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States with Franchise Relationship Laws

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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)

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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
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Starting a Franchise | Jones Day | Doing Business 2.0

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