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Legal issues for Franchisors and Franchisees


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This presentation outlines the disclosure and other legal issues franchisors face, the important parts of the franchise disclosure document, the number of franchise systems, the supplier and customer and liability issues franchisees need to address, and the lawsuit types franchisors and franchisees, franchisees and customers, franchisees and suppliers, and franchise investors have faced in recent years. Franchisor fraud, employment law, financing, and other business agreements are explained.

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Legal issues for Franchisors and Franchisees

  1. 1. Legal Issues In Franchising William A. Price
  3. 3. Franchising Or Other Capital? • Franchising • Loans for Expansion • Project Investors • Company Investors: Friends, Angels, Privat e Eqity • Public Investors
  4. 4. Franchising Laws: Federal Federal Trade Commission: a. Franchise Disclosure Document Rules b. Franchisee and Customer Complaints c. Truth In Advertising Rules
  5. 5. Franchising Laws: State Illinois: 1. Attorney General: Regulates Disclosures (FDD OK) Takes Customer/Franchisee Complaints 2. Secretary of State: Regulates Franchise Brokers
  6. 6. Franchise System Needs • System Name • Artwork for logo and ads and all system elements • Franchisee recruitment • Franchise disclosure documents and other legal reports, securities disclosures, taxes • Supplier contracts, terms • Real estate program • Operator training and systems documentation
  8. 8. The Franchise Disclosure Document (FDD) Big Items: Item 1: Franchisor background Item 3: Material Litigation (and check personal and organizational judgment and credit) Item 5, 6, and 7: Franchisee upfront, ongoing fees and costs Item 20: Locations and Expansion Plans
  9. 9. FDD May Not Have • Earnings Claims • Unsuccessful Franchisee Sites • Supplier and Other Site/Contract Requirements • New Advertising and Other Change Authority • Old Name Franchisor Failed Systems
  10. 10. Your Best Source Other Franchisees! All current operators must be listed in FDD: CALL THEM!
  12. 12. Multiple Options For Entry • Buy An Existing Franchise • Buy Multiple Existing Franchise Sites (If System Allows) • Start A New Location • Take Over A Region And Recruit Operators For Sites • Start Your Own System
  13. 13. Best Success Predictor Sweat Equity Nothing replaces industry experience: Get Some, Or Get A Partner Who Has Experience
  14. 14. Your Franchise Business Plan • Visible Site • Franchise With High Net Profit Potential • Franchise Type You Are Qualified To Manage • Adequate Capital To Start And Run Until Profitable • Sustainable Competitive Advantages • Good Franchisor Support • High Quality Supplies From Franchisor System
  16. 16. Franchisee Entity Selection The Issues: • Pass-Through Tax? Other Tax? • Who Manages? • Who Controls? • What Investor Rights? • Who Can Bind The Entity? (Agency) • What incentive programs needed?
  17. 17. Site Issues • Lease or Buy? • If Lease, what rent, buildout, uses, hours, si gnage, costs? • If buy, need investors? • Build or lease: zoning, building code, permits required? • Traffic, site access issues, other infrastructure, sewerage and other fees/taxes/needs
  18. 18. Supplier Issues • Franchisor specifies, but you and your credit pays • What if supplies are bad, deliveries fail? • What about menu or other product additions? (Franchisor may control)
  19. 19. Employee Issues • Healthcare mandates • EEO Mandates: customers served, persons hired: avoid inappropriate hiring process • Payroll issues (overtime, tax withholding, reports) • Other HR/Benefits (yours or system) • Frequent Employee Replacement/Retraining • Shrinkage • Site Security
  20. 20. Partner Issues • Equipment Providers/Reliability (Franchisor specifies, but you pay and deal with when break down) • Cooks and Other Prima Donnas • Money Split And Other Arguments • Divorce, Retirement, Resigna tion, Bankruptcy, Death
  22. 22. Franchisor vs Franchisee • “7-Eleven Exploiting Franchisees”: CA Huffington Post, August 1, 2013 • Stratus Building Solutions and related Camino Real Ventures accused of fraud, violations of state business opportunity laws (TX), 2013 • Play N Trade Video game franchise, market losses
  23. 23. Franchisor Controls Court • Mandatory Arbitration, Franchisor picks Arbitrator • Mandatory Venue In Franchisor Location • Limited Franchisee Remedies (Only Fees Back?) • No Guarantees of Supplier Services, Franchisee Income
  24. 24. Franchisee vs Supplier • Mandatory use of Suppliers • Franchisor writes supply contracts • Franchisees must arbitrate or litigate within contract requirements, system elements • UCC still applies, requires good faith and fair dealing
  25. 25. Franchisee vs Employee • Average “wrongful termination” federal judgment, IL, over $600,000 • Age, national origin, race, religion, sexual orientation all protected categories for hiring, discipline, firing • Sexual harassment and hostile workplace liability
  26. 26. Franchisee vs Public • Slip and Fall Liability • Dram Shop Liability • Product or Service Caused Injury Liability • Credit and Collections Issues
  27. 27. Franchisee vs Landlord • Landlord services problems (snow/ice removal, garbage pickup) • Landlord signage and buildout not done • Rent escalators and passthroughs (energy costs, property taxes, cleaning, major building repairs)
  28. 28. Succession Planning • Buy-Sell to operator or partners or family • Estate planning and other capital gains reduction options • Finding A Buyer: brokerage and other finder agreements • Pricing The Exit • Term Sheets, Due Diligence, and Sales Agreement/Closing • Post-Closing Services and Disputes
  29. 29. William A. Price Attorney at Law Tel/Fax 1-800-630-4780 P.O. Box 1425, Warrenville, IL 60555 ANY QUESTIONS?