starting a franchise | jones day | doing business 2.0

Doing Business 2.0

Washington, D.C.

March 13, 20139:00 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 Day51 Louisiana Avenue, N.W.Washington, D.C. 20001(202) 879-3686 (phone)[email protected]

HANDOUT VERSION

©Copyright 2013. Andrew J. Sherman. All Rights Reserved.

Andrew J. ShermanMr. 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 (22rd) 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.

31206722


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

31206723


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

31206724


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

31206725


U.S. Disclosure Regulation Timeline

31206726


U.S. Disclosure Regulation Timeline

31206727


What Information is Disclosed in the FDD?

Franchisor & History• Managers• Litigation History of Franchisor, Managers• Bankruptcy History of Franchisor, Managers• Initial Fees• On-Going Fees• Initial Investment• Designated Sources• Franchisee Obligations• Financing Offered• Franchisor Obligations (Training and Support

Territorial Protection• Trademarks• Patents• Franchisee’s Participation• Restrictions on What the Franchise May Sell• Terms of the Relationship (Termination; Disputes, etc.)• Public Figure Involvement• Financial Performance Representations• Franchise Census Data• Financial Statements• Contract Forms

31206728

(22 SEPARATE ITEMS AND A RECEIPT)

Note: As Franchisor, be ready to gather and articulate this information clearly. As Franchisee, be ready to review and analyze this informationFairly and objectively.


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.

31206729


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

312067210


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

312067211


“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

312067212


States with Franchise Relationship Laws

312067213


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)

312067214


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

312067215

starting a franchise | jones day | doing business 2.0

Business

america radio network

usa radio network

ap radio network

bloomberg radio

business growth strategy

business news network

local radio interviews

national public radio