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IFA’s 45th Annual

LEGAL SYMPOSIUM

LEGAL SYMPOSIUM IFA’s 45th Annual

Basics Track: Best Practices in Franchise Administration

Charlene York – Moderator

Akerman Senterfitt LLP

Jennifer Yiangou Anytime Fitness Inc.

Joanna Lim Cheng Cohen LLC


Best Practices in Franchise Administration

1. Franchise Law Overview 2. Registration 3. Managing Multi-State Registrations 4. Internal Training 5. Pre-Sale Compliance 6. Post-Sale Compliance


States with Franchise Laws • Registration States

• In California, Hawaii, Illinois, Maryland, Minnesota, New York, North Dakota, Rhode Island, Virginia and Washington, submissions are reviewed by a state franchise examiner

• Although technically registration states, Indiana, Michigan, South Dakota and Wisconsin now only require the filing of an annual notice

• Notice States • One-Time Filings - Kentucky, Nebraska and Texas • Annual Filings - Florida and Utah


If No Registered Trademark • Connecticut and North Carolina-registration required

if no federal registered trademark • South Carolina-registration required if no state or

federal registered trademark • Georgia and Louisiana-consent to service of process

required if no state or federal registered trademark • Maine-if no federal registered trademark, a

franchisor may only sell one franchise without registering under the state business opportunity statute


Exclusions from the Amended Rule • Employer-employee relationships and general

partnerships • Cooperative associations, including agricultural

cooperatives and retailer-owned cooperative chains

• Certification and testing services, such as those offered by Underwriters Laboratories and Good Housekeeping

• Single trademark licenses


Exemptions Under the Amended Rule • Federal exemptions (automatic)—

• Nominal or Minimum Payment • Fractional Franchise/Leased Department • Oral Contract • Petroleum Marketers and Resellers • Large Initial Franchise Investment • Experienced, High-Net-Worth Franchisee • Related Party or Insider Exemption


Exemptions Under State Laws • State exemptions (generally not automatic)—

• Some action is required by the franchisor in order to claim the exemption

• Do not reduce the franchisor’s pre-sale disclosure obligation

• There are a wider variety of exemptions—some similar to the federal exemptions and some unique to a particular state


State Advertising Requirements • California, Maryland, Minnesota, New York,

North Dakota, Rhode Island and Washington require the filing of the advertising and promotional materials before use in that state • Franchisors are prohibited from using any information

in advertising materials that is not either contained in or substantiated by their FDD

• Franchisors are prohibited from using any untrue statement of a material fact or from omitting a material fact necessary to make the statements in the advertising materials not misleading


Franchise Sellers and Brokers • California, Hawaii, Illinois, Indiana, Maryland,

Minnesota, North Dakota, New York, Rhode Island and Washington require franchise sellers to register by submitting a “Franchise Seller Disclosure Form” (Form D) – In California-

– franchise sellers whose information is disclosed in Item 2 do not have to complete and submit Form D

– the submission of a Form D after an initial or renewal filing has been made effective is considered a post-effective amendment filing and requires payment of an additional fee


Franchise Sellers and Brokers • New York—a franchise seller must file a Sales

Agent Disclosure Form with the Department of Law and wait for the issuance of a registration order before offering and selling franchises

• Washington—franchise sellers must register before offering or selling franchises

• In New York and Washington, a franchise broker is also independently responsible for registering annually with the state before engaging in the offer or sale of franchises


Initial Registration • The registration packet contains:

• A cover letter and required application fees • Form A—Uniform Franchise Registration Application

(indicate initial, renewal or amendment) • Form B—Franchisor’s Costs and Sources of Funds • Form C—Uniform Consent to Service of Process

(including corporate acknowledgment) • Form D—Franchise Seller Disclosure form • Form E—Auditor’s Consent • Form F—Guaranty of Performance • State specific forms (advertising materials, CA forms)


Annual Renewals • State registrations expire either 90, 110 or 120

days following the close of the franchisor’s fiscal year end: – Hawaii expires 90 days after fiscal year end – California expires 110 days after fiscal year end – Illinois, Minnesota, New York and Rhode Island expire

120 days after fiscal year end • Or 1 year from the date of the order granting

registration – Indiana, Maryland, Michigan, North Dakota, South

Dakota, Utah, Virginia and Washington


Annual Renewals • In order to be considered timely, a renewal application

must be filed before the expiration of the registration • Illinois-1 business day before expiration • North Dakota - 15 business days before expiration • Rhode Island - 30 days before expiration

• If a registration lapses before the renewal is declared effective, the franchisor must “go dark” and may not offer or sell in the state during the lapse period

• Once the renewal is effective, the franchisor must re-disclose any serious prospect and re-observe the waiting periods before closing the sale of the franchise


Partial Filings

• I n practice, some states will accept partial filings: – Illinois, North Dakota, Rhode Island and Washington will

accept documents and a check without an FDD – California, Maryland and Virginia will accept documents, a

check and an FDD without financials – Indiana, South Dakota and Wisconsin must be filed as a

complete package


Amendments

• Under the Amended Rule, a franchisor is required to update its disclosure document on the occurrence of a “material change.” – A material change is any fact, circumstance, or set of

conditions which has a substantial likelihood of influencing a reasonable franchisee or a reasonable prospective franchisee in the making of a significant decision relating to the franchised business or which has any significant financial impact on a franchisee or prospective franchisee.


Amendments • Some state laws list specific events which constitute a

material change, but events that generally trigger the need to amend include:

• The termination or failure to renew a substantial portion of a system’s franchisees (5% or 10% is considered “substantial” by some states)

• A significant change in the franchisor’s management team • A significant change in the franchisor’s corporate structure (a

sale, for example) • An adverse change in the franchisor’s financial condition • A change in the terms of the offering itself (e.g. a change in

the initial fee or a drastic change in the type of products or services offered)


Amendments - Timing • The time within which a franchisor has to amend

its FDD after the occurrence of a material change varies. – Under the Amended Rule, the update must be done

on at least a quarterly basis – Under state statutes, the time allowed for amending

the FDD is described as “promptly” after the event, “upon the occurrence” of a material change or “as soon as reasonably possible”


Comment Letters

• Common issues addressed in comment letters: – undercapitalization

• escrow, fee deferral or surety bonds – missing information required by the Amended Rule or

state law – inconsistencies in the disclosure document or

franchise agreement – extraneous information or information in the wrong

place in the disclosure document – risk factors required


Pros and Cons of a Multi-State FDD

• Pros – Disclosure – Tracking – Manageability

• Cons – State specific requirements – Timing of effectiveness may result in different

forms


Managing Multi-State Registrations

• Differing requirements by different states – if the franchisor doesn’t want to include the

changes in the base FDD, the state-specific requirements usually can be placed in riders and amendments

– Creating multiple FDDs to deal with things like risk factors required by certain states

– Moving renewal dates closer together and closer to the franchisor’s fiscal year end


Multi-State FDD

Non registration

states IL, IN, MI, SD,

WI

Non-Material Change State Specific Change

Revise and send to states where registration is pending

Multi-State FDD with changes

State specific FDD

Material Change

Amendment to states already

approved


Client X

Client Y Correspondence

FDD

Orders of Registration

Comment Letters

State Registration Materials

•Applications •Franchise Seller Forms •Costs and Sources of Funds •NY Annual Report •Auditor’s Consent

Advertising

Mirror electronic file structure to physical

Distinguish filings

2012 Renewal

2011_Oct Amendment

2011 Renewal

Key Sub-files

Document Management


Internal Training

• Importance of Sales & Legal working together • Gathering the Sales team’s input on FDD • Test the Sales team (Secret Shops) • Collecting proper documentation • Proper staffing to administer a program


Staffing Needs

•Head of Sales •Sales Reps •Sales Coordinators •Real Estate Reps •Real Estate Coordinators

Sales/Real Estate

•General Counsel •VP Operations •Operations Manager •Paralegals •Compliance Coordinators

Operations •VP Support

•Franchise Consultants •Marketing Consultants •Affiliate Companies

Support


Compliance Training

• Choose strong & engaging speakers • Get creative – make it fun • Bring in the outside counsel to hear a different

view point • Review Financial Performance Representation

in FDD


Other Important Items

• Waiting Periods • Checks & Balances • Dealing With Downtime • Electronic Disclosure • Advertising Materials • Discovery Days • FDD Receipts & Supplemental Questionnaires


Technology/CRM Database


Shared Legal Docs


Tracking Protected Territories


Example of a Prospect Pipeline

symposium - franchise.org symposium ifa’s 45th annual basics track: best practices in franchise...

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