Here is a due diligence tip. If you see this type of non answer when you ask "How Much Money Can I Make?", run away.
See Todd Weiss's answer on the thread, in which he explains:
"A thoughtful and compliant franchise seller wouldn't do this... an unethical one would.... it's deceptive and a major red flag... I wouldn't walk from this... I'd run...."
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Should a Franchisor be required to disclose what the SBA has determined about the viability of its loans, in the past?
If so, what form & liability for this obligation be -- given that the SBA's data can be error prone?
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Joe and I see franchisors fouling up sales by making unlawful sales too often.
Here is a nice tip sheet designed to make lawful franchise sales, compliant with the FTC Franchise Rule and other State Laws.
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Disclosure requirements for franchise sellers vary around the world.
Do these self-regulated disclosure jurisdictions work better than the FTC Rule?
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Last night I reviewed a franchise agreement and found a surprising, and illegal, provision buried deep in the contract. If ever there was a compelling case for being careful when you are choosing legal counsel, I just found the provision that makes it.
But first, some background. My law practice involves representing both franchisors and prospective franchisees. For franchisors, I primarily draft franchise disclosure documents ("FDDs") and franchise agreements; I assist my clients in obtaining franchise state registrations; and I assist them with day-to-day issues that arise in running their businesses. For prospective franchisees, I will review their proposed franchise agreements and FDDs and help them understand what they will be committing to do if they decide to buy the franchise. If the franchise company is willing to negotiate, I help prospective franchisees through that process.
I find that reviewing other companies' FDDs and franchise agreements also helps me in my practice for franchisors; it's always instructive to see what other industry leaders are doing. I have noticed that, in a small minority of systems, some franchisors go well beyond what is legally permitted to be included in the franchise agreement and include provisions that unquestionably violate the FTC Franchise Rule (the "Franchise Rule") as well as various state franchise laws.
The Provision
If you're on either side of the franchise relationship, you should know if your contract has a provision like this one. Pull out your franchise agreement now. Go ahead, I'll wait.
You have it now? Good. Here's the provision we're looking for:
Release of Prior Claims. By executing this Franchise Agreement, Franchisee, and each successor of Franchisee under this Franchise Agreement forever releases and discharges Franchisor and its Affiliates, Its designees, franchise sales brokers, if any, or other agents, and their respective officers, directors. representatives, employees and agents, from any and all claims of any kind, in law or In equity, which may exist as of the date of this Franchise Agreement relating to, in connection with, or arising under this Franchise Agreement or any other agreement between the parties, or relating In any other way to the conduct of Franchisor, its Affiliates, its designees, franchise sales brokers, if any, or other agents, and their respective officers, directors, representatives, employees and agents prior to the date of this Franchise Agreement, including any and all claims, whether presently known or unknown, suspected or unsuspected, arising under the franchise, business opportunity, securities, antitrust or other laws of the United States, any stale or locality.
In plain English: "you, the franchisee acknowledge that we, the franchisor, may have lied to you and might be lying to you right now. Our entire FDD might be one of the greatest works of fiction sinceMoby Dick. You agree, however, that you waive all your legal rights to take action against us based on those lies, even if you have invested hundreds of thousands of dollars of your hard-earned money in this phony business." Wow.
Do you have that one in your franchise agreement? You might have to do a bit of hunting for it. You would think something like that would be on the first page, bolded, in caps, with a box around it and perhaps accompanied by a self-lighting sparkler that draws your attention directly to the provision when you open the contract. But no, in the case of the contract in which I found this provision, it was buried on page 36 of a 39-page franchise agreement, with no particular emphasis placed upon it.
I will never include a provision like this in a franchise agreement I draft, nor will I ever recommend that a prospective franchise buyer sign a contract when it includes this provision. Why? It's not only unfair, but it's also illegal under the Franchise Rule and under various state franchise laws.
The Problem with Having the Provision
Now, I highly doubt that in most situations, the franchisor even knows this provision is in its franchise agreement. Most start-up franchise companies trust their franchise counsel to draft the agreement and don't necessarily carefully consider each provision in the contract. This sort of provision is typically created by counsel, who is seeking to protect his or her client. An admirable goal, to be sure.
The problem is that this provision is impossible to justify to a prospective franchisee that notices it and understands its implications. If you're a franchisor, imagine trying to explain that to a potential buyer: "we're not lying to you. But you have to agree as a condition of buying this franchise that we might be and that you won't ever do anything about it if we are.
A franchisor may be able to slip this one by a franchisee unnoticed, but a franchisee that notices and understands this provision is always going to have a problem with it. A franchisee that has experienced franchise legal counsel review the agreement for them will certainly flag the term and warn the franchisee against agreeing to it. That could cost you a sale.
To make matters worse for the franchisor, the types of franchisees that actually read the agreement before signing it and have legal counsel review it for them are exactly the type of franchisees the franchisor wants: franchisees that take their commitments seriously and are willing to put their time, effort, and money into understanding commitments before they make them.
Now, I have my doubts that this type of provision will be enforceable in any event because, as I said, including a provision like this one is an explicit violation of the Franchise Rule, which "prohibits franchise sellers from disclaiming or requiring a prospective franchisee to waive reliance on any representation made in the disclosure document or in its exhibits or amendments." This provision does exactly that - and, as a result, the franchisor that included it in its agreement is in violation of the Franchise Rule (and various state laws) just for having the term in the contract.
Violating the Franchise Rule and state franchise laws leaves the franchisor exposed to lawsuits by franchisees that may have a state law "unfair trade practices" cause of action against the franchisor because of it. When those legal claims exist, a franchisor could face claims for damages or rescission. Moreover, state franchise administrators could refuse to register the franchise offering with a provision like this one (if they notice it) or worse, later take administrative action against the franchisor based on its violation of franchise law.
The better practice for franchisors that want to protect themselves, but do so within the bounds of the law, is to use exculpatory provisions and "compliance questionnaires" as part of the agreement signing process. A well-drafted exculpatory provision will provide a measure of protection to franchisors for unauthorized statements made by a renegade sales person, but will not seek to disclaim statements made by the franchisor in its FDD (and therefore is permissible under the Franchise Rule and many state laws).
The Lesson for Franchisors and Franchisees
If you are a franchisor, inclusion of a provision like this in your franchise agreement should make you question your legal counsel. Ask yourself: are you willing to risk losing a potential sale to a qualified, savvy, and ideal franchisee because you have a provision in your franchise agreement that probably isn't enforceable anyway? Are franchisees that sign your contract without even reading or understanding it really the type of franchisees you want? And is "sneaking something past" your unwitting franchisees who don't review every term of your contract really the way you want to do business? As I explain above, there are better (and legally-enforceable) ways to protect yourself in your franchise agreement, anyway.
If you are a prospective franchise buyer, this situation highlights the importance of: (1) reading your franchise agreement, cover-to-cover; and (2) hiring legal counsel experienced in franchise law to review your contract before you sign it. Contrary to the opinion of some, franchise agreements aren't all boilerplate, and not all franchise contracts are created equally. Don't assume that your franchise agreement doesn't contain something objectionable just because other franchisees signed it.
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As Chief Development Officer for a capital intensive franchise, I knew that we had an advantage in the marketplace - we could tell franchise candidates how much money they could make - because of our Item 19, or what is now called a "Financial Performance Represenation".
But we had a problem. While our ads in the Wall Street Journal could explain our business model and make representations consistent with our FPR, we had to be compliant with the FTC Rules on Misleading Advertising. We had a great average unit volume story, AUV, and we just had to tell it in the right way.
I knew all of this, wrote the ad & added the FTC required disclaimer -sent the ad to our legal counsel. We were "experts" on compliant franchise sales.
It was great! We had a terrific response, and we were in compliance with the law.
My joy was short lived -replaced with nerve racking fear. Our great advertising success was about to become a liability that would kill the franchisor!
A competitor of ours phoned me up. Here is their story. "Joe, saw the ad you were running. Just a word to the wise. We ran the exact same type of ad, pulled information from our FPR, and inserted the standard FTC disclaimer language. The next thing we heard was not from a happy or excited franchise candidate, but from the dour FTC. We had forgotten something. And it was going to kill us.
We didn't put on the ads the number of units and percentage that they represented which reached or exceeded the AUV. And the FTC wanted $11,000 for each ad we ran because of that one infraction. Just a word to the wise."
Now, we never got that call from the FTC. Thank heavens. But, I sure moved quickly to change the ad so that we told franchise candidates not only the AUV, how much they could make, but how many units were hitting that mark, and what percentage of the system they represented.
The joy returned. Our aggressive ads were working.
I still see franchisors advertising and selecting figures from their FPR, but either leaving out the disclaimer language or forgetting to put in the number of units and percentage they represent. I guess that they can afford the FTC fine - but I know we couldn't.
I was thankful that a competitor who was marketing with their Financial Performance Representation - FPR in their advertising as we were, was thoughtful enough to let us know. This way we could avoid the pain of having to pay the FTC fines of well over $100,000, at $11,000 per infraction, and have our reputation needlessly damaged.
So if you see a franchisor marketing with non-compliant sales claims in their advertisements do them a favor and give them a heads up so they can make a quick and easy fix. Feel free to send them this article.
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As an attorney who represents franchisors, a significant part of my practice is drafting franchise agreements and franchise disclosure documents.
Once these documents are completed, I also help franchisors comply with state laws by filing and maintaining their registrations in the various states that have franchise registration laws. As a result, much of my time (particularly during the first half of the year) is spent dealing with franchise regulators in various states.
During my years of practice, I have seen a number of common mistakes made by both start-up and established franchisors in their Franchise Disclosure Documents ("FDDs").
Many of these mistakes, which can cause delays in a franchisor's ability to obtain registration, are easily avoided. Make them, and state regulators will refuse to register your franchise offering - sending you a comment letter requiring you to correct your errors before issuing a registration permit. Avoid them, and your time to obtaining registration may be cut down by weeks, or even months.
To read my other "common mistakes in the FDD" blog posts, click here.
The Disclosure Requirement
A common FDD mistake is failure to list all "Initial Fees" in Item 5.
Item 5, entitled "Initial Fees," is where a franchisor must disclose all initial fees paid by the franchisee, and the conditions under which the fees are refundable.
Initial Fees" are defined as "all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee's business opens, whether payable in lump sum or installments." A franchisor must also disclose whether the initial fees can be paid in installments, and what those payment terms are.
Many franchisors do not follow instructions and fail to list all initial fees in Item 5. There are two types of common mistakes.
1. Common Mistake #1: Failure to List All Initial Fees Paid to the Franchisor
The first type of mistake is that the franchisor or its counsel assumes that "Initial Fees" means only the initial franchise fee paid by the franchisee (the fee franchisors charge franchisees for the right to enter into a franchise agreement). This is wrong because it ignores the other types of fees that are paid (or that the franchisee is committed to pay) to the franchisor prior to the franchisee's business opening.
In some franchise systems, there can be a multitude of initial fees charged that need to be disclosed in Item 5. Some examples:
In connection with processing the franchisee's application (running credit, doing a background check, etc.), the franchisor requires a deposit or "application fee."
The franchisor charges a fee for the franchisee to attend initial training.
The franchisor requires (or has the right to require) the franchisee to pay a fixed amount directly to the franchisor so that the franchisor can conduct grand opening advertising for the franchisee.
The franchisor charges a technology start-up or other type of fee relating to the franchisee's use of the franchisor's point of sale or other software system.
This is only a partial list of the types of fees that can fall under the category of "initial fees." I have seen many FDDs where franchisors will clearly charge these fees, but fail to list or disclose them in Item 5.
2. Common Mistake #2: Failure to List All Initial Fees Paid to the Franchisor's Affiliates
The second type of common mistake is the franchisor lists only initial fees paid by the franchisee directly to the franchisor, but ignores the fees paid to the franchisor's affiliates. The instructions for Item 5 clearly call for these fees to be disclosed, too. Remember, an "affiliate" is defined as "an entity controlled by, controlling, or under common control with, another entity."
Some examples of fees paid to a franchisor's affiliates:
The franchisee must purchase an initial stock of inventory from the franchisor's affiliate.
The franchisor's affiliate builds out the store for the franchisee (often referred to as a "turn key" franchise), and the franchisee pays the affiliate for the build-out.
The franchisee is required to pay the franchisor's affiliate to buy or obtain the right to use the franchisor's proprietary software system.
The franchisee buys an initial supply of marketing materials from the franchisor's affiliate.
Again, these are just some examples of the types of fees that are paid to affiliates. If these fees are paid before the franchisee opens for business, they are "initial fees" and must be disclosed in Item 5.
Conclusion
Avoid making these common mistakes in Item 5 of your own FDD, and you will have an easier time of getting registered in the registration states.
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As an attorney who represents franchisors, a significant part of my practice is drafting franchise agreements and franchise disclosure documents. Once these documents are completed, I also help franchisors comply with state laws by filing and maintaining their registrations in the various states that have franchise registration laws.
As a result, much of my time (particularly during the first half of the year) is spent dealing with franchise regulators in various states.
During my years of practice, I have seen a number of common mistakes made by both start-up and established franchisors in their Franchise Disclosure Documents ("FDDs"). Many of these mistakes, which can cause delays in a franchisor's ability to obtain registration, are easily avoided. Make them, and state regulators will refuse to register your franchise offering - sending you a comment letter requiring you to correct your errors before issuing a registration permit. Avoid them, and your time to obtaining registration may be cut down by weeks, or even months.
To read my other "common mistakes in the FDD" blog posts, click here.
The Disclosure Requirement
A common FDD mistake is failure to list all "Other Fees" in Item 6. Item 6, entitled "Other Fees," is where a franchisor must disclose all fees, other than initial fees, that are paid to or imposed by the franchisor. Specifically, in Item 6 a franchisor is directed to disclose "all other fees that the franchisee must pay to the franchisor or its affiliates, or that the franchisor or its affiliates impose or collect in whole or in part for a third party." The franchise company must list the type of the fee, state the amount (either a fixed amount or a formula used to determine that amount), state the due date, and make any remarks, definitions, or caveats regarding the fee.
Many franchisors do not follow instructions and fail to list all "other fees" in Item 6. These mistakes typically come in two varieties.
1. Common Mistake #1: Failure to List All "Other Fees" Paid to the Franchisor or its Affiliates
The first type of mistake is that the franchisor or its counsel fails to list all of the fees that could be charged during the life of the franchise according to the franchise agreement. In these situations, the franchisor may list only the more "obvious" fees like the royalty fee, advertising fund fee, technology fee, and the like - the fees that are typically identified in a section of the franchise agreement devoted specifically to listing fees.
The problem with this approach is that often, a number of other possible payments are hidden within other section of the franchise agreement, and these amounts clearly fall within the definition of "other fees" in Item 6.
There can be a multitude of fees charged that may be hiding in the franchise agreement but need to be disclosed in Item 6. Some examples:
This is only a partial list of the types of fees that can fall under the category of "other fees." I have seen many FDDs where franchisors will clearly charge these fees, but fail to list or disclose them in Item 6.
2. Common Mistake #2: Failure to List All Initial Fees Imposed and Collected by the Franchisor
The second type of common mistake is the franchisor lists only fees paid by the franchisee directly to the franchisor, but ignores the fees that are imposed and collected by the franchisor. The instructions for Item 6 clearly call for these fees to be disclosed, too.
Some examples of fees that might be imposed and collected by a franchisor:
Again, these are just some examples of the types of fees that might be "imposed and collected" by the franchisor.
3. Common Mistake #3: Over-listing Fees in Item 6
The final type of mistake is not as problematic as mistakes #1 and #2, but a franchisor should strive to avoid it anyway. Many times, a franchisor will list too many fees in Item 6, and include fees that are not called for by the FDD Guidelines. A franchisor should avoid listing these fees because they clutter and unnecessarily lengthen the FDD. Moreover, both the Federal Trade Commission and the various states that regulate franchise companies admonish franchisors to not include information in the FDD that the Franchise Rule or state law do not specifically call for.
Some of these over-disclosed fees that I have seen listed in Item 6 of franchisors' FDDs include:
Again, the listing above is only a partial one - I have seen many different fees included in Item 6 of franchisor FDDs when they clearly did not have to be listed there.
Conclusion
Avoid making these common mistakes in Item 6 of your own FDD, and you will have an easier time of getting registered in the registration states. You may also avoid liability due to claims by franchisees that you did not comply with disclosure laws by failing to disclose fees as required by law.
The call came just when Kevin was about to drain the last of his scotch. The muffled ring startled him a little as he gazed lazily across the soft white sands to the calm ocean waters gently caressing the beach.
He hardly ever received phone calls anymore, not since buying a condo in an exclusive St. Lucia's resort - aptly named Sugar Beach - almost five years ago.
Unless, of course, it was the concierge informing him about the dinner reservations he had made for him at yet another five star restaurant, or his masseuse confirming his weekly appointment.
His mind briefly flashed back to former times - another place in another time, when he had managed his own franchise retail stores in Virginia and Maryland, working relentlessly to make his dream come true - to be his own boss and to prove his business acumen by the only true scorecard that has ever been used for centuries - a healthy financial statement.
And a very healthy financial statement it had turned out to be after eight years running his "Pause for Paws" franchise units.
Who knew that pet pedicures would be so popular? Talk about the golden dog laying the golden.... Well, anyway, he was very well off, and he had developed a warm spot in his heart - and wallet - and for those canines, felines, and other pampered pets.
The rude, persistent ring tone refused to allow Kevin to reminisce. "All right, already," he bellowed as he rummaged through his beach bag in search of his I-phone. He could see as he picked up the device that it was his accountant back in the States.
"We have a problem," Harvey announced flatly. "The buyer of your P for P store has gone out of business, and now the landlord is demanding that you pay the back rent and damages. Some $353,000, or thereabouts."
The slight breeze suddenly felt very cold as Kevin tried to process this unexpected disaster. "Why is the landlord coming after me," he asked weakly, "I haven't been involved with the business for over six years now. How could this be happening!?"
Unfortunately for Kevin, he had been so focused upon the planning, learning, hiring, training and everything else that consumes a new franchisee starting a business that he gave too little thought to the commercial lease he had to sign for his new store.
"As long as I pay the rent on time, I'll be okay," he had reasoned back then.
"Besides, I will have such a poor negotiating position, it makes no sense to waste time and money having an attorney review my lease."
He had been too distracted with the pressing demands of an exciting new venture to focus on the fact that his entire business would depend upon the soundness of his lease, by far the biggest asset - and liability - of his nascent enterprise.
Too often franchisees like Kevin fail to appreciate the substantial financial obligations he or she is being straddled with: even modest space of between 1,500 - 3,000 sq. ft. can have cumulative minimum rent obligations in the $700,000 to $900,000 range for a typical ten year term, plus common area maintenance, real estate taxes and insurance charges that keep going up over time.
Moreover, if a purchaser of the business elects to exercise extension rights, those obligations will only continue even longer. The landlord does not have to try to get any money out of the existing tenant, either; he can come directly after the fat guy downing booze on the beach.
It's true that a newly established business needing only a few thousand square feet of retail space is not going to have the same leverage as an anchor tenant, but there are many important provisions in a lease where a landlord has significant flexibility - indeed, almost all retail developers have already drafted second and third level positions on many important lease issues they anticipate a tenant's experienced legal counsel will raise; low-hanging fruit that can even the smallest tenant can grab - but only if he knows what those issues are, how to articulate the winning arguments, and how far one can push.
As Kevin found out too late, most landlord retail lease forms insist that the initial tenant remains liable under the lease for the full duration of the term - even if the business is sold to another person in the meantime.
On top of that, the standard personal guaranty Kevin was also required to sign put all of his personal assets behind that commitment.
It doesn't need to be that way, though. Often a landlord will agree to a significant but manageable liquidated damage amount for tenant defaults occurring after a certain period of time, or to the termination of the personal guaranty after the initial term, or to a full release of the initial tenant and its guarantor if a replacement tenant, together with a replacement guarantor, has at least a certain minimum net worth.
The point is, there are many ways to avoid this open-ended nightmare: if, like Kevin, you worked hard and "hit a home run" in the business world, you should not have to worry about an ugly hand from the past snatching it all away in an instant.
On-going tenant liability is only one of many ways in which a standard retail lease form can destroy a franchisee's exit strategy from a successful business. No franchisee should have his winning business plan become a financial disaster because he sought to "go budget" on the most important legal document he would ever sign.
"Don't worry," offered Harvey, "my brother, Rich, is a litigator. He'll find a way to fight this and maybe cut your losses - if we give him enough time to look into it."
"Yeah," sighed Kevin, "and we give him a big enough retainer."
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(Gordon has been representing retail tenants around the country for nearly thirty years, including serving as corporate counsel for twenty-two years leading new store site acquisition teams for major corporations, such as Costco Wholesale Corporation. In 2013, he decided to apply the extensive experience he had gained going toe-to-toe with the major retail developers around the country to the representation of the underserved small to medium-sized business client seeking to rent retail space.
Inspired by Costco's model of high quality goods and services offered with a spartan cost structure, Gordon joined a virtual law firm, Fisher Broyles, LLP, that enables him to offer all of the benefits of a major law firm - a large group of experienced, partner-level only attorneys representing clients in a broad array of practice areas ,with offices in eleven major cities throughout the United States - with the responsiveness and economy only possible through the maximum utilization of available technologies.)
As an attorney who represents franchisors, a significant part of my practice is drafting franchise agreements and franchise disclosure documents.
Once these documents are completed, I also help franchisors comply with state laws by filing and maintaining their registrations in the various states that have franchise registration laws. As a result, much of my time (particularly during the first half of the year) is spent dealing with franchise regulators in various states.
During my years of practice, I have seen a number of common mistakes made by both start-up and established franchisors in their Franchise Disclosure Documents ("FDDs").
Many of these mistakes, which can cause delays in a franchisor's ability to obtain registration, are easily avoided.
Make them, and state regulators will refuse to register your franchise offering - sending you a comment letter requiring you to correct your errors before issuing a registration permit. Avoid them, and your time to obtaining registration may be cut down by weeks, or even months.
The Disclosure Requirement
On the top of the list of these common FDD mistakes is the franchisor's failure to comply with the requirements for Item 2. Item 2, entitled "Business Experience," is where a franchisor must list employment history of certain of its key officers, managers, directors, and employees. The instruction for completing Item 2 is a simple one:
Disclose by name and position the franchisor's directors, trustees, general partners, principal officers, and any other individuals who will have management responsibility relating to the sale or operation of franchises offered by this document.
For each person listed in this section, state his or her principal positions and employers during the past five years, including each position's starting date, ending date, and location.
That's it - that is the entire instruction for Item 2. The instruction does not call for the franchisor to give the entire resume, or even a mini biography, for its key personnel. But that's exactly what many franchisors tend to do.
Common Mistakes in Item 2
The franchisor's natural tendency in Item 2 is to use it as a sales tool - explaining why and how its key people are well-qualified, outstanding individuals with a long history of leading successful companies, and why they are great human beings, to boot. Here's an example of how a non-compliant, overly-descriptive Item 2 might look:
Jules Winnifield, President
Jules has been the President of Jack Rabbit Slim's Franchising Company for six years, and has been the driving force behind growing our franchise system from two locations to seventy-five. Before coming to work for Jack Rabbit Slim's, Jules was the Chief Operating Officer of Red Apple Security, one of the largest private security companies in the world. During his eight years at Red Apple, Jules was responsible for a 22% increase in revenue company-wide. Jules earned his Ph.D in Behavioral Psychology from the University of Santa Cruz in 1992. In addition to his hobbies, which include walking the earth and memorizing passages from important works of literature, Jules enjoys spending time with his wife, Mia, and his children, Marsellus and Lance.
So what's wrong with the above description? A lot.
First, it provides only a small portion of the information called for by the instructions in Item 2. While it does at least describe where Jules has been employed for the last five years, it doesn't tell you the dates of employment or where those positions were located.
Second, the listing reads like a sales pitch, telling the prospective franchisee why Jules is so well-qualified for his current position. Nothing in the instructions for Item 2 asks the franchisor to provide that information.
Third, the franchisor has provided more than five years of work experience for Jules, going back more than thirteen years into Jules's prior employment.
Fourth, the Item 2 instructions do not call for educational experience - only work history. And in this situation, it's not even clear that Jules's doctoral degree is even relevant to his current line of business.
Fifth, nothing in the guidelines asks a franchisor to provide information regarding the hobbies or family members of its key personnel.
You might think I'm exaggerating non-compliance with Item 2 when I list Jules's hobbies, wife and children. I'm not. I've seen many franchisors provide exactly that type of information in Item 2 of their own FDDs.
Here's how an Item 2 disclosure should look:
Vincent Vega, Chief Executive Officer
Vincent has been our Chief Executive Officer since March 2012. Prior to becoming our CEO, Vincent was President of Butch's Boxing Club in Inglewood, California, a position he held between December 2010 and March 2012. Before that, Vincent was the Vice President of Operations for McDonald's in Amsterdam, the Kingdom of the Netherlands, a position that he held between October 2006 and December 2010.
The above Item 2 description is correct because it provides all of the information called for by the instructions, and only that information. Vincent's work experience the location of each position he held is listed in the description, and his starting and ending dates with each employer (month and year are all that is necessary) are given. The disclosure gives enough information to cover his last five years of employment, and no more.
Conclusion
Avoid making these common mistakes in Item 2 of your own FDD, and you will have an easier time of getting registered in the registration states. While it may be tempting to include the extraneous information in Item 2, your doing so will increase the likelihood that you will obtain comment letters from those states, and that your registration will be delayed as a result.
The International Franchise Exposition ("IFE") is coming back to New York City again for this summer of 2014. In order to continue enabling franchisors that are not registered to sell franchises there, the State of New York has again renewed the limited exemption to its Franchise Sales Act (N.Y. Gen. Bus. L. § 680 et. seq.) (the "Act"). The three-day exemption allows franchisors that are not registered with the State to participate in the 2014 IFE under certain circumstances.
An eligible franchisor that files and complies with the exemption rules will be permitted to exhibit and offer for sale, but not to sell, franchises at the IFE. Before a company can actually sell a franchise covered under the Act, the franchisor would still have to register with the state as provided under New York law.
Why the distinction between making an "offer to sell" and "selling" a franchise? It's because ordinarily, an unregistered franchisor that exhibits at a trade show in a franchise registration state would potentially violate that state's registration law. The way most registration state laws are written makes it illegal to either offer to sell or to sell a franchise without first being registered there. Arguably, simply exhibiting at the show is making an "offer to sell" a franchise.
Franchise companies have long argued that these state franchise registration laws unnecessarily discourage commerce by preventing them from participating in franchise expos when they are not registered, even where those franchisors do not plan to make franchise sales without complying with applicable state law.
Franchisors (and companies that are interested in franchising) contend that participating in trade shows can provide a valuable opportunity for them to "test the waters" to determine the market demand for their concepts. If franchisors (and companies that are interested in franchising) are allowed to participate in trade shows without having to first register in the host state, they would be able to gain valuable insight from comments and suggestions made by prospects, other franchisors, and even attending consultants.
From the franchisee's perspective, greater trade show participation by franchisors will increase the availability of information about a variety of concepts and give them the opportunity to obtain information, one-on-one, from representatives of those concepts - an opportunity that is unique to the franchise expo format. Franchisees contend that franchisors that participate in franchise expos are usually better-educated about franchising. It follows that better-educated franchise companies make better franchisors, and will result in higher-quality Franchise Disclosure Documents and better franchise systems.
This exemption may prove critical even to franchisors that file to register in New York in advance of the IFE. During 2013 (at least based on my own experience in representing franchisors that applied to register in New York), New York was one of the slowest states to respond to franchise registration and renewal filings, often taking three or more months to register a franchise. If the same holds true in 2014, a franchisor that plans to exhibit at the IFE, but has not already obtained registration in NY by early May 2014, should consider filing for this exemption to ensure that it can do so without violating state law.
To take advantage of New York's exemption, a franchisor is required to complete and submit an application exemption form and supporting materials to the Office of the New York Attorney General. Follow the link: application form for U.S.-based franchisors / application form for international franchisors. Please note that exemptions are not automatic; the Attorney General's office will review applications and reserves the right to deny any request. For this reason, it's important for franchisors planning to take advantage of the exemption to file well in advance of this year's IFE.
How Do Franchises Go Bad?
Franchises start out with an initial cash requirement - initial fee, business set up costs and working capital. It is not unusual for this to be $ 500,000 to $ 1,000,000. The money comes from liquidating a lot of family assets plus SBA guaranteed loans or start up loans that are not SBA guaranteed.
Franchisees always have to personally guarantee the full performance of the agreement. In addition to the regular operating costs, there is the ongoing cost of being a franchisee, nominally in the disclosure materials around 10 % of gross sales.
Because the disclosure materials never tell the whole story, the cost of being a franchisee begins at around 15 % of gross sales.
Hidden franchise fees include the additional cost of having to buy from designated vendors who have no competition when selling to the franchisees and can charge more than competitive prices. Some parts of some franchise systems are franchised separately under add on licenses with additional royalties. Software is often licensed separately for additional charges per month.
The list is long. When I tell franchisee clients to go back and refigure their business plan pro formas using 15 % of gross sales as the true royalty and advertising cost and then come back and talk about whether the working capital number is adequate or whether they can come out at all, they are often in disbelief that people would do something like that to them.
As the franchise matures, imaginative franchisors find other things that can produce additional revenue streams from the systems at the cost of the franchisees. So called improvements, remodels, and miscellaneous fee add-ons drive the cost of being a franchisee to over 20 % of gross sales. Franchisees cannot survive.
The businesses cannot be sold to others in most instances. Avarice has bled the system dry. There are other nuances in the mix, but I think this shows the pattern of what is happening in scores of tough franchise systems today. Oddly enough, some of the profit that is removed by the franchisor resulted from franchisee cheating.
There is no difference in the honesty rate between franchisors and franchisees. Business information tracking capability has so improved over the last 35 years that cheating is harder, but it still happens. If this was about telling war stories I could use up a lot more space on the subject of shenanigans.
If you are a businessperson, sooner or later you will have to deal with a lawyer. In the franchise world, it helps - tremendously - to deal with attorneys who understand franchising and franchise law. It doesn't matter whether you are a franchisor or a franchisee; no matter which side of the transaction you happen to be on, you will want an experienced franchise attorney to be on the other side.
Surprisingly, the level of franchise law knowledge among attorneys who actually get involved in franchise transactions varies considerably. The majority of the time, lawyers who are knowledgeable in franchise law are on both sides of the transaction. But that is not always the case.
Sometimes, the attorney on the other side is inexperienced, and "dabbling," in franchise law.
This is the first of a two-part piece on why these dabbling attorneys can hinder a transaction, or worse, do harm to their clients.
This part one looks at it from the point of view of the franchisor, which is negotiating with a prospective franchise purchaser. Let's assume this prospective franchisee is the party represented by a lawyer without franchise law experience. This situation is much more common than the reverse - where it is the franchisor, and not the franchisee, that has inexperienced counsel.
Why Franchise Agreements are Different from other Business Contracts
Some, but not all, franchise agreements are negotiable. The most significant problem involving inexperienced counsel occurs when the franchisor is otherwise willing to negotiate with the prospective franchisee.
If a prospective franchisee seeks legal counsel, s/he will typically seek out that person's usual business attorney, if there is one. If the prospective franchisee doesn't have or know an attorney, that person will ask friends and family for referrals. Frequently, the referral is to a business attorney who has little or no experience in franchise law.
The business attorney may be tempted to do the work, instead of referring it to another lawyer. After all, the terms in franchise agreements look a lot like the ones you might find in other types of business contracts. But the problem is that the franchise relationship isn't a typical business relationship. It is critical for the attorneys on either side of a negotiation to understand what makes franchising different.
Specifically, franchise agreements are (on the whole) much more one-sided than other business contracts. This is for a good reason: the provisions are there (in one way or another) to protect the health and integrity of the system as a whole, including its intellectual property and goodwill. Protecting the system is paramount, because if the system fails, all of its franchisees lose.
An attorney representing either side of the franchise transaction needs to understand this basic truth at the core of franchising. When s/he has experience in franchise law, counsel will understand which provisions are typical or atypical. They will also understand which terms may be negotiable and whether, taken as a whole, the franchise contract is more or less one-sided than is typical for those agreements. Having this experience will make the negotiation more productive and efficient. A more efficient negotiation will typically result in lower attorney fees.
The Frustrations of Dealing with Inexperienced Franchisee Counsel
You might think that the franchisor would benefit if the lawyer on the other side is inexperienced. I can assure you that is not the case.
Here's the problem: when a franchisor is negotiating with a prospective franchisee's counsel, that attorney's lack of franchise law experience frustrates and needlessly complicates the process. Because the lawyer for the prospect doesn't understand franchising, s/he may try to negotiate items that simply can't be negotiated from a system protection perspective.
Again, the provisions in a franchise agreement are there to protect the system as a whole. An attorney who understands franchise law gets this, and will instead turn his/her attention to the contract terms that a franchisor may be willing to negotiate. The dabbling attorney, on the other hand, will often try to change these critical terms.
Here is how things usually shake out in those negotiations. The prospective franchisee's counsel issues a 30-page memo outlining each and every provision of the franchise agreement that s/he wants to have changed. Or even worse, the attorney submits a redlined version of the entire contract containing his or her requested changes or revisions to the contract, which are usually voluminous.
The franchisor is likely to give one of two responses in that situation, and neither of them is good for the prospective franchisee.
1. Refusal to negotiate
The franchisor's first possible response to the attorney's negotiating position is to simply refuse to negotiate, at all. A franchisor will react this way when it is overwhelmed and frustrated by the number of requests, which the company believes seek to change key provisions of the contract.
The franchisee is then presented with a choice: (1) walk away from the deal entirely, and lose out on what may have been a good business opportunity; or (2) accept the entire franchise agreement as written, without any changes, thereby missing the chance to negotiate for some critical changes. In either case, the inexperienced attorney did his/her client a disservice by impeding the deal. This is frustrating to both sides.
2. Agreeing to limited changes
The franchisor's second possible response to the attorney's negotiating position is to agree to some, but not all, of the proposed changes. Obviously, this is better for the prospective franchisee than under the first scenario. But even in this situation, inexperienced counsel can be an impediment to the prospective franchisee.
This is when experience really matters: an attorney who understands franchising will also know which provisions are worth negotiating, and which are not. The experienced attorney will know when the franchisor can be pushed, and when it cannot. As a result, the selection of specific provisions that are the subject of any negotiation becomes critically important.
In other words, the "shotgun" approach to negotiation -- asking for everything under the sun -- lacks focus. And it's this lack of focus that can result in a less effective negotiation process, when the different / changed provisions are not the ones that can make the biggest difference for the client. By taking the unfocused approach, the dabbling franchise attorney misses the opportunity to conduct an effective negotiation for his or her client.
Conclusion
When franchise contracts are negotiable, an attorney who dabbles in the area, lacking experience in franchising, can frustrate or impede the process. For this reason, franchisors tend to prefer that their prospective franchisees hire experienced franchise counsel, and those prospective franchise buyers should seek out lawyers who understand franchising. Plus, hiring an experienced franchise lawyer will typically save money, because the knowledgeable attorney will be more efficient than the dabbler.
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Should a prospective franchisee work with a franchise broker or consultant?
I am often asked that question by prospective franchisees.
Alternatively, someone will contact me and after speaking with me may decide that they want to look at other franchise opportunities.
Typically, in those situations I refer the prospective franchisee to both the IFA website (www.franchise.org) and to a franchise broker or franchise consultant who does not charge the prospective franchisee.
A franchise consultant or franchise broker works with the "candidate" or prospective franchisee by performing almost a matchmaking service.
A good broker learns about the prospective franchisee's financial and personal background and determines franchises that would be a good fit, both financially and personally, for the candidate.
Once the prospective franchisee narrows down his or her selection to a few franchises, typically the franchise broker will recommend that the prospective franchisee speak with existing franchisees of those systems, make suggestions to perform validation of the franchise and encourage the candidate to attend the franchisor's Discovery Day.
The best franchise brokers or franchise consultants also understand the importance of encouraging the prospective franchisees to utilize experienced franchise attorneys as part of their candidate's validation or due diligence.
They are not concerned about losing the deal, but rather making sure that the prospective franchisee has a clear understanding of the franchise opportunity and is properly represented.
The best franchise consultants or franchise brokers understand that good relationships with their candidates is critical to consultant's future success.
In my experience the prospective franchisees that contact me after working with a franchise consultant or franchise broker are typically most prepared to pursue the franchise opportunity.
Like other areas of business, franchising has its own jargon or vocabulary.
The terms "master franchise" or "sub-franchise" and "area developer" have technical definitions, but are often used improperly. This article will help to define a master franchise or sub-franchise and area developer and distinguish them from other forms of expanding a franchise.
Franchise systems sell a master franchise (also known as a "sub-franchise") in order to more rapidly expand their brand and system. Often master franchising is used internationally. In that context, a master franchise or sub-franchise may be sold to a person or entity to sell franchises on the franchisor's behalf in another country.
The master franchisee has the responsibility of selling franchises throughout that country. Typically the master franchisee will sell, train and support the franchisees of that country and act as their franchisor. This may make sense for the franchise system that is interested in expanding globally.
In the United States, certain systems have attempted to sell master franchises for certain states or regions. For example, a system may sell a master franchise for New York state. That master franchisee would be responsible for selling, training and supporting the franchisees of New York. The concerns of this type of system is that often the master franchisee is unable to provide the appropriate support to its franchisees.
A master franchise is distinguished from an area development in which a person or entity who buys a territory or region is required to develop that region him, her or itself.
The area developer would be trained and supported by the franchisor and required to open a certain amount of locations within a certain territory and in a certain timeframe.
Panera Bread® is an example of a franchise that has expanded through area development. They sell a minimum territory of 15 units. The Panera Bread franchisee must develop that territory typically within six years.
Often a master franchise or sub-franchise is not the best manner of expanding in the United States for 3 reasons:
A master franchise or sub-franchise may be one way a franchisor can expand rapidly. However, there are concerns that any franchise system or prospective master franchisee should consider. Becoming an area developer for a territory is another means of rapid expansion and has its own concerns.
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FTC (Press Release) The Federal Trade Commission will host a workshop on December 4, 2013 in Washington, DC to examine the practice of blending advertisements with news, entertainment, and other content in digital media, referred to as "native advertising" or "sponsored content."
Increasingly, advertisements that more closely resemble the content in which they are embedded are replacing banner advertisements - graphical images that typically are rectangular in shape - on publishers' websites and mobile applications. The workshop will bring together publishing and advertising industry representatives, consumer advocates, academics, and government regulators to explore changes in how paid messages are presented to consumers and consumers' recognition and understanding of these messages.
The workshop builds on previous Commission initiatives to help ensure that consumers can identify advertisements as advertising wherever they appear. This includes recent updates to the Search Engine Advertising guidance, the Dot Com Disclosures guidance, and the Endorsements and Testimonials Guides, as well as decades of law enforcement actions against infomercial producers and operators of fake news websites marketing products.
The FTC invites the public to submit original research, recommendations for topics of discussion, and requests to participate as panelists. The Commission also invites the submission of examples and mock-ups that can be used for illustration and discussion at the workshop. Topics the workshop may cover include:
Electronic submissions can be made online. Paper submissions should reference Native Advertising Workshop both in the text and on the envelope, and should be mailed or delivered to: Federal Trade Commission, Office of the Secretary, Room H-113 (Annex X), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC requests that any paper submissions be sent by courier or overnight service, if possible, because postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions. Requests to participate should include a statement detailing any relevant expertise in digital advertising and should be submitted by October 29, 2013 
via email to[email protected]. Panelists selected to participate will be notified by November 6, 2013.
Here is an email I recently received. I live in Maryland and not Ontario, Canada.
Chem-Dry, the world's largest and highest rated carpet and upholstery cleaning franchise system with 3,500 units in 35 countries, has recently opened new territories and will be exhibiting and recruiting new franchisees at the show.
The show is being held at THE INTERNATIONAL CENTRE in Mississauga, Ontario on September 7th and 8th. ChemDry has been ranked the #1 carpet cleaning franchise by Entrepreneur magazine for 25 consecutive years.
With our proprietary hot carbonating extraction cleaning process and ongoing marketing and operational support, ChemDry is a franchisor that helps you grow.
We offer in-house financing with as little as $9,995 down and total investment starting at $41,000.We also deliver top-line results.
Check out our average franchise sales numbers:
Usually, I would simply look up the franchisor's FDD and compare this earning's claim with the Item 19 claim.
But, this is a much more difficult case. I don't know much about the Ontario Franchise Disclosure law - except Webster tells me it that it is for lawyers and not franchise investors.
So, I looked up the Item 19 for Chem-Dry in the US, How Much Can I Make.
First, the Item 19 is not based on the franchise owner's reported profit and loss statements.
"HRI does not currently require all Chem-Dry business franchise owners to provide periodic revenue and other financial reports concerning their franchises.
In February, 2013, HRI conducted a system-wide survey requesting that all franchise owners provide certain financial and other information relating to the operation of their Chem-Dry business franchises during 2012.
As of December 31,2012. HRI had 1,081 franchise owners who operated 2,039 Chem-Dry business franchises.
Of those, 211 franchise owners (the "Responding Franchise Owners"), who collectively own 475 Chem-Dry business franchises, and who have owned their businesses at least 2 years, provided complete 2012 financial information in response to the survey and operated those franchises throughout all of 2012."
Second, and it gets more tangled, here is the chart from the survey, click on it to expand it.
The average revenue number reported from the US survey as representative to Ontario prospects is the same: $111,184!
It is it all all plausible that the 211 franchisees who completed the Chem-Dry survey in 2012 forms a reasonable basis to tell a prospect in Ontario what he or she might make?
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Most business owners do not realize that there is a difference between a franchise and a business opportunity. Franchises are regulated by both the federal law (FTC regulation) and by certain state franchise laws.
Business opportunities are also regulated under both certain states' laws and the FTC.
What is a Franchise?
Franchises, under the federal franchise law are business arrangements that meet three criteria:
1) there is a trademark owned by the seller under which the investor operates;
2) the seller receives $500 or greater in the first 6 months that the investor is in business (for product, training or anything else);
3) the seller exercises sufficient control over the investor and the investor's business.
If these criteria are met, the FTC franchise law states that the seller/franchisor must provide a regulated franchise disclosure document (FDD) to a prospective franchisee/investor at least 14 calendar days prior to accepting any money from the investor and prior to the investor signing any contract with the franchisor/seller.
What is a Business Opportunity?
What are business opportunity laws and why were they promulgated? The business opportunity laws were designed to reach distribution arrangements that are typically different than franchises, such as dealerships, vending machine businesses, certain work-at-home businesses and other "seller-assisted" marketing plans.
A business opportunity is defined as an arrangement in which a person:
1) offers, sells or distributes goods, commodities or services to another and;
2) the goods, services or commodities are provided by the seller of the opportunity or by someone affiliated with the seller or required by the seller and the seller secures business for the purchaser or retail outlets or accounts for the purchaser and;
3) the purchaser is required to pay or commit to pay to the seller or its affiliates at least $500 within six months after commencing operations.
The purpose of the business opportunity laws is to protect the investor in these business schemes from questionable or fraudulent offerings.
The legal definitions of a business opportunity are intentionally broad and unclear to cover a plethora of unconventional marketing schemes and businesses. Franchises are typically excluded from the definition of business opportunity in these laws.
However, without a specific exemption or exclusion, there may be franchises that will fit within the state definition of a business opportunity.
What are the requirements of the Business Opportunity laws?
The statutes typically require a disclosure document in a prescribed form be delivered to the prospective investor prior to the time any agreement is signed or any monies are paid for the business opportunity. This form varies from state to state and under the FTC.
Unlike franchise laws, there is no uniformly accepted business opportunity disclosure format that all states and the FTC accept.
Many states also require that the business opportunity disclosure document be filed or registered with the state prior to selling any business opportunities in that state.
Many states also require that a surety bond or trust account or letter of credit be posted so any future claims by business opportunity investors can be paid. Some states also require escrow accounts if greater than 20% down payments are required prior to the investor's receipt of the goods promised. Many states also have certain required language in the business opportunity contract with the investor, including cancelation rights.
There are also typically prohibited acts, such as making earnings claims without substantiation.
In certain states a violation of their laws on business opportunities may be a felony or misdemeanor.
A seller of any type of business opportunity, including franchises, should be cautious about meeting the requirements of the various state and federal laws governing the sale of the opportunity.
Penalties for failure to comply can be steep and should be avoided.
Connie Gentry of FSR has written a short blurb on the popular Maryland franchise The Green Turtle Sports Bar & Grille.
It is not clear whether this is an advertorial, a press release, or simply a small news piece. It matters because if this was an advertorial, it would have to comply with the FTC's Rules on Testimonials and Endorsements.
It is further unclear as to what the * is supposed to refer to - I expect the author thought that this was sufficient notice that some disclaimer was being made about these numbers. But no such disclaimer was in the article.
Since, it was not clear what reliance one could reasonably place on these AUV's, I decided to get the Green Turtle's 2012 FDD and look at the Item 19, directly.
This is the middle of 2013, and the 2012 Item 19 was calculated for the end of 2011, we do need to get some up to date data if we were going to make a buying decision.
But, instead I want to highlight something I have seen a number of times.
First, this is a gross sales only Item 19. There is not enough data here to make a reliable cash on cash return estimate - important basic costs line rent, cost of goods solds, and labor are not disclosed.
Second, and I have seen this a number of times, is the insertion of a median annual gross sales. In this case, 11 locations had gross sales above the median and 11 had gross sales below the median.
The natural question is: what was the average gross sales for the 11 locations under the median? Could be $500k, $1million, or even up to $2.24million. Makes a big difference.
But, we don't get any more useful data - just some disclaimers.
So, what you should you do? After all, it is important to know what the gross sales of those units below the median.
It is a flip of the coin whether your location will be above or below the median.
The answer is to ask: ask for the back-up, look at those 11 units and calculate yourself their average gross sales. Because if you don't ask, nobody is going to tell you.
Another interesting decision has come down regarding the use of exculpatory clauses in franchise agreements -- and this time, the decision went in favor of the franchisee.
Exculpatory clauses are provisions that parties use to disclaim the making of any promises, representations, or statements outside of the contract.
Such provisions are commonly used by franchisors in franchise agreements to give the franchisor the assurance that their franchisees are not relying on any promise, statement, or representation that was made before signing -- many of which the franchisors may not even be aware (for example, those that were made by salespeople speaking beyond the limits of their authority).
The most common form of exculpatory clause is an integration clause, which in most contracts goes by the title "Entire Agreement." An example of an integration clause (taken from the franchise agreement in this case) is below. Often, a franchisor will be able to rely on an integration clause and other exculpatory provisions to avoid liability in court for promises that were allegedly made to a franchisee that are not reflected in the terms of the franchise agreement.
But other times, a badly-written or otherwise non-comprehensive exclupatory clause will not provide a sufficient shield to a franchisor to avoid liability. The C&M v. True Value case, from the Wisconsin Court of Appeals, provides a good example of how courts can sometimes find that a franchisor's exculpatory clause is insufficient to protect it from liability for an alleged misrepresentation.
In this case, C&M was a True Value hardware store franchisee for a short time, having only operated the store for less than a year before closing it due to financial reasons. Shortly after closing the doors, C&M sued True Value, claiming that (among other things) that True Value misrepresented the possible performance of the franchise business.
The franchise agreement in question, called a "Retail Member Agreement" (the "Agreement") was signed by C&M and contained two different exculpatory clauses that said:
[True Value] has not represented to [C&M] that a "minimum," "guaranteed," or "certain" income can be expected or realized. Success depends, in part, on [C&M] devoting dedicated personal efforts to the business and exercising good business judgment in dealings with customers, suppliers, and employees. [C&M] also acknowledges that neither [True Value] nor any of its employees or agents has represented that [C&M] can expect to attain any specific sales, profits, or earnings. If [True Value] has provided estimates to [C&M], such estimates are for informational purposes only and do not represent any guarantee of performance by [True Value] to [C&M]. [TRUE VALUE] MAKES NO REPRESENTATIONS OR WARRANTIES EITHER EXPRESS OR IMPLIED REGARDING THE PERFORMANCE OF [C&M'S] BUSINESS.
And
This Agreement, and any other agreement which [C&M] signs with [True Value], is the entire and complete Agreement between [C&M] and [True Value] and there are no prior agreements, representations, promises, or commitments, oral or written, which are not specifically contained in this Agreement or any other agreement which [C&M] signs with [True Value]. The current form of the Company Member Agreement shall govern all past and present relations, actions or claims arising between [True Value] and [C&M].
Based on these two exculpatory clauses, the trial Court determined that C&M was placed on notice that anything True Value said could and did not constitute representations or warranties about the possible performance of the business. Based on this holding, the trial Court dismissed C&M's misrepresentation claims.
C&M appealed. The Court of Appeals of Wisconsin first stated the general rule that exculpatory contracts are disfavored in the law. Because of this general rule, the Court said that exculpatory contracts should be carefully reviewed by a trial court to determine whether they violate public policy.
Moreover, the Court advised that any such provisions should be strictly construed against the party seeking to rely on them.
The Wisconsin Court of Appeals stated that, to enforce an exculpatory provision in Wisconsin, the contract must specifically inform the signer of the types of risks being waived.
The Court found that the Agreement failed to notify C&M that it was intended to operate as a "waiver of True Value's liability for misrepresentation" and that it did not make any "mention of disclaiming liability let alone specifying any specific tort." Because the two exculpatory provisions in question failed to "clearly, unmistakably, and unambiguously" inform C&M of these types of liability being waived, the Court held that the provisions failed to protect True Value.
The Wisconsin Court of Appeals also determined that the exculpatory provisions were not sufficiently conspicuous in the Agreement because they "did not stand out from the rest of the form in any manner and did not require a separate signature."
The Court particularly noted that the exculpatory provisions were not placed together, did not have to be specifically initialed or signed by C&M, were not in a conspicuous location, were not surrounded by an attention-grabbing box, and were not emphasized by a heading.
The provisions were in the same typeface as the rest of the contract, and, "although the last sentence in the first provision is in capital letters, it is neither a title nor a warning to C&M."
Because the provisions were not remarkable or notable on the face of the Agreement, the Court held that they could not be enforced against C&M.
In light of the above findings, the Court of Appeals reversed the trial Court's dismissal of C&M's misrepresentation claims, holding the exculpatory provisions void because: "(1) [they] failed to clearly, unambiguously, and unmistakably explain to C&M that they were accepting the risk of True Value's negligence; and (2) the form, looked at in its entirety, failed to alert the signer to the nature and significance of the document being signed."
The lesson for franchisors (at least under Wisconsin law) in C&M is twofold: first, make sure that your exculpatory clauses are reasonably specific, addressing the types of statements that you do not authorize your salespeople to make and upon which your prospective franchisees should not rely.
Second, your exculpatory clauses should in some way stand out from the rest of your franchise agreement -- by separating them from the agreement itself, or by using capital letters, bold, or a text box to call the reader's attention to them. Many franchisors have successfully relied on a separate "disclosure questionnaire" containing exculpatory clauses for this purpose.
For franchisees, the lesson is to carefully read your franchise disclosure document, franchise agreement and other related contracts before you sign them!
If a promise, statement, or representation was made to you by the franchisor or its salespeople and you're relying on it, make sure it's in the franchise agreement or in an addendum before you sign.
A word of caution about franchise businesses is indeed good advice; and our readers are wise to heed the warning. Unfortunately not all franchise opportunities are created equal.
As the vice president of Sparkle Wash International - a pressure washing franchise that has been in business since 1965 - I have had thirteen years of experience.
What has become abundantly clear during this time is there is one sure-fire way to get a handle on the legitimacy of a franchise organization... and that is through what is known as VALIDATION CALLS.
A validation call is the act of the franchise candidate conducting telephone interviews with several existing franchisees already up and operating in the franchise system.
During this process everything comes out in the wash - good, bad and ugly. To be fair to the franchisor the candidate must understand that not all franchisees within a system are going to be in love with the franchisor - and this is to be expected.
However, after several calls the candidate will start to see a pattern emerging, and THIS will be the truth behind the franchise opportunity.
Here is how to make a validation call.
a) Introduce yourself to the franchisee
b) Tell him you're interested in opening a _____________ franchise in (your location)
Here are three important questions you will want to ask the franchisee:
1) What were you concerned about before you bought into the franchise?
2) What have you learned since?
3) Knowing what you know now, would you do it again?
Be fair to the franchisor, not all franchisees will be in love with the system - that is only to be expected.
However, are the majority of the franchisees you speak with giving you a favorable report?
A "financial performance representation," also called an "FPR," is any representation, whether oral, visual or written, to a prospect that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits or net profits .
If the franchisor states in Item 19 of its FDD states that it and its representatives do not make FPRs to prospects, you must avoid making any oral, visual or written FPR to a prospect outside of the FDD.
If the franchisor includes FPRs in Item 19 of its FDD, you may discuss any FPR in Item 19 with a prospect, but you must avoid making any oral, visual or written FPR to a prospect that is not in Item 19. For example, if Item 19 gives the average annual sales of outlets open in the previous year, you are prohibited from representing orally that average sales in the current year have exceeded average sales in the previous year, since that oral representation is not supported in Item 19.
Here are some examples of FPRs outside of an FDD that must be avoided:
A chart, table or mathematical calculation that shows possible results based on a combination of variables.
A software program containing a spreadsheet with assumed cost percentages.
A copy of a published article which states that some franchisees have earned a specified amount.
A pro forma showing assumed low, medium and high sales and costs based on actual average cost percentages.
"You will earn enough to be own a new Porsche within a year."
"You will break even within 6 to 9 months."
"Your sales will increase 20% to 30% if you convert to be a franchised outlet."
"The sales and cost projections in the pro forma prepared by your accountant look reasonable to me."
"You are likely to realize a 100% return on investment within the first year of operation."
Here are some examples of statements related to sales, profits and costs that likely are not FPRs, subject, of course, to the full context of what is said to a prospect:
"This franchise offers exceptional profit potential."
"Your sales will depend on your location and how much effort you put into the business."
"If you want to know about typical sales, profits and costs, you should talk with our franchisees."
"This is an opportunity of a lifetime."
If you would like to know if you can franchise your business, connect with me on LinkedIn and give me a call.
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One of the important findings in behavioral economics is the discovery of "anchoring". Anchoring is responsible many poor financial decisions and this is how it works in franchise sales.
Science has discovered that when we are presented with an estimate or percentage measure from a population that we know nothing about, we tend to anchor on the estimate and act as if it was true -even though we understand that we have no real knowledge.
Here is an example, from a QSR interview and Teriyaki Madness, which states how much you can make with Teriyaki Madness.
"He says that not only are potential franchisees attracted to the impressive numbers operators are pulling off--including an average 23 percent same-store sales increase; AUVs of $855,000; and profitability of 16-21 percent--but also to the uniqueness of the concept, which combines Asian flavors with healthy items."
Now you and I have no idea whether the AUV is correct, what the average is based upon, or how "profitability" was calculated. However, the science says that you will anchor on these numbers and act is if they were true - despite not knowing what the Item 19 actually stated.
You will also notice that this claim made in an interview could not be compliant if it were an ad - the required disclaimer about how many units achieved that AUV is not present. QSR can make this claim on behalf of Teriyaki Madness only if the interview is not a paid advertorial.
So for fun, let's take a look at the numbers behind the claim.
This is from Terriyaki Madnesses' 2012 FDD - and things could have changed by then. Even so, the real numbers are revealing.
Teriyaki Madness Item 19 (2012)
We have provided the following information: the high and low annual gross revenue information for each year that the franchised locations were open; the average same store sales percentage increases for each year; the average unit volume of the group for each year; and the number and percentages of franchisees that met or exceeded the average unit volume for each year.
For 2011, four (4) Teriyaki Madness restaurants were in operation for the entire year and for the years 2008 to 2010 only three (3) Teriyaki Madness restaurants were open for the entire year.
The financial picture disclosed in the Item 19 looks very different from the rosy picture described in the QSR article. We find out that we have reporting only from 4 units, and two of those units had an AUV between $380,000 and $615,000 for the three years 2008-2010.
A new store would likely face a similar ramp up period.
Even the reported high is less than the AUV reported in the QSR story, compare $796,000 to an AUV of $855,000.
Further, the profitability story is taken not from a franchisee store but a company or affiliate store.
All of the reporting is designed in the writers minds to paint the glossiest story that he or she can tell - but, a smart reader like you knows to go beyond the anchoring effect, read for youself the Item 19, request the back-up for the Item 19, and then come to a more realistic conclusion.
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The FTC franchise rule prohibits a franchisor from including any information in an FDD that is not required by the rule or state laws or regulations. The rule contemplates, however, that there will be times when a franchisor will want to provide a prospect with supplemental material information, or even will be required by other federal or state laws to provide a prospect with supplemental material information.
Supplemental information could include, for example, background in- formation on the franchisor's executives or on litigation not required to be disclosed in an FDD.
Supplemental information may be required to be filed as "advertising" with certain states before being used, see permitted advertising.
Supplemental information is prohibited from contradicting information in an FDD, see "Prohibited 3: Information Contradictory to Information in FDD" below.
Prohibited 1: Disclaimers or Waivers of Representations in FDD
You must not disclaim or require a prospect to waive reliance on any representation made in the franchisor's FDD, including any exhibit in the FDD. The only exception to this prohibition is when a prospect voluntarily waives specific contract terms or conditions in the course of negotiation (see "Permitted 6: Negotiation" above).
The franchisor must make sure that its franchise agreement and oth- er agreements do not contain provisions requiring a new franchisee to acknowledge reliance only on representations in the agreements. This type of provision is prohibited, since it requires a prospect to waive reliance on other representations in the franchisor's FDD.
Prohibited 3: Information Contradictory to Information in FDD
You and the franchisor must avoid making any claim or representation to a prospect, orally, visually or in writing, that contradicts any information in the franchisor's FDD.
For example, if Item 7 in the FDD states that the initial investment ranges from $100,000 to $180,000, you are prohibited from stating orally to the prospect that the initial in- vestment often is less than $100,000.
Or, if Item 5 of the FDD states that the initial franchise fee is non-refundable, you are prohibited from stating orally to a prospect that the fee is refundable in some situations.
Prohibited 4: Use of "Shills"
You and the franchisor must avoid referring a prospect to a "shill." A "shill" is any person misrepresented by you or the franchisor to be the purchaser of a franchise from the franchisor or the operator of a franchise of the type offered by the franchisor, or to be an independent and reliable source about the franchise or the experience of any current or former franchisee.
The prohibition on the use of shills applies to individual shills who are paid or otherwise compensated to provide false favorable testimonials or fictitious references to prospects, and to institutional shills that are paid to purport to act like Better Business Bureaus providing consumers with "independent" reports on their members.
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The franchisor may negotiate with a prospect, subject to the limitations discussed below.
The information and exhibits in the franchisor's FDD must reflect the franchisor's actual initial offer to a prospect. If, based on changing conditions or other factors, the franchisor has decided to change it initial offer, for example, by increasing its initial fee from $25,000 to $30,000, it must amend its FDD before furnishing the FDD to a prospect. It may not furnish a FDD with a $25,000 initial fee and tell the prospect that the initial fee is actually $30,000, in effect "negotiating up" from what is offered in the FDD. Similarly, if the franchisor has decided to decrease its initial and royalty fees, it must amend its FDD to reflect the changes and its actual initial offer to a prospect, even though the changes favor the prospect.
A prospect may initiate negotiations with the franchisor before or after receiving the franchisor's FDD. In response, the franchisor may refuse to negotiate (except in Virginia, as discussed below), or may negotiate or indicate a willingness to negotiate. Negotiation may be about any matter, and may continue until the prospect signs final agreements.
Negotiated changes made as a result of negotiations initiated by the prospect do not trigger the 7-calendar-day waiting period for final agreements. If the prospect negotiates additional changes during any 7-calendar-day waiting period, the changes do not trigger an additional waiting period.
Give and take is permitted during negotiations. You or the franchi- sor may require the prospect to agree to terms more favorable to the franchisor, or may require the prospect to voluntarily waive terms and conditions, in exchange for agreeing to terms more favorable to the prospect. Under the FTC franchise rule, the prospect must merely be aware of all of the changes.
California is the only state that requires filings, approval and disclosures to later prospects if you or the franchisor negotiate with a prospect. Check with the franchisor's lawyer or compliance manager if you need or want to negotiate with a prospect covered by the California law.
New York requires negotiated changes overall to favor the prospect. This is not a requirement under the FTC franchise rule or an explicit requirement under other state laws. As a practical matter, however, most negotiations result in negotiated changes overall that favor the prospect.
Virginia requires the franchisor to negotiate with the prospect, but does not require the franchisor to agree to any concession requested by the prospect.
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Communications with Probable Franchisees
Before you furnish the franchisor's FDD to a prospect, you may communicate in writing and orally to a prospect on a regular basis, as long you and the franchisor are properly registered or on file with any involved regulatory state (see Appendix A), and as long as your statements are consistent with the standards for advertising discussed above (truthfulness, consistency with the FDD, etc.).
After you have furnished the franchisor's FDD or final agreements to a prospect, you may continue to communicate in writing and orally to a prospect on a regular basis during any 14-calendar-day, 7-calendar-day or 10-business-day period that may be running.
You are not required to observe a "cooling-off" period during which you must cease all communications with the prospect.
Confidentiality with Probable Franchisees- FTC Franchise Rule
Under the FTC franchise rule, you or the franchisor may require a prospect to sign a confidentiality agreement before you furnish the franchisor's FDD to the prospect, or before you grant the prospect access to the franchisor's proprietary information or operations manual.
This type of agreement does not trigger any disclosure obligations under the FTC franchise rule, as long as it does not contain any other type of agreement that triggers disclosure.
The franchisor is not required to include the confidentiality agreement as an exhibit in its FDD.
Confidentiality with Probable Franchisees- State Laws
For a prospect covered by a state law, the franchisor may be required to include any required confidentiality agreement as an exhibit in its FDD; and you and the franchisor may be required to furnish the FDD to the prospect and observe a 14-calendar-day or 10-business-day waiting period, before requiring the prospect to sign the confidentiality agreement.
State prohibitions and requirements vary in this area, so check with the franchisor's lawyer or compliance manager.
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For so many years the quality of most of what passes for franchise investment opportunities has been so abysmally low that their selling risk has had to be hedged with capital punishment clauses galore in the franchise agreements and in the FDD materials.
Part of this is that the quality of the concept being sold has been marginal and worse almost all the time. Whole business segments are now populated junk offerings.
Along these lines one might mention sandwiches, ice cream yogurt and gelato shops, pizza, printing, car repair and maintenance and dozens more. For various reasons - a long list - these are not real business investment opportunities and only fools buy them. Since the market does not provide protection for fools, I am not going to waste any more time talking about what they are and how they are sold. Rather, I would prefer to discuss how one should sell a real, investment worthy franchise opportunity.
In a real investment opportunity you have demonstrable revenue credibility.
The franchisor, before embarking upon a franchising program, had a real business that made decent profits and showed substantial growth and could be operated by trained and monitored managers in several replications of the franchise model. This kind of franchisor paid attention to what was happening in his market and made adjustments and improvements as soon as the opportunities presented themselves, keeping the operating manual current and paying attention to detail. It is a fine tuned, well managed business at the moment that the decision is made to franchise it.
In other words, it is a real business with an identifiable attainable breakeven point that will occur within a year in the right market.
The franchise's financial performance is sufficiently monitored both in company store mode and in the franchised mode, and differences in financial performance are accounted for in terms of what causes the differences. The franchisor knows his franchise and is not just some circus clown with a glib sales pitch chock a block with slogans and meaningless pseudo information.
A real franchise is not sold to every bozo with a temperature and a room temperature IQ who can write a check for the initial fee. A real franchise is not sold in any market where its anticipated performance is not responsibly projectable.
A real franchise skims the best markets first. In that manner the franchise itself, as a system, achieves early revenue credibility that enables the franchisor to begin writing a more aggressive FDD.
A real franchise is sold to carefully vetted franchisee prospects with more than enough money than will be needed and a proven business track record that includes actually having to make serious business risk decisions, not some marginal mid level "executive" who had to remortgage his house to meet the anticipated total initial investment.
Total initial investment, as presented in almost every FDD is an inadequate range of numbers intended to speak to the first 90 days after store opening and omits far too much to be remotely reasonable. In our real franchise, the Item 7 information will be a much higher number because the caliber of investor sought will not be scared off by it.
The number will also change frequently because its underlying information is being monitored carefully. The franchisor will have a good grasp on where breakeven can be expected to occur and how long it takes to get there. This enables more aggressive FDD information that is not misleading. This is the kind of information a real investor wants to know about. This is what sells franchises to intelligent investors.
If area development deals are sold, they are sold to people who have a track record demonstrating the capability to meet a development schedule. That schedule will describe the art of the possible in an area with defined top level geographic areas and good demographics specifically measured for this franchise.
With this approach the FDD can and will become more aggressively informative each year. There will be few surprises and those easily manageable. The franchisor will be willing to make adjustments for these surprises so that they do not result in serious economic disruption and the rise of disputes. The franchisor's willingness and ability to make adjustments and accommodations where appropriate, no matter what the franchise agreement may say, will mark that franchisor as the affiliation of choice for the best operators. Good reputations grow almost as fast as bad ones, and one does not become known as a chump for using good sense.
In this kind of franchise there is no danger in demanding compliance with the agreement terms, because the business is not financially impaired by the range of possible additional charges that could be made by the piggish franchisor. Good business partners know that everyone in the deal has to make money and that only a pig tries to squeeze every last nickel and dime out of it.
However, the extraneous revenue stream temptation will always be there, and an enlightened franchisor is all too often succeeded by more opportunistic types. For this reason it is critically important that franchisees establish an effective independent franchisee association long before abuses occur. It is far easier and less expensive to prevent abuse than it is to stop abuse.
Usually franchisees assume the best and leave themselves open to abuse until it is too late. That is a terrible mistake.
Franchisor established franchisee advisory boards are no substitute for the franchisees having their own independent organization. The franchisees of Quiznos and Marble Slab Creamery and many others learned this lesson the hard way. They are now dropping like flies.
For several years the franchise world has been populated mainly by mediocrities and worse, all sold to moron FranWads who were usually corporate middle management types - glorified clerks. They accumulated close to a million dollars in many instances through hard work and frugality, only to lose it all and end up in bankruptcy.
It is time for a higher level of investment quality. There are plenty of investors for those opportunities who are financially and experientially qualified. Following the plan suggested here and elsewhere on www.FranchiseRemedies.com a solid and credible franchise investment environment can again be established. I will be very happy to help guide them through their early years into their growth phase to maturity.
The information provided to franchisee candidates is meant to be read, understood and acted upon.
Some franchise sales processes are designed to run around this information, minimize its import or in some cases to blatantly contradict this information.
Consider this marketing piece put out for Mooyah Burgers.
The advertising clearly states & makes a financial performance claim: 2 to 1 sales/investment ratio.
Now, let's check what the franchisor actually says in their FDD.
Item 19 from Mooyah Burgers 2013 FDD
The FTC's Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchisedand/or franchisor-owned outlets, if there is a reasonable basis for the information, and the information is included in the disclosure document.
Financial performance information that differs from that included in ftem 19 may be given only if:
(1) a franchisor provides the actual records of an existing outlet you are considering buying; or
(2) a franchisor supplements the information provided in this ftem 19, for example, by providing information about performance at a particular location or under particular circumstances.
This franchisor does not make any representations about a franchisee's future financial performance or the past financial performance of company-owned or franchised outlets.
We also do not authorize our employees or representatives to make any such representations either orally or in writing.
If you are purchasing an existing outlet, however, we may provide you with the actual records of that outlet.
If you receive any other financial performance information or projections of your future income,
you should report it to the franchisor's management by contacting Michael Mabry or our Franchise Sales Department at:
6100 Preston Road.
5212 Tennvson Parkwav Suite 240.
Frisco 120.
Piano. Texas
7503475024 or f2141 872 4313 310-0768.
the Federal Trade Commission, and the appropriate state regulatory agencies.
This is a clear case in which the sales process & the marketing materials are at odds with the 2013 Franchise Disclosure Document. The presentation of this contradictory information likely harms the franchisor's sales process.
You and the franchisor may use "advertising" to promote the sale of franchises, subject to the limitations discussed below.
"Advertising" includes website pages, Internet ads, magazine ads, newspaper ads, brochures, handouts, CDs and DVDs oriented to prospects.
Less obviously perhaps, "advertising" includes blank pro formas given to prospects, form letters or emails used to communicate with prospects, and copies of published articles and other materials given to prospects.
For purposes of this handbook, "advertising" does not include consumer-oriented materials, such as sample ads, menus or point-of-sale displays, shown or given to prospects.
Advertising must be truthful and not misleading. For example, advertising may not reference studies that purport to show that franchisees are more successful than independent business people, if those studies, such as the discredited U.S. Department of Commerce or Gallup studies, have been found to be unreliable.
Advertising may not expressly or impliedly assure or guarantee success, profitability, earnings, or a safe investment that is free from risk of loss or default.
Therefore, variations on the words "success," "profit," "proven," "lucrative" and "recession-proof," or any other term that states or implies earnings, must be used carefully and sparingly in advertising.
Advertising must be consistent with information in the franchisor's FDD. As to fees and initial investment costs, advertising must be supported by information in the FDD.
For example, any initial fee or initial investment information in advertising must match, and may not go beyond, what is in the FDD.
Advertising may not include financial performance representations, also called FPRs, unless the same FPRs are included in Item 19 of the franchisor's FDD.
Advertising may provide some supplemental information that is not required or permitted to be included in the FDD. For example, a franchisor executive is required to include 5 years of employment history in Item 2 of an FDD and may not include more unless the executive has held the same position with the franchisor for longer than 5 years.
Advertising may include much more information about an executive's experience and background.
A franchisor is prohibited from including a blank pro forma in its FDD, but it may provide a blank pro forma to a prospect to show typical categories of sales and costs.
The franchisor may not help the prospect to fill in the blank pro forma. If used in this manner, the blank pro forma is advertising that provides permitted supplemental information to the prospect.
Advertising on the franchisor's website must include a disclaimer such as the following:
NOTE: This website is not a franchise offering. A franchise offering can be made by us only in a state if we are first registered, filed, excluded, exempted or otherwise qualified to offer franchises in that state, and only if we provide you with an appropriate franchise disclosure document. Follow-up or individualized responses to you that involve either effecting or attempting to effect the sale of a franchise will be made only if we are first in compliance with state registration or notice filing requirements, or are covered by an applicable state exclusion or exemption.
The following states regulate the offer and sale of franchises:
California, Florida, Hawaii, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Nebraska, New York, North Dakota, Rhode Island, South Dakota, Texas, Utah, Virginia, Washington and Wisconsin. If you reside, plan to operate or will communicate about the franchise in one of these states, you may have certain rights under applicable franchise laws or regulations.
This disclaimer should be on or linked to the first website page oriented to franchisee prospects, but is not required to be on or linked to each website page oriented to franchisee prospects.
You may run ads in national publications such as Franchising World, Entrepreneur, Franchise Times or Franchise Update, and may post pages oriented to franchisee prospects on the franchisor's website, without pre-submitting the ads or pages to any states.
You must pre-submit, before use, other types of advertising, such as local newspaper ads, brochures, handouts, CDs, DVDs, blank pro formas, form letters and emails, and copies of articles distributed to franchisee prospects, to the following states: California, Maryland, Minnesota, New York, North Dakota, Rhode Island and Washington.
New York requires you to add the following disclaimer to advertising:
NOTE: This advertisement is not an offering. An offering can only be made by a prospectus filed first with the Department of Law of the State of New York. Such filing does not constitute approval by the Department of Law.
California and Washington sometimes require you to pre-submit written consents permitting the use of third-party endorsements, such as franchisee testimonials.
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FTC Franchise Rule.
Under the FTC franchise rule, you are not required to follow the basic franchise sales steps if the prospect will be granted a franchise for an outlet not located in the United States or any U.S. territory.
It does not matter whether the prospect resides in or outside of the United States or its territories. The rule simply does not apply if the outlet, including all protected market area associated with the outlet, will be outside of the United States and its territories.
Please note that if you are dealing with a prospect residing outside of the United States for an outlet to be located in the United States or any U.S. territory, or if you are dealing with an outlet located outside of the United States - such as in Canada or Mexico - but grant a protected territory that extends into the United States, you must follow the basic franchise sales steps.
NOTE: For any prospect or outlet in another country, you may be required to comply with that country's franchise laws, such as the Canadian provincial franchise laws and the Mexican franchise law.
State Laws.
But, some state laws may require you to follow the basic franchise sales steps even if the prospect will be granted a franchise for a non-U.S. outlet.
For example, the Maryland and New York laws may require you to follow the basic franchise sales steps if the prospect is a resident of the state, even if the outlet will be located outside of the United States.
If you think a state law might apply, check with the franchisor's lawyer or compliance manager about your disclosure obligations.
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The FTC franchise rule may exempt you from following the basic franchise sales steps.
For example, you may be exempt if the franchise involves:
a required payment of less than $500 within the first 6 months
a fractional franchise within an established business
a leased department within an established retail business
a transaction covered by the Petroleum Marketing Practices Act
an initial investment of $1,000,000 or more, excluding the cost of unimproved land
a prospect with at least 5 years of business experience and a net worth of at least $5,000,000
a prospect related to the franchisor
a purely oral franchise.
You must follow the basic franchise sales steps if the franchisor is selling an operating outlet to a prospect.
If the operating outlet was previously franchisee-owned, you must provide a prospective purchaser with the following additional information, for the franchisor's last 5 fiscal years:
the name, city, state, and current business telephone number (if known) or last known home telephone number of each previous owner
the time period when each previous owner controlled the outlet
the reason for each previous ownership change (for example, termination, non-renewal, voluntary transfer, ceased operations, reacquired by the franchisor, etc.)
the time period(s) when the franchisor controlled the outlet.
The additional information may be attached to the franchisor's FDD as an addendum when the FDD is furnished to the prospect, or may be provided later to the prospect in a supplement to the previously furnished FDD. The addendum or supplement must be given to the prospect at least 14 calendar days before the prospect signs any binding agreement with, or pays any amount to, the franchisor or any affiliate.
At your option, you may provide a prospective purchaser of the operating outlet with information about the actual operating results of that outlet. The information is not required to be attached to the franchisor's FDD or to be put into any particular format. For example, it may include unaudited financial statements for the outlet.
You may not provide the prospective purchaser with information about the operating results of other operating outlets. Similarly, you may not provide information about the operating results of the outlet to prospective purchasers of other operating outlets or of franchises for new outlets.
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1. Renewal or Extension of Franchise
FTC Franchise Rule. Under the FTC franchise rule, if the franchise of an existing franchisee is being renewed or extended, you must follow the basic franchise sales steps if the existing franchisee signs agreements with materially different terms, or if there is an interruption in the operation of the franchisee's business.
If the franchisee will be signing the franchisor's current agreements, as opposed to the original agreements signed by the franchisee, it is likely that the current agreements contain materially different terms and that you must follow the basic franchise sales steps.
If the franchisee will be granted a renewal or an extension period without any other changes in the terms of original agreements, it is likely that you are not required to follow the basic franchise sales steps. This is true even if the franchisee will pay a fee for the renewal or extension period.
State Laws. The laws of the regulatory states generally are consistent with the FTC franchise rule, but some of the laws are silent on renewal and extension issues. If you think a state law might apply, check with the franchisor's lawyer or compliance manager about any special requirements.
2. Modification of Franchise
FTC Franchise Rule. The FTC franchise rule does not require you to follow the basic franchise sales steps if the franchisor and an existing franchisee agree to modify their existing agreements, even if the modifications are material. It does not matter whether the modifications are sought by the franchisor or the franchisee.
State Laws. Most state laws are silent on the issue of modification, but some of the laws require the basic franchise sales steps or special disclosure procedures to be followed.
For example, the California law has very detailed special disclosure rules that must be followed if the franchisor seeks a material modification to a franchisee's existing agreement.
Similarly, the North Dakota law permits a material modification of an existing franchise agreement as an exemption to registration requirements if the franchisor discloses to each franchisee information about the specific sections of the franchise agreement that are proposed to be modified.
If you think a state law might apply, check with the franchisor's lawyer or compliance manager.
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