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

1. Legal Issues In
Franchising
William A. Price
wprice@growthlaw.com

2. QUESTIONS FOR
FRANCHISORS

3. Franchising Or Other Capital?
• Franchising
• Loans for Expansion
• Project Investors
• Company Investors:
Friends, Angels, Privat
e Eqity
• Public Investors

4. Franchising Laws: Federal
Federal Trade
Commission:
a. Franchise Disclosure
Document Rules
b. Franchisee and
Customer Complaints
c. Truth In Advertising
Rules

5. Franchising Laws: State
Illinois:
1. Attorney General:
Regulates Disclosures (FDD
OK)
Takes Customer/Franchisee
Complaints
2. Secretary of State:
Regulates Franchise Brokers

6. Franchise System Needs
• System Name
• Artwork for logo and ads and
all system elements
• Franchisee recruitment
• Franchise disclosure
documents and other legal
reports, securities
disclosures, taxes
• Supplier contracts, terms
• Real estate program
• Operator training and
systems documentation

7. ISSUES FOR
FRANCHISEES

8. The Franchise Disclosure
Document (FDD)
Big Items:
Item 1: Franchisor background
Item 3: Material Litigation (and
check personal and
organizational judgment and
credit)
Item 5, 6, and 7: Franchisee
upfront, ongoing fees and costs
Item 20: Locations and
Expansion Plans

9. FDD May Not Have
• Earnings Claims
• Unsuccessful Franchisee Sites
• Supplier and Other
Site/Contract Requirements
• New Advertising and Other
Change Authority
• Old Name Franchisor Failed
Systems

10. Your Best Source
Other Franchisees!
All current operators
must be listed in FDD:
CALL THEM!

11. YOUR FRANCHISE
BUSINESS

12. Multiple Options For Entry
• Buy An Existing Franchise
• Buy Multiple Existing
Franchise Sites (If System
Allows)
• Start A New Location
• Take Over A Region And
Recruit Operators For Sites
• Start Your Own System

13. Best Success Predictor
Sweat Equity
Nothing replaces
industry
experience: Get
Some, Or Get A
Partner Who Has
Experience

14. Your Franchise Business Plan
• Visible Site
• Franchise With High Net
Profit Potential
• Franchise Type You Are
Qualified To Manage
• Adequate Capital To Start
And Run Until Profitable
• Sustainable Competitive
Advantages
• Good Franchisor Support
• High Quality Supplies From
Franchisor System

15. LEGAL ISSUES IN
FRANCHISE SETUP

16. Franchisee Entity Selection
The Issues:
• Pass-Through Tax? Other
Tax?
• Who Manages?
• Who Controls?
• What Investor Rights?
• Who Can Bind The Entity?
(Agency)
• What incentive programs
needed?

17. Site Issues
• Lease or Buy?
• If Lease, what
rent, buildout, uses, hours, si
gnage, costs?
• If buy, need investors?
• Build or lease:
zoning, building
code, permits required?
• Traffic, site access
issues, other
infrastructure, sewerage and
other fees/taxes/needs

18. Supplier Issues
• Franchisor specifies, but you
and your credit pays
• What if supplies are
bad, deliveries fail?
• What about menu or other
product additions?
(Franchisor may control)

19. Employee Issues
• Healthcare mandates
• EEO Mandates: customers
served, persons hired: avoid
inappropriate hiring process
• Payroll issues (overtime, tax
withholding, reports)
• Other HR/Benefits (yours or
system)
• Frequent Employee
Replacement/Retraining
• Shrinkage
• Site Security

20. Partner Issues
• Equipment
Providers/Reliability
(Franchisor specifies, but you
pay and deal with when
break down)
• Cooks and Other Prima
Donnas
• Money Split And Other
Arguments
• Divorce, Retirement, Resigna
tion, Bankruptcy, Death

21. FRANCHISE LITIGATION

22. Franchisor vs Franchisee
• “7-Eleven Exploiting
Franchisees”: CA Huffington
Post, August 1, 2013
• Stratus Building Solutions
and related Camino Real
Ventures accused of
fraud, violations of state
business opportunity laws
(TX), 2013
• Play N Trade Video game
franchise, market losses

23. Franchisor Controls Court
• Mandatory
Arbitration, Franchisor picks
Arbitrator
• Mandatory Venue In
Franchisor Location
• Limited Franchisee Remedies
(Only Fees Back?)
• No Guarantees of Supplier
Services, Franchisee Income

24. Franchisee vs Supplier
• Mandatory use of Suppliers
• Franchisor writes supply
contracts
• Franchisees must arbitrate or
litigate within contract
requirements, system
elements
• UCC still applies, requires
good faith and fair dealing

25. Franchisee vs Employee
• Average “wrongful
termination” federal
judgment, IL, over $600,000
• Age, national
origin, race, religion, sexual
orientation all protected
categories for
hiring, discipline, firing
• Sexual harassment and
hostile workplace liability

26. Franchisee vs Public
• Slip and Fall Liability
• Dram Shop Liability
• Product or Service Caused
Injury Liability
• Credit and Collections Issues

27. Franchisee vs Landlord
• Landlord services problems
(snow/ice removal, garbage
pickup)
• Landlord signage and
buildout not done
• Rent escalators and
passthroughs (energy
costs, property
taxes, cleaning, major
building repairs)

28. Succession Planning
• Buy-Sell to operator or
partners or family
• Estate planning and other
capital gains reduction
options
• Finding A Buyer: brokerage
and other finder agreements
• Pricing The Exit
• Term Sheets, Due
Diligence, and Sales
Agreement/Closing
• Post-Closing Services and
Disputes

29. William A. Price
Attorney at Law
www.growthlaw.com
wprice@growthlaw.com
Tel/Fax 1-800-630-4780
P.O. Box 1425, Warrenville, IL 60555
ANY
QUESTIONS?