Citrin Cooperman Partner Aaron Chaitovsky, in conjunction with law firm Gray Plant Mooty, present on the requirements and issues involved in California Law AB 525 and what franchisors must do now to avoid costly mistakes.

1. How To Deal With California AB 525
Requirements, Issues And What Franchisors
Must Do Now To Avoid Costly Mistakes
Wednesday, December 9, 2015
Panel:
Aaron Chaitovsky, CPA, Citrin Cooperman, New York, NY
Jan Gilbert, GPM, Washington, DC
Carl Zwisler, GPM, Washington, DC
GPM Webcast

2. Why Is AB 525 Unprecedented?
• The franchisee defaults –
the franchisor pays
• Franchisors must provide
(written) standards for approving new
and renewing franchisees when a
transfer approval is requested
2

3. Aaron Chaitovsky,
CPA, CFE
Partner
Citrin Cooperman
New York, NY
Aaron Chaitovsky, CPA, CFE, is the Partner-in-Charge of the Citrin
Cooperman’s franchise accounting and consulting practice, focusing on
audit and consulting services for franchisors and multi-unit franchisees.
Citrin Cooperman is among the largest, nationally recognized full-service
CPA firms in the United States– currently ranked in the top 25. With
locations in New York, NY; White Plains, NY; Livingston, NJ; Norwalk, CT;
Philadelphia, PA; Plainview, NY, and Bethesda, MD, Citrin Cooperman has
steadily built its business serving a diverse and loyal clientele since 1979.
Our daily mission is to help our clients “focus on what counts.” We
enhance the business and personal lives of our clients through our
customized approach which includes offering a wide range of attest,
assurance, tax, and business advisory services, including valuation and
forensic services, across the globe.
3

4. Jan S. Gilbert
Principal
Gray Plant Mooty
Washington, DC
• Jan is a principal practicing in the Franchise & Distribution practice group
• Worked with both start-up and developed franchisors and franchisees for
more than 25 years
• Counsels on all aspects of domestic and international franchising
• Experience includes structuring franchise programs, counseling on federal
and state regulatory issues, mergers and acquisitions, franchisee
compliance issues, drafting franchisee- and distribution-related
agreements, negotiating domestic and international agreements and
disputes, obtaining exemptions and interpretative opinions from
regulatory agencies, responding to state and federal administrative
inquiries and investigations, and establishing franchise advisory councils
and cooperatives
• Honors include Chambers USA: America’s Leading Lawyers for Business;
The Best Lawyers in America; The International Who’s Who of Franchise
Lawyers; The International Who’s Who of Business Lawyers; and Franchise
Times “Legal Eagle”
4

5. Carl E. Zwisler
Principal
Gray Plant Mooty
Washington, DC
• More than three decades of experience advising franchisors and
master franchisees on U.S. and international franchising issues
• Former IFA General Counsel, IFA Supplier Forum Chair, and Member of
IFA Board of Directors
• Chair IFA’s SBA Franchise Registry Task Force
• Member Maryland Attorney General’s Franchise Advisory Task Force
• Chair GPM Webinar on Franchisor Joint Employer/Vicarious Liability
• Principal Author - GPM analysis of California AB 525, NLRB v. Browning,
and GPM response to NASAA Commentary Financial Performance
Representations
• Comments cited more than 160 times in Statement of Basis and
Purpose to 2007 Amended FTC Franchise Rule
5

6. 20020. Except as provided in Section
20021, good cause shall be limited to the
failure of the franchisee to substantially
comply with the lawful requirements
imposed upon the franchisee by the
franchise agreement after being given
notice at least 60 days in advance of the
termination and a reasonable opportunity,
which in no event shall be less than 60
days from the date of the notice of
noncompliance, to cure the failure.
AB 525

7. The period to exercise the right to cure
shall not exceed 75 days unless there is a
separate agreement between the
franchisor and franchisee to extend the
time.
7

8. What Must A Franchisor
Know To Comply With
New Termination Standard?
• Definition of “substantially comply”
• Exceptions to a 60-day cure period
(unless earlier termination is authorized
by the CFRA)
8

9. Consequences Of A Lawful
Termination – Section 20022(a)
Lawful
Franchisor
Termination
No Franchisor ban on
Franchisee’s control of
premises
Franchisor collects
damages
Franchisor does not
allow Franchisee to
control premises
Franchisor buys
assets
Franchisor and
Franchisee agree in
writing to termination /
non-renewal
No asset purchase
obligation outside of
agreement
Franchisor announces
market area
withdrawal
No asset purchase
obligation; Franchisor must
withdrawal from franchise
activities in the MSA
9

10. 10
Franchisee
Terminates ?

11. Terms
offered by
Franchisor
rejected by
Franchisee
Non-
renewal
No asset
purchase
obligation
11

12. Franchisee
does not
request
renewal within
time set in
Agreement
Non-renewed
?
12

13. Remedy For Unlawful
Termination Or Non-renewal
Section 20035(a)
• Franchisee is entitled to receive “fair
market value of franchised business and
franchise assets and any other damages
caused by the violation…”
• Franchisor may offset amounts “owed the
franchisor or its subsidiaries….”
13

14. Elements Of Purchase Requirement
Section 20022(a)
14
1. Franchisor shall purchase from the franchisee
2. At the value of price paid minus depreciation
3. All inventory, supplies, equipment, fixtures and
furnishings
7. At the time of the notice of termination or
nonrenewal
4. Purchased or paid for:
a) Under the terms of the franchise agreement
b) Or any ancillary or collateral agreement by the
franchisee
5. To the franchisor or its approved suppliers and
sources
6. That are in the possession of the franchisee or
used by the franchisee in the franchised business
8. To which the franchisor receives clear title

15. How Will Accountants Interpret
“The Value Of The Price Paid,
Minus Depreciation”?
• Which type of depreciation will be
applied to which assets?
• What should be addressed in Franchise
Agreements to determine depreciation?
15

16. Depreciation Variables
• Depreciation is a systematic allocation of the
cost of PP&E (less scrap or salvage value, if
any) over the estimated useful life of the asset.
It is a process of allocation, not of
valuation.
• The objective of a depreciation method is to
charge a portion of the cost of the PP&E to
operations each year in order to match the
revenue produced by the asset. Obviously, a
critical factor in achieving that objective is the
choice of the estimated useful life. It is
important to note that useful life is an asset’s
service life, which may not coincide with its
physical life. 16

17. Depreciation Methods Allowed
By GAAP
• Straight-line: This method spreads the cost of the
fixed asset evenly over its useful life
• Declining-balance: An accelerated method of
depreciation, it results in higher depreciation
expense in the earlier years of ownership
• Sum-of-the-years’ digits: Compute depreciation
expense by adding all years of the fixed asset’s
expected useful life and factoring in which year
you are currently in, as compared to the total
number of years
• Units-of-production: The total estimated number
of units the fixed asset will produce over its
expected useful life, as compared to the number of
units produced in the current accounting period, is
used to calculate depreciation expense 17

18. Financial Statement Footnotes
The following is a partial listing of items that
must be explained in the footnotes that
accompany the Franchisor’s financial
statement with regard to the “purchase of the
franchisees assets”:
• The basis of valuation
• The amount of major classes of assets, by
nature or by function
• The amount of depreciation expense for each
period presented
• The amount of accumulated depreciation,
either by major classes of asset or in total
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19.  A general description of the method(s) used
in computing depreciation
 Separate identification of the amounts
of:
• Idle property and equipment
 A description of collateral and the amounts
pledged
 Commitments to purchase large amounts of
property and equipment
19

20. Select Key Information Needed
To Evaluate Cost Of
Terminating A Franchise
1. Identity of each of its franchisees’ asset and
price paid
2. Purchase date of each asset
3. Depreciation method of useful life
4. Whether each asset is owned or leased
5. Whether each asset is subject to liens or
encumbrances
– purchase money security interest, blanket
security interest, first refusal right, landlord’s
lien, and tax lien
6. Date by which liens must be released
7. Calculation of franchisor’s set off 20

21. How Franchise Agreement
Language May Prepare For A
Post-Termination Purchase
1. Require periodic reports regarding all assets
2. Define every ambiguous term in AB 525 in
the Franchise Agreement and/or Asset
Purchase Agreement:
a) Define depreciation method and useful life of
franchisee’s assets
b) Salvage value
c) Fixtures
d) Whether purchase price includes cost of removal
and transportation of assets
e) Set-off calculation
f) How closing date is to be set 21

22. Transfer Standards
Section 20028(a)
1. Standards for approval of new or
renewing franchisees
2. Made available to the franchisee
3. Consistently applied
4. To similarly situated franchisees
5. Operating within the franchise brand
6. Within 15 days of request for approval
7. Reasonable
22

23. What Must A Franchisor Know
To Comply
1. Standards for approval of:
a) new franchisees
b) renewing franchisees
c) owner of a non-controlling interest
2. Whether standards can be merged and
defined as a standard for transferees
3. How to document their consistent
application to new and renewing
franchisees
23

24. 4. Whether disclosure of standards to the
franchisee when proposed transferor is
an owner of an equity interest
constitutes requisite notice to the
“franchisee”
5. How soft or subjective standards may
be articulated and applied
24

25. Will AB 525 Have Any Affect On
Franchisor’s Financial Statements?
• Portion of franchisees in California
• Franchisees in default when audit is
performed
• Franchisees contemplated for nonrenewal
when audit is performed
25

26. The Franchisor Financial
Statement Impact
• Contingencies and their treatment –
Something new to consider with AB 525
• A contingency is defined as an existing
condition, situation, or set of
circumstances involving uncertainty as to
a possible gain or loss that will ultimately
be resolved when one or more future
events occur or fail to occur. The term
“loss” includes a charge to income that
may otherwise be referred to as an
expense.
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27. Following are probability classifications of
loss contingencies:
• Remote. The chance of the future event
occurring is slight.
• Reasonably possible. The chance of the
future event occurring is more than remote
but less than likely.
• Probable. The future event is likely to occur.
27

28. • An estimated loss from a contingency
should be accrued and charged to
operations only if both of the following
conditions are met:
1) Information available prior to the issuance
of the financial statements indicates that it
is probable (virtual certainty is not
required) that an asset has been impaired
or a liability incurred as of the date of the
financial statements; and
2) The amount of the loss can be reasonably
estimated
28

29. Conclusion
• AB 525 changes the cost and risk of
franchising in California for franchisors.
Although the legislation abounds with
ambiguity, franchisors have the ability to
lessen the impact of the law by carefully
revising their franchise agreements to
define terms and establish procedures for
avoiding or addressing purchase
obligations.
• They also have the opportunity now to
create written transfer standards that may
withstand challenges of unreasonableness
and discrimination. 29

30. • Franchisors who fail to act to address
these issues now will face unnecessary
uncertainty, and the likelihood of making
unnecessary payments and accepting
unqualified transferees.
• We have prepared issues outlines that
detail many of the issues that time did
not allow us to address. Please contact
us if you would like a copy.
• Thank you for joining us!
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31. Questions For Consideration
1. Should franchisors use asset or stock
purchase options in California Franchise
Agreements?
2. Should franchisors create new checklists?
– Termination
– Transfer
– Renewals
3. Should franchisors include independent
termination agreements in FDDs?
31

32. 4. Should franchisors who want to control
real estate abandon franchising in
California?
5. Should franchisors charge higher fees to
California franchisees to compensate for
added risk or expense?
6. When does it make sense to terminate in
violation of AB 525 and elect those
remedies?
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33. 33
Thank You
Carl E. Zwisler
Gray Plant Mooty
The Watergate - Suite 700
600 New Hampshire Avenue, N.W.
Washington, D.C. 20037
www.gpmlaw.com
Telephone: 202-295-2225
Facsimile: 202-295-2275
carl.zwisler@gpmlaw.com
Jan S. Gilbert
Gray Plant Mooty
The Watergate - Suite 700
600 New Hampshire Avenue, N.W.
Washington, D.C. 20037
www.gpmlaw.com
Telephone: 202-295-2230
Facsimile: 202-295-2280
jan.gilbert@gpmlaw.com
Aaron Chaitovsky
CitrinCooperman
529 Fifth Avenue
New York, NY 10017
www.citrincooperman.com
Telephone: 212-697-1000
Facsimile: 212-697-1004
achaitovsky@citrincooperman.com