Prospective Franchisee Boot Camp Cummary (Perkins Law, October 2014)
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Richmond, Virginia franchise attorney Eric Perkins is a frequent author and speaker on franchising issues, and in 2014 he organized two "boot camp" workshops to provide those thinking about buying a franchised business an overview of franchising. This presentation is a summary of the topics discussed during the workshop. Additional handouts were provided to workshop attendees and are available upon request.
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Prospective Franchisee Boot Camp Cummary (Perkins Law, October 2014)
- 1. ERIC C. PERKINS, ESQ. PERKINS LAW, PLLC 4870 SADLER ROAD SUITE 300 GLEN ALLEN, VA 23060 WWW.ERICPERKINSLAW.COM (804) 205 - 5162 Prospective Franchisee Boot Camp October 24, 2014
- 2. Franchise System Experience (Zor or Zee): SMARTBOX Portable Self Storage - sweetFrog Premium Frozen Yogurt - Super Cuts - The Grout Geeks - 9Round - 1-800-GOT JUNK - The Sparkling Image - Jet Black - Anytime Fitness – Zoup! – Michelle Lea Massage Therapy – ComForcare Senior Services– Tropical Smoothie Café – The Entrepreneur’s Source – Apple Spice Junction – Dominic’s of New York – Sparkling Image – The Cleaning Authority – Edible Arrangements – Faces Cosmetics – Wild Birds Unlimited – Copper Penny - Omega Learning Center – LA Boxing – Pure Barre – CKO Kick Boxing – Jump Bunch – Baskin Robbins – Spring-Green Lawn Care – Five Star Painting – Money Mailer – The Alternative Board – Dream Dinners – Salad Creations – Salsarita’s Fresh Cantina – Minuteman Press – etc.
- 3. Three Definitions of Franchising Common Sense Definition Definition by Example Legal Definition
- 4. Three Great Things About Franchising You don’t have to reinvent the wheel You benefit from a built-in support structure You have special laws to protect you
- 5. Three Things About You Can I afford this? Can I follow someone else’s rules? Am I good with people? Internal leader/manager External Sales
- 6. Three Bad Things About Franchising Failure is possible Your long term success is still largely up to you (and other factors beyond your control) It is not cheap
- 7. Three Things to Know About the Legal Side of Franchising It’s a contract Federal law regulates franchising State law regulates franchising
- 8. Three Things to Look for in the FA Exclusive/Protected Territory Term and Renewal Transfer Restrictions
- 9. Three Reasons Zees Fail They make emotional decisions, not business decisions They have unrealistic expectations They were undercapitalized
- 10. Three Reasons Zees Succeed They do their homework They budget conservatively They follow the system
- 11. Three Great Sources of Information International Franchise Association www.franchise.org Blue Mau Mau www.bluemaumau.org Entrepreneur www.entrepreneur.com
- 12. Dissecting the FDD Item 1: The Franchisor and any Parents, Predecessors, and Affiliates WHAT TO WATCH FOR: Several years of franchising experience
- 13. Dissecting the FDD Item 2: Business Experience WHAT TO WATCH FOR: Stability in management team and franchising experience
- 14. Dissecting the FDD Item 3: Litigation WHAT TO WATCH FOR: The volume and type of litigation with which the franchisor is involved
- 15. Dissecting the FDD Item 4: Bankruptcy WHAT TO WATCH FOR: Check for any bankruptcy filings of the franchisors affiliates, officers, or directors in the last ten years
- 16. Dissecting the FDD Item 5: Initial Fees WHAT TO WATCH FOR: Initial costs will vary greatly depending on: Term of the franchise Services offered by the franchisor Protected territory
- 17. Dissecting the FDD Item 6: Other Fees WHAT TO WATCH FOR: Frees the franchisor will collect from the franchisee for itself or third parties on an ongoing basis Operating royalties Advertising fund royalties Lease Negotiation Site Selection Permitting fees Training fees Audit fees Transfer fees Renewal fees
- 18. Dissecting the FDD Item 7: Estimated Initial Investment WHAT TO WATCH FOR: Budget conservatively, these numbers are notorious for being too optimistic
- 19. Dissecting the FDD Item 8: Restrictions on Sources of Products and Services WHAT TO WATCH FOR: Does the franchisor make more money from operating its own units or from selling stuff to its franchisees? Are the purchase terms competitive?
- 20. Dissecting the FDD Item 9: Franchisee’s Obligations WHAT TO WATCH FOR: Compare and contrast what is written in the FDD and Franchise Agreement versus how franchisees rate their relationship with the franchisor (validation process); sticklers vs. collaborators
- 21. Dissecting the FDD Item 10: Financing WHAT TO WATCH FOR: Franchisor leases equipment to franchisees
- 22. Dissecting the FDD Item 11: Franchisor’s Assistance, Advertising, Computer Systems and Training WHAT TO WATCH FOR: Services franchisor will provide for the franchisee during term of agreement Franchisor’s initial training and ongoing assistance programs
- 23. Dissecting the FDD Item 12: Territory WHAT TO WATCH FOR: Exclusions, exemptions, and exceptions to the notion of exclusivity
- 24. Dissecting the FDD Item 13: Trademarks WHAT TO WATCH FOR: USPTO Registration Status
- 25. Dissecting the FDD Item 14: Patents, Copyrights, and Proprietary Information WHAT TO WATCH FOR: Copyright protections for operations manuals and computer software Trade secrets and proprietary information
- 26. Dissecting the FDD Item 15: Obligation to Participate in the Annual Operation of the Franchised Business WHAT TO WATCH FOR: Active vs. Passive Ownership
- 27. Dissecting the FDD Item 16: Restrictions on What the Franchisee May Sell WHAT TO WATCH FOR: Necessary to preserve the uniformity, consistency and integrity of the franchise system
- 28. Dissecting the FDD Item 17: Renewal, Termination, Transfer, and Dispute Resolution WHAT TO WATCH FOR: Franchisees have very limited rights when terminating franchise agreement before expiration date All disputes must be submitted for mediation or arbitration in franchisor's home state Fees and Flexibility
- 29. Dissecting the FDD Item 18: Public Figures WHAT TO WATCH FOR: Relationship must be described in the FDD
- 30. Dissecting the FDD Item 19: Financial Performance Representations WHAT TO WATCH FOR: Are the numbers validated by the Franchisees? How will the numbers translate to your market?
- 31. Dissecting the FDD Item 20: Outlets and Franchisee Information WHAT TO WATCH FOR: Trends Is the system growing or contracting? What is the closure rate in recent years?
- 32. Dissecting the FDD Item 21: Financial Statements WHAT TO WATCH FOR: Liquidity/Cash on Hand Long-Term Debt Cash Flow Balance Sheet
- 33. Dissecting the FDD Item 22: Contracts WHAT TO WATCH FOR: Standard contracts the franchisor requires of the franchisee Leases Guarantees Promissory Notes
- 34. QUESTIONS?
Notas del editor
- The difference between a license and a franchise (the sweetFrog story)
- You hopefully will be in a position to avoid many (but NOT ALL) of the mistakes startup businesses make…you’ll have a smoother start and benefit from a system that has proven successful over the course of time and a brand that either has already generated significant recognition and goodwill or is an emerging brand with upside potential. Federal and state regulation of franchising: disclosure laws, registration alws, and relationship laws
- --Franchise opportunities come in all sizes, from required startup outlays of $50,000 on up to $1 million and higher…..wherever you fall along that spectrum, it is important that you budget conservatively…things will inevitably be more expensive and take longer than you initially hope or expect, so give yourself plenty of cushion. --I’ve seen a number of brilliant, technical professionals who came out of the corporate world thinking because they were smart and disciplined that they would be successful franchise owners…but they lacked fundamental people skills and suffered as a result. WARNING: Don’t fall into the trap of thinking you’re just buying yourself a job…that’s a bit short-sighted and puts extra pressure on you to do it all….so take stock of what you’rr strenths and weaknesses are and be sure to fill in the gaps on your team—either through a business partner or manager. --You need some entrepreneurial spirit to go into business for yourself under any circumstances—franchise or not—however, it is possible to be so entrepreneurial, creative, and independent that you’re not well suited to being a franchisee and being required to follow someone else’s rules and not having the freedom to do what you want, when you want. --No matter what business you’re in, sales/marketing, and customer service are going to be key drivers of your success (and survival)…so you have to have superior people skills (or partner up with someone who does). For many prospective franchisees a great resource is a franchise consultant aka broker aka lead generator…what they do is help you better understand what franchising is all about, help you assess whether you’re a good fit for franchising, and help you narrow down you search for the right franchise. They get paid by the franchisor if and only if you sign a franchise agreement…hats the good news, on the other hand, they will only share franchise opportunities that happen to be in their company’s portfolio, so you’re looking at a limited universe of franchises…pitch for Tom and Gus. --Pitch for SCORE and SBDC
- Franchising is no guarantee of success—franchisees fail every day (so do franchisors)…there have been grown men break down in tears in this very room as a result of a failed attempt at being a franchise owner. There’s a point in the life of your business at which the franchisor lets go and whether you succeed or fail is in your hands. Like everything else in life, every franchise system is a bell curve—some zees are all-stars and enjoy great success, the majority fall in the middle category of doing OK, and the bottom 10% struggle no matter hat they try and ultimately drop off the face of the earth. Things under your control: Costs, hiring and firing, choosing a location and negotiating a lease, setting up employee benefits, complying with applicable laws, deciding ho best to market and advertise, motivating your employees, developing customer loyalty and brand awareness within your community. Franchising offers many benefits, but rest assured, there’s no lunch…you’re paying for everything you get….and at some point all franchisees have second thoughts as to whether what they are getting from the franchisor is worth what they are being charged each month---initial fee, operating royalty, advertising royalty, and other fees and expenses….it all adds up and it can be demoralizing at times. But don’t lose sight of the fact that you’re using someone else’s stuff…you don’t own it, you’re just borrowing it and when your agreement expires, you gotta give it all back
- Probably the most important contract you’ll ever sign—long term (10 years), significant investment of money (your life savings?)—and it is by and large a one sided agreement to protect the franchisor and preserve consistency throughout the system---uniformity and consistency is a hallmark of franchising. NOTE: Franchise Agreements are negotiable (to a degree) Federal law—FTC Franchise Rule—Disclosure—FDD—23 items of disclosure—14 day waiting period…samples available online for free—California, Minnesota, Washington, Wisconsin, freefranchisedocs.com, go downtown to SCC to view documents on file for free (there is a charge for copies). State law—registration laws and relationship laws
- “Exclusivity” is a bit of a misnomer...lots of carveouts and potential exceptions…the size of territory is often a topic of negotiation. Term is typically 10 years, with one or more renewal options…but there are always a number of renewal conditions and hoops you have to jump through to renew…some of which are arguably not fair to the franchisee, but have become fairly standard in franchising You won; be able to freely sell your business if you want out….any sale of a franchised business is essentially a three-party transaction.
- Approach the process in a businesslike fashion, gather as much relevant information as you can, Don’t count on taking a salary for the first year…be prepared for it to take up to 12-18 months for you to reach break-even point. Understanding the franchise sales process: initial questionnaire and telephone/email discussion, more detailed application, Discovery Day, signing (16 week average cycle from first contact to contract signing)…don’t pay any initial deposits. Expect to work very hard, this will not be easy under any circumstances
- budget conservatively (for both the new business and your personal/family situation) Be proactive and get to know your franchisor and fellow franchisees
- Lots of franchising info online…some better than others.