fbpx
×
☰

WHAT ARE ‘OUTSIDE IN-HOUSE COUNSEL’ SERVICES FOR FRANCHISORS?

WHAT ARE ‘OUTSIDE IN-HOUSE COUNSEL’ SERVICES FOR FRANCHISORS?

“How are you guys different from a typical law firm?”

We’ve answered this question several times recently in response to inquiries from franchisors about EntrePartner’s “Outside In-House Counsel” services. Thus, we’re including our response on our blog to help explain how we work with emerging, growing, and established franchised brands from a legal perspective.

Due to the nature of being in a regulated industry, every franchisor has ongoing and regular legal needs. This goes far beyond drafting an initial Franchise Disclosure Document and preparing annual updates. A growing franchisor is required to comply with ongoing regulatory requirements, as well as establish new systems for franchisee relationships and disputes, support its franchise sales program, comply with agreements, adopt new system standards and policies, and pursue additional growth avenues such as alternative growth structures and international growth.

Depending on certain factors, such as a franchisor’s size, industry, and growth trajectory, those legal needs can range from a standard set of projects, to a specified number of hours of legal support each month. For example, every franchisor will need a standard set of compliance documents to administer its franchise agreements, and ensure that the legal foundation to enforce those agreements against the appropriate people is in place. Additionally, a myriad of issues typically come up in day-to-day operations of a franchise program. Some specific requests that we have heard recently:

• What happens when a franchisee brings in a new partner?
• What do we do if a franchisee wants to sell or transfer its business?
• What if a franchisee wants to move its territory?
• What documentation do we need for a site approval process?
• What do we do if a franchisee misses its required opening date?
• What information can our sales team provide to a prospect?
• What terms should our vendors be required to adhere to?
• What disclaimers and terms should our ops manual and policies include?

Our team of former in-house lawyers provides the answers, and helps establish templates and systems to deal with these and other common recurring issues. Unlike most law firms, though, we provide these services through predictable flat fee arrangements or ongoing subscription agreements with discounted legal rates. Most of our clients that choose this model subscribe to a certain number of attorney hours per month at exclusive, reduced hourly rates. The more hours needed, the lower the hourly rate. While our clients appreciate the financial savings of this arrangement, equally important is the fact they get more in-depth representation. Our subscription clients may take advantage of unlimited emails and phone calls of 15 minutes or less, and a free, monthly client check-in lunch (or happy hour) meeting to discuss ongoing matters, business operations or other topics as necessary – which allows us to have deeper insight into our clients’ businesses.

We have found that this model can significantly delay the timeframe in which a franchisor needs to incur the payroll expense of a full-time general counsel. It also avoids the need to incur big firm legal rates for every question asked or document needed. Having represented many franchisors across various industries, our lawyers draw from a wide range of experience to solve both legal and business issues. Not only that – our lawyers have actually been franchisors AND franchisees, too! This allows us to offer insights beyond those provided from a purely legal advisor.

EntrePartner is founded on the belief that legal services can be provided in a different way. As entrepreneurs ourselves, we represent our clients the way we would want to be represented. First of all, we provide all services at a reasonable and predictable cost – whether that be subscription agreements, flat and capped fee arrangements, or proactive discussions with our clients about their legal budgets and corresponding value for services. In this manner, we focus on developing long term strategic alliances rather than maximizing legal fees.

Secondly, where we really excel is helping our clients translate legal advice into smart business decisions. We leverage our in-house and on-the-ground business experience to help clients avoid the common mistakes that many growing franchisors make, or reinventing the wheel with every issue. Whatever the issue, we’ve likely seen it or something like it (or are able to connect clients to the person who has), and have a first-hand awareness of where it should fall in your priorities list. We combine that actual business and operational experience with legal expertise to do what we do best: help you create, grow, and protect your franchise system.

Last Revised on

WHAT DO PROSPECTIVE FRANCHISEES LOOK FOR IN THE FRANCHISE DISCLOSURE DOCUMENT?

All franchisors face one common business growth challenge:  how do I sell my franchise to quality prospective franchisees?  If you’ve forayed into the franchise industry to any extent, you know that a franchisor’s Franchise Disclosure Document (FDD) is a cornerstone of any franchise sales program, and – for better or for worse – every prospective franchisee will eventually receive this document and information regarding their prospective franchisor.  Some industry professionals may brush off the document as being ‘too legal’ or not helpful in doing true due diligence about a franchise system – however, we advise our clients that there are nuggets of information that can really shed some light about a franchised brand.  Whether you’re a prospective franchisee going through the due diligence process, or a franchisor that needs to be prepared to answer questions regarding its disclosures, it is important to note these items in order to dig deeper into the presentation of a franchised network.

Item 19 – Obviously!

Most prospects will flip directly to the Item 19 financial performance representation section of the FDD, which franchisors can use to present a financial picture of units in its system.  Outside of limited exceptions, this is the only place that financial performance information should be presented.  We won’t spend too much time here on this item as analyzing this section is an article in and of itself, however, it goes without saying that prospects will want to understand whether and how a franchisor presents unit financial information. 

Skip Right to Franchisor Financials

After paging to Item 19, the next thing many prospects review are the franchisor financials, which are required to be included as an exhibit, and except in some specific circumstances, are required to be audited.  Here, prospects can glean some key information – such as, whether the franchisor has enough capital to be able to meet its ongoing obligations, and invest in infrastructure, support, and other investments needed to grow and evolve a brand.  Franchisees can also find other important information such as alternative revenue sources to the franchisor, like supplier or vendor rebates, conference or training revenue, and amounts for the purchase of equipment or other supplies directly from the franchisor.  The footnotes to the financials also often contain interesting nuggets of information – including whether third party financing or debt exists, which may include obligations that the franchisor has to third parties.

A Story of Openings and Closures

Item 20 of an FDD requires a franchisor to present state by state information on unit openings and closures over the most recent three fiscal years, plus a list of franchise agreements that have been signed, but for which the unit is not yet open, as of the end of the last fiscal year.  Reviewing this information in detail can be the most important way to understand the evolution of a franchised brand.  Openings or closure rates alone only tell one part of a story, and can be used to create a list of questions based on the information presented.  For example, a franchisor might display a year or multiple year period of significant openings, which can lead to questions as to how the franchisor has capitalized itself and what systems have been created to support such fast growth.  The same can be said about a significant number of franchise units which have yet to be opened.  As another example, closures can sometimes be limited to a time period or particular geographic region – which may indicate an obstacle that a franchisor faced or results of one particular troubled franchisee – from which the franchisor has strengthened its systems accordingly.

After reviewing Item 20 charts, we also advise reviewing the associated information about franchisees that have left the system or otherwise not communicated with the franchisor within 10 weeks of the issuance date of the disclosure document.  This list will display contact information for franchised locations that were bought, but never opened, which invites its own list of questions as to what led to these occurrences.

It’s All About the Ad Fund

The franchisor’s use and management of a system advertising fund can be one of the most contentious points in a franchise system on an ongoing basis.  How a franchisor collects and utilizes this money is often of significant importance to franchisees who contribute a percentage or portion of their revenues into the advertising fund, and hope for a return on this investment.

Item 11 of the FDD requires a franchisor to break down how it made expenditures from its ad fund in its last fiscal year. Smart prospective franchisees will review this information to determine whether the ad fund was spent on true marketing initiatives, how much was spent on administrative amounts (i.e., internal salaries and costs), and to determine if funds have been kept in reserves rather than being spent in a particular year.

Supplies and Rebate Revenues

Item 8 of the FDD is designed to present information regarding suppliers to the franchise system, which is often another hotly debated and relevant part of any network.  Franchisors commonly either sell items and/or services directly to franchisees, or designate mandatory or preferred suppliers to provide items and services to franchisees.  A close reading of this section should help to paint a picture as to under what circumstances a required supplier is used (i.e., a mandatory software vendor), and under what circumstances the franchisor itself is the direct vendor.  One key sentence in this section is often the starting point for many conversations:  the required disclosure that a franchisor must make regarding the amount of revenue it receives as a result of franchisee purchases in its last fiscal year, displayed also as a percentage of its total revenues.  Reading this disclosure carefully in conjunction with the franchisor financial statements can create an important picture in the minds of prospects.

Fee Negotiations

Obviously, up-front initial franchise and other fees (Item 5) and ongoing fees (Item 6) are going to be carefully reviewed by any prospect.  However, outside of the list of current fees, franchisors are also required to disclose information about initial fees that they charged in their last fiscal year.  This information can be scrutinized to determine if the franchisor offered any discounts or reductions to its standard fees, and can many times be a negotiating point for new prospects entering into the system.  This disclosure should be carefully reviewed and understood prior to negotiating any particular discounts, as it can have a real effect on ongoing disclosures and negotiations.

***

As lawyers, we feel that the entire FDD is important and riveting information, but this list is a starting point on where we direct our franchisor clients to pay attention to their ongoing operational decision-making that may have an effect on these disclosures.  We also direct our franchisee clients to these sections to help them evaluate the franchise opportunity presented.  Most importantly, we encourage all prospects to truly read and understand the information presented in the disclosure document itself prior to making an investment, as many times purchasing a franchise can be a life changing decision for all parties involved.

Last Revised on