Results
for “franchise compliance”
3 Reasons Why Your Franchise Lawyer May be Costing You Deals
For some franchise brands, the legal process can be frustrating. You spend tons of money, time, planning, and effort to attract, recruit, and onboard new franchisees. And along the way, come legal obstacles. These obstacles come in different forms and varieties. What they all share in common, is that they cost deals, add unnecessary frustration, and, so much more often than not, are avoidable. They're also a sign that you're not getting the legal support that you need and deserve. Why does this happen? Well, you may not be working with the right legal partner for your brand, and below, we list 3 reasons why your legal team may be costing you deals: 1. Your FDD Does Not Meet Best Practices The Franchise Disclosure Document is, unavoidably, a part of the franchise sales process and needs to be competitively positioned. No matter how great your franchisee attraction, education, discovery, and sales processes are, your FDD plays a role that is front and center to your entire recruitment process. This is even more the case when dealing with franchise brokers and broker organizations that scrutinize FDDs who are looking for the right relationship and fit for themselves and their franchisee candidates. If your FDD doesn't reflect best practices, it's costing you deals. Not only the deals that seem to fall off track last minute and don’t close but, also, lost deals that either never gain traction or never get to your door. Consider some of the following best practices strategies that you cannot afford to miss out on: An Industry Best Item 19 Just about every brand has an Item 19. But, most of them are missing the detail, data, and insights that are needed to supercharge franchise sales and attract brokers. Transparency is critical. And, even if your data is average or on par to your competitors, there is so much opportunity to differentiate your brand within your Item 19. You know the questions that candidates are asking, so why not do a deep dive with your legal team to develop a great Item 19 framework? It should include detailed definitions, a clear narrative about company-owned and franchised outlets, data that goes beyond gross sales and, at a minimum, includes cost factors and gross profits or unit level metrics demonstrating average sales, pricing, year over year growth, and other data unique to your business. Modeling out your Item 19 should involve a planning process that starts early--months before registration and renewal season--and not a last minute conversation in December or January. Multi-Unit Strategies that Attract and Support Future Growth Your FDD needs to get your multi-unit development offering right. We all know that brokers, for good reason, love to sell multi-unit / multi-development franchise opportunities. So, how well is your FDD structured? If you are a brick and mortar retail based business or restaurant, do you have a competitively positioned and easy to understand multi-unit development opportunity? If you are a service based business, does your FDD clearly offer multi-territory opportunities that make sense? Getting your multi-unit development opportunity right is not just about sales. Your legal team should help you make sure that you have the right legal safeguards in place to avoid underperforming franchisees and under-serviced territories. This requires a smart assessment of territory requirements, performance requirements, and adaptable minimum royalty structures. Franchising Fairness With your legal team, there should be an always-on process focused on streamlining your FDD. Where possible, your FDD should incorporate fairness provisions that balance out franchisee concerns and frustrations during the initial review process. Whether it's granting multiple renewal terms, reducing renewal fees, facilitating franchisee estate planning goals, and other fair and reasonable franchisee requests, there's an opportunity to improve your FDD and differentiate your brand. At The Internicola Law Firm, we start our planning process for the next year around June/July. 2. Your Registrations are Delayed and Your Sales Go Dark Every franchise brand has experienced this at one time or another. And, many times, it may have nothing to do with your legal team. But, if FDD development and state registration delays are caused by your legal team and a poor update process, then you’re unnecessarily losing deals and hurting yourself. For calendar year franchisors, your FDD updates, renewals, and planning should start in the summer and not later than September. Early on, your attorneys should be modeling out and communicating opportunities to improve your Item 19 and give you the time needed to collect and organize data. Also, the planning process should involve accountant conversations to prepare audited financial statements, and stage FDD updates to be painless and ready to launch in the new year. Early planning, process, and communication is key. Waiting until November, December, or January is just a recipe for frustration, delays, and lost opportunity. Then, once your FDD is submitted for registration and renewal, your legal team needs to place an absolute priority on immediately responding to comment letters and providing you with immediate updates and the ability to track the status of your registrations. We provide our clients with live access to track the status of their filings and registrations. 3. Attorney Communication, Access, and Turnaround Takes too Long Many times, we hear from franchisors about how much they like their current attorney and franchise law firm, but that the communication and turn-around is killing deals . We also hear about the frustration of having to go over information multiple times with different legal team members and personnel about agreements, addendum, or FDD updates to get out the door. In addition to endless attorney phone-tag, we also hear about the frustration of not having a legal team accessible when you need them. Many times, these problems are caused either because your franchise lawyer and his or her firm is not a franchise only law firm or because they are not built around serving the needs of emerging franchise brands like yours. Your franchise growth priorities need to be their priorities. You need a legal team that’s always accessible, proactively plans FDD updates, registrations, and renewals, and that provides guaranteed turnaround of your agreements, addendums, and franchisee compliance needs. How We Can Help Learn more about our Franchise Counsel Program that’s designed to eliminate these problems. You’ll get 24 hour turnaround time for franchise agreements, addendums, and negotiations, no phone tag, priority responses to state comment letters, plus so much more. Give us a call and we will give you a free evaluation of your current FDD with tips on how we can help improve your FDD that may be killing deals. Learn more about our Franchise Counsel Program and how we can help grow your franchise by calling (800) 976-4904. Learn more
FDD Item 2: Business Experience
Within Item 2 if the Franchise Disclosure Document (FDD), franchisors must disclose the last five years of specific individuals’ business experience.
FDD Item 1: The Franchisor and Any Parents, Predecessors and Affiliates
Within Item 1 of the Franchise Disclosure Document, franchisors must disclose their corporate information, including information about their affiliates and parent companies.
FDD Item 3: Litigation
Item 3 of the FDD discloses lawsuits involving the franchisor, the franchisor’s affiliates, predecessors, and other individuals identified in Item 2.
FDD Item 4: Bankruptcy
Item 4 of the FDD must disclose whether or not the franchisor, affiliates, predecessors, and/or individual management team members identified in Item 2 filed for bankruptcy.
FDD Item 6: Other Fees
In Item 6 of the FDD, franchisors must disclose all other fees including ongoing royalties, brand development funds, marketing, technology, training, and more.
Menu Labeling Requirements for Growing Restaurant Franchises
If you are the franchisor of an emerging and growing restaurant franchise and you haven’t already complied with the Food and Drug Administration’s (“FDA”) menu labeling requirements, then it’s time to start evaluating your obligations and options before more franchisees commit to menu boards and build-outs that may not be in compliance. Restaurant Franchises with 20 or More Units – The rule applies to restaurants and “similar food establishments” that are part of a chain with 20 or more locations doing business under the same name. So, if you are a restaurant franchisor, application of this rule to your system is not a question of “if” it applies but rather a question of “when.” Well before 20 units, planning will need to be put into implementation and menu boards for existing franchisees may have to be retrofitted with compliant menu disclosures. Standard Menu Items – The menu labeling requirements apply to “standard menu items.” Standard menu items are menu items that are “routinely included on a menu or menu board or routinely offered as a self-service food or food on display. Variable Menu Items – The menu labeling requirements apply to “variable menu items.” Variable menu items are menu items that qualify as “standard menu items” but that come in different flavors, varieties, or combinations and are listed as single menu items. Temporary Menu Items – The menu labeling requirements do NOT apply to temporary menu items, which are menu items that “appear on a menu or menu board for less than a total of 60 days per calendar year.” The 60 days includes each day on the menu board and need not be consecutive days. Summary of FDA’s Menu Labeling Requirements: Generally: Calorie Disclosure Obligations – The number of calories contained in each standard menu item must be displayed on the menu and menu board. As to variable menu items, calories must also be disclosed, but the method of disclosure varies depending on how the variable menu items are listed on the menus and menu boards. Standard Menu Items: Calorie Disclosure – For standard menu items, the number of calories must be listed adjacent to the name or the price of the associated menu item in a type size no smaller than that of the menu item or price or the associated menu item (whichever is smaller). Also, calorie information must be in the same color and as conspicuous as all other menu information. Reference to calories may be by using the word “calories” or the abbreviation “cal” and may be used as the heading above a column of calorie declarations. Variable Menu Items: Calorie Disclosure – In addition to the requirements imposed for standard menu items, there are additional requirements for variable menu items: When the menu or menu board lists flavors or varieties for an entire individual variable menu item, the calories must be declared separately for each listed flavor or variety; and When the menu or menu board does not list flavors or varieties for an entire individual variable menu item, and only includes a general description of the variable menu item, the calories must be declared for each option with a slash between the two calorie declarations where only two options are available or as a range when more than two options are available. There are other variations as to variable menu items. Serving Sizes – When dealing with combination menus and menu items that represent multiple serving sizes, additional disclosure requirements exist as to serving sizes. Next Steps for Achieving Compliance: As a growing restaurant franchise, you must start implementing a plan for ensuring that your menu boards and menus comply with the FDA requirements. The FDA guidelines are extensive. While this article summarizes some of them, there are many more and many variations. Plan to review your existing menu configuration and menu items with your legal or franchise counsel. Review the FDA Menu Labeling Regulations in detail. In addition to federal law, many states and local municipalities have implemented additional labeling requirements. So be sure to evaluate the local jurisdictions in which your franchisees are located. Read More Articles
FDD Item 8: Restrictions on Sources of Products and Services
Item 8 of the FDD discloses what products and supplies franchisees must purchase or lease from the franchisor or the franchisor’s designated suppliers.
FDD Item 11: Franchisor's Assistance, Advertising, Computer Systems and Training
Item 11 of the FDD discloses assistance and training that the franchisor will provide, and advertising, computer and software systems that is required.
FDD Item 23: Receipts
Within Item 23, the receipt page must be signed to confirm and prove the proper disclosure and delivery of the FDD.
Winning Strategies for Selling Your Franchise System
Strategies and steps for selling your franchise system to future private equity investors Tak eaways Start with the end in mind: keep documents in order, build strong franchisee relationships and develop a five-year plan. Choose an exit strategy that aligns with your goals. Follow industry best practices to increase your brand’s value over time. Work with an experienced franchise lawyer to minimize legal exposure. Whether you’re just starting out as a franchisor or you’re closing your 100th deal, having an exit strategy in place is critical for maximizing the value of your franchise system before selling it in the future. From private equity to generational inheritance and conglomerate sales, making sure your brand is positioned for future sale and investment opportunities is important. By following best practices, adopting smart strategies and knowing the right steps to take early on, you can increase the value of your franchise system while ensuring you’re well-prepared when it’s finally time to exit your business. In this guide, we’ll explore the winning strategies every franchisor should know before selling a franchise – and what you can do today to maximize your brand’s value in the future. 1. Begin with the end in mind When you’re getting started in the franchising world, it’s important to begin with the end in mind . When drafting your initial Franchise Disclosure Document (FDD) and franchise agreement with your attorney, it’s a good idea to have an exit strategy in place – even before you’ve sold your first franchise. By making sure your future exit is built into your franchise system’s legal foundation early on, you’ll add value to your brand from the start. “What are the things that you're going to be looking at now, as you're going through a deal, or something that someone five years from now – as they sit down in an equity transaction – is going to be evaluating that they would have wished [you] had done better or thought about more if [you] could have gone back in time?” says Charles N. Internicola , a franchise attorney with over 25 years of franchise experience and the founder of The Internicola Law Firm . Develop a five-year plan For startup or emerging franchisors, it’s also a smart idea to develop a three- to five-year franchise success plan before selling your first franchise. This process can help you gain clarity about your vision while empowering you to set milestones for growing your brand over time. “For new franchisors, as we're developing the FDD – and really the development strategy embedded in it – it's always, what does that three- to five-year vision look like? What does a potential equity investment in year four and five look like? And how do all of your documents and your compliance practices hold up?” Internicola says. When developing your five-year plan, take time to think about how your exit strategy fits into your vision for the future – and make sure to leave room for a potential private equity investment in years four or five. Compliance practices and legal documents For more mature franchisors that have possibly already taken on some private equity, building an exit strategy around your franchise’s compliance systems can be a good approach. “We have brands that are in acceleration mode – some have already taken on some private equity and they're at the second stage of their growth. And there are other more mature systems. But I think the answer along the way is, you have to build in your compliance systems or your exit strategies when developing your franchise program and how you maintain compliance,” Internicola says. By maintaining ongoing compliance with franchise laws, keeping your documents and filings up to date, and having a plan for managing franchisee relationships and compliance, you can add value to your already-established franchise brand as a seasoned franchisor. 2. Choose an exit strategy that’s right for you Every franchisor has a unique set of personal and professional goals. Because of that, it’s important to understand the exit options that are available to you and to choose the exit that best aligns with your goals. Private equity exit In recent years, private equity exits – or selling a franchise to private investors – have become a popular exit strategy for franchisors. “Private equity is not the only way to exit a franchise system. But when I'm thinking about [exits] as I'm preparing the FDD and franchise agreement, I'm thinking about private equity, because private equity is the one that's going to be scrutinized the most,” says Brian A. Lincer , a franchise and trademark attorney at The Internicola Law Firm. Because private investors acquire franchise brands with the goal of making excellent purchases, private equity exits typically require franchisors to undergo deeper levels of financial and legal scrutiny than other exits. Because of that, it can be a good idea to plan your exit strategy around private equity regardless of whether you ultimately choose a different exit in the future. “If we're prepared for a private equity exit, we will be prepared for all the other exits – you know, the other exits will be easier. So I think of it as if we're going to sell to private equity five years from now, and then that's the way I think about pretty much everything – not only the FDD but the way we deal with the franchisee on behalf of the franchise, or vendors. Every component of a franchise system has something to do with the private equity exit,” Lincer says. Generational inheritance exit Although private equity exits are common among franchisors selling their franchise systems, generational inheritance exits are also popular for franchisors with children or other family members that are interested in taking over the family franchise. If generational inheritance is your preferred exit strategy, it’s a good idea to work with an experienced attorney to draw up the appropriate legal documentation. Conglomerate sale exit Another popular exit strategy for franchisors is to sell the franchise system to a conglomerate, which will then add the franchise to its portfolio of brands. Like other exit strategies, it’s best to work with an experienced franchise attorney to make sure your conglomerate exit strategy is developed properly. 3. Follow best practices to maximize your brand’s value When it comes to maximizing your brand’s value, there are strategies and steps you can take to make sure your franchise system will be attractive to potential investors further down the road. Maintain compliance At the foundational level, making sure your franchise system stays compliant with federal and state franchise laws and regulations is critical for maximizing its value potential. This includes avoiding regulatory violations, steering clear of lawsuits and making sure all filings and licenses are current. “When you're selling, you're going to make representations and warranties that your franchise company is in good standing, that [you’re] in compliance with franchise laws or [you] don't know of any violations – that [you] haven't made illegal financial performance representations,” Internicola says. Protect your intellectual property When it comes to franchising, intellectual property can make or break your franchise brand. Because of that, it’s critical to register your trademarks with the U.S. Patent and Trademark Office as early as possible – and continue policing those trademarks until you exit the business. “IP is really important – making sure your trademarks are registered, making sure that all of your renewals are filed correctly, making sure your whole IP portfolio is protected, whether that be trademarks, copyright on occasion,” Lincer says. Establish strong Item 19 representations Another strategy for maximizing the value of your franchise system is to build up strong financial performance representations – that is, any written or oral statement or communication made by a franchisor to a franchisee or the public about the actual or potential financial performance of a franchised business – and to disclose those numbers in Item 19 of your FDD. “The better your Item 19 is, the more protection you'll have. Not only will it help with franchise sales, but [it will also] get rid of the ambiguity of bad Item 19’s and make sure you're drilling down with your team members on good sales practices,” Internicola says. Make honest representations and warranties During the exit process, making honest representations and warranties to private equity investors or buyers is critical – not only for maintaining good professional relationships but also for limiting potential legal and financial liabilities. “First of all, you need to make those representations for a deal to happen. And second, even after you close a deal, if they're false, there could be an ability for a buyer to come back and either clawback compensation or you could have liability,” Internicola says. Despite those risks, making honest representations and warranties is within your control as a franchisor – and it should be a priority from day one. “If we think we're selling to private equity in five years, and we know we're going to have to make those promises, those representations, we want to make sure our compliance program addresses those issues and we can confidently, without having any possibility of repercussions, say those things affirmatively,” Lincer says. Even in cases where a franchisor might have been involved in litigation at some point, it’s important to be upfront about those situations with potential investors to avoid paying a higher price later. “It's not unusual where sometimes we have a litigated matter that's out of our control. Maybe we had a rogue franchisee that tried to open up a competing business, and we could say we didn't have any litigation except for this one instance, and here's the information about that – which generally won't be seen as a negative. We're trying to figure out ways where we can make those representations without having the private equity company come back after us and potentially … pull back some money,” Lincer says. Limit your legal exposure Because private equity firms typically focus on liability issues during the franchise acquisition process, it’s important to make sure possible legal liabilities are minimized throughout your franchising journey. Although it isn’t always possible to avoid litigation as a franchisor, you can add value to your franchise system by working with an experienced franchise attorney to build a rock-solid legal foundation for your franchise – particularly when it comes to developing a private equity exit strategy. “Part of the sales document and the agreement between the private equity firm and the franchise system that is selling is something called representations. Basically, they're the promises of the seller. If these promises aren't accurate, there are some repercussions, typically. So I'm thinking about this on day one – because a lot of those representations will trail back five years from now,” Lincer says. A key strategy for limiting exposure involves making sure legal protections are built into your franchise system’s legal foundation from the start, including the FDD and making sure your franchise agreements are assignable. “You need to have provisions that allow acquisition – allow you to be acquired without requiring franchisee consent. … You need a very robust [franchise] development in terms of anyone who acquires your brand is going to be looking for expansion opportunities, so you need to be really precise on how your agreement grants franchise territories. Do you have carve-outs for certain captive market accounts? And is your IP and your entire infrastructure protected?” Internicola says. Because private equity firms want to make sure they aren’t investing in a brand that’s going to explode on them in the future, expect the acquisition process to involve scrutiny of your franchise system’s past litigation, defaults and other compliance issues. “Other areas would include taxes – making sure all the taxes are paid, making sure all of your vendor agreements are in order. If you have particular vendor agreements, make sure those are assignable,” Lincer explains. Confidentiality clauses are also critical to include in your franchise’s legal documents. And in situations where a franchise system relies on a few key employees, it can also be a good idea to make sure those valuable employees are locked into a contract. By retaining top talent, you can add unique value to your franchise system and make it more attractive to potential investors. Indemnification can add a layer of protection Although franchisors can limit much of their legal exposure by working with a lawyer to establish a strong legal foundation for their business, the potential for unanticipated risks is always present when it comes to exiting a franchise. It’s important to work with an experienced franchise attorney to make sure the proper legal safeguards are in place when selling a franchise, including indemnification. Although some insurance companies offer coverage for representations and warranty claims, due to policy limitations franchisors should be proactive in their exit strategies by including indemnification provisions in future deals with private equity investors. “Generally, a seller of a franchise system is going to want to have some sort of cap on [liabilities]. And it could be a monetary cap; it could be a time lapse – after a year, the indemnification obligations are going to subside,” Lincer says, adding that indemnification could be negotiated by a qualified attorney as a material part of the transaction. 4. Franchise the right way In addition to limiting your liability as both a franchisor and the seller of a franchise system, franchising the right way – with the help of a seasoned franchise attorney – can offer other important benefits. From stronger legal protections and improved contract provisions to better negotiations and enhanced due diligence, working with a law firm that specializes in franchising can ensure that your journey as a franchisor is a success, from FDD to exit. Listen to the full interview: To learn more about how we can help you maximize your brand’s value and develop an exit strategy that works for you, contact us using the button below or call (800) 976-4904. Read more
Why Most Franchisors Fail (and Strategies to Win)
Why many startup franchisors fail and mistakes to avoid in an interview with Lisa Welko of Integrity Franchise Group.
How A Place at Home Uses EOS, Values and Vision to Transform their Franchise System
A Place at Home Franchisors Dustin Distefano and Jerod Evanich discuss EOS and a mission-driven culture to propel franchisee growth.
How to Franchise Your Business in Canada
Learn about franchising your business in Canada and the steps to take.
Mastering the Franchise Sales Discovery Process and Converting Leads
How to convert your franchise sales pipeline for franchisee candidates and close deals.
Victoria Gracia | Franchise Development Team Leader
Victoria “Vicki” Gracia is a Franchise Development Team Leader at The Internicola Law Firm. With over a decade of experience, she oversees FDD issuance, renewals, and the firm’s legal infrastructure that supports franchisors nationwide.