One central benefit that franchisees seek from joining a franchise system is the leadership of the franchisor’s team. This team controls the brand standards, leads national marketing, gives advice and support, and is responsible for brand innovation and development.

Item 2 of the Franchise Disclosure Document (“FDD”) discloses to prospective franchisees who these leaders are and their business experience. Item 2 also discloses who is involved in franchise sales and operations. However, under the requirements of the FTC Franchise Rule, not every leader, manager, or salesperson needs to be included. The below lists summarize who needs to be included in Item 2 and who does not.

Continue Reading Who’s Who in Item 2?

In 2020, banks had to contend with general new underwriting guidance in SOPs, COVID-19 specific underwriting guidance, and the rules about the Paycheck Protection Program (“PPP”). All of these circumstances impacted the availability of funding for franchisors and franchisees. Despite the uncertainties about the economy and trend towards more conservative lending, the good news is that banks are still issuing useful loans. In this webinar, Geoff and Sherri Seiber, the CEO and COO of FranFund, the leading full service franchise funding solution, discuss Small Business Administration (SBA) loan options for franchisees, analyze changes in the lending environment in 2020, and provide advice to franchisors about building their financial toolkits.

The SBA loans most frequently utilized by franchisees are the SBA 7A standard loan (for amounts more than $350,000) and the SBA 7A small loans (for amounts less than $350,000). The SBA also offers special working capital loans that are particularly beneficial to businesses. In the webinar, Geoff and Sherri outline the more specific eligibility requirements and considerations for these SBA loan products. By understanding these programs, franchisors can be a resource for prospective franchisees, which in turn helps the franchise system to grow and new units to open more rapidly.

Some of the important takeaways from the discussion of these loans include:

  • The importance of post-closing liquidity;
  • Unique changes in the working capital loan requirements;
  • The pros and cons of the Rollovers for Business Start-Ups (ROBS) option, which can be used as an alternative to a loan or to generate extra liquidity to qualify for a loan; and
  • The importance of gaining meaningful pre-approval (which often requires more than a local bank’s review).

Another critical takeaway for franchisors is that a successful financial toolkit includes strong relationships with not only accountants and lawyers, but also bankers. Franchisors (and by extension their franchisees) who had strong working relationships with a bank had an advantage in the pandemic lending environment and will continue to do so. Knowing the bank and interacting with trusted bankers helps franchisors meet their goals and needs.

The COVID-19 pandemic has dramatically impacted business in 2020, from government stay at home orders that prevented operations to adjusted customer service capacity or additional safety procedures. Some of these changes to your franchise system may be what the FTC or states regard as “material”, meaning the change likely affects a prospective franchisee’s conduct or decisions with respect to the purchase of the franchise.  If a change is material, then the franchisor has an obligation to amend its FDD to account for the changes.

Federal and state law provide standard guidance about what is a material change, and in June 2020 the North American Securities Administration Association (NASAA) issued additional guidance specific to the pandemic. The major takeaways from these guidelines were that more than temporary changes to the way that the franchise system delivers goods and services or operates need to be included in an amendment.

Even more significantly, the NASAA guidelines impacted what franchisors can disclose for a financial performance representation (“FPR”) in its 2020 FDD. The guidelines emphasized that merely having historically accurate information from pre-pandemic operations is not enough to prevent the FPR from being misleading. For example, a 2019 gross sales disclosure for a dine-in restaurant may not be reasonable given the year-to-date 2020 gross sales that are significantly behind 2019 sales. Each franchisor must carefully review the NASAA guidelines to determine if its FPRs are still supported by a “reasonable basis.” If not, then Item 19 needs to be updated to reflect pandemic operations or needs to be removed.

In this webinar, Manning Fulton attorneys Ashley Nielsen and Carlie Smith discuss the implications of the NASAA guidelines in more detail and explain how to move forward if you’ve determined that a pandemic-induced change to your franchise system is material.

Businesses are increasingly defined by the technologies they use internally or that they offer to their customers; franchisors are no exception Technology is interwoven into the way that businesses think about themselves and the world. For example, Amazon famously declared itself first a technology company that “just happens to do retail.” Developments in technology distinguish companies from their competition and open new growth opportunities.

Your franchise business likely depends of an array of systems to interact with customers, provide goods and services, and link franchisees to you and each other. Or, perhaps, those advancements are still aspirations for your system, and you want to leave the door open to introduce those technologies later.

Having the technology fee disclosed in your Franchise Disclosure Document (“FDD”) and included in your Franchise Agreement provides you with the flexibility to implement technologies systemwide and have your franchisees help bear the cost.

Continue Reading What is the Technology Fee and Why Should I Charge My Franchisees One?

Items 5, 6, and 7 of a Franchise Disclosure Document (“FDD”) are all about money – how much the franchisor charges for the goods and services it provides franchisees before the franchised business opens, how much the franchisee will pay to the franchisor throughout the business relationship, and how much the franchisee will need to invest to open the business. After reading Items 5, 6, 7, the franchisee must understand how much things cost, how much they’ll be paying you, and when they will be making payments.

It is important for you to give accurate estimates to avoid litigation risks and help prospective franchisees evaluate their ability to successfully finance and open the business. Continue Reading Franchise Disclosure Document (“FDD”) Items 5, 6, and 7 Explained

Your trademark is a critical asset in your franchise system. You work hard to cultivate the brand associated with the trademark and you carefully monitor how your franchisees and competitors use your trademarks. Registering your trademark with the U.S. Patent and Trademark Office gives you additional legal protections for this valuable intellectual property.

Continue Reading Trademark Registration 101

How to Avoid Litigation in Franchising

There is a host of issues that can arise in a relationship between a franchisor and a franchisee. If not properly addressed, some of these issues can mushroom into legal sparring or even full-blown litigation.

Common issues include the enforcing of system standards, franchisees performing below their and/or the franchisor’s expectations, adapting to changes in the marketplace, diverging values and principles, or compliance with federal and state laws that regulate the franchise relationship.

No matter what the particular catalyst, there are several critical steps a franchisor can take to help assuage – or even avoid – legal issues. Continue Reading How to Avoid Litigation in Franchising

Developing a Social Media Policy for Franchise Systems

Effective use of social media is challenging for any business, but creating a strategy that works for an entire franchise system can be even more difficult.  Once that strategy is developed, it needs to be supplemented with a social media policy that protects you and your franchisees.

Below are four things to consider as you develop a social media policy. Continue Reading Developing a Social Media Policy for Franchise Systems

You have worked hard to grow your business and brand.  The last thing you want to do is give it all away.  A carefully drafted non-competition agreement can protect your brand and trade secrets.

Well-drafted, enforceable non-compete agreements include the following elements:

Narrow List of Prohibited Activities

Courts are increasingly focusing on balancing former franchisees’ right to work against franchisors’ interests in preserving its trade secrets and protecting its brand from unfair competition.  For this reason, a court is unlikely to enforce a non-competition that is drafted to prohibit activities that would not adversely affect the franchisor’s rights or trade secrets.  For example, a court will likely strike down as too broad a non-compete that would prevent the former owner of a pizza restaurant franchise from working in any business that sells pizza of any type or quantity.   This is because the franchisor’s interests would not really be adversely affected if this former franchisee worked as a cashier at Trader Joe’s.  A more enforceable non-compete would prohibit such a former owner from managing, owning, or investing in a restaurant that primarily sells pizza.

Reasonable Term

As nice as it would be to keep a former franchisee from competing forever, courts will not enforce an unlimited term of non-competition. What’s considered reasonable can vary widely by state, so it’s important to talk to an experienced franchise attorney to determine what time period is considered reasonable in your and your franchisees’ jurisdictions.  The risk of defining the term for too long (and for drawing the restricted territory too broadly, as described below) is that the court will not enforce any part of the agreement.

Restricted Territory

A franchisor must define the territory in which the competitive activities are prohibited and, just like with the list of activities and the term, the territory must be drafted narrowly to be enforced by courts. Most typically, a franchise agreement non-compete will prohibit a former franchisee from competing within a set radius around the franchised location and other system locations.  The proper radius for the territory will depend on factors such as the jurisdictions involved, the uniqueness of the concept, or the ubiquity of the brand.

In today’s judicial climate, a franchisor must think carefully about each of these terms, but with careful drafting, the non-competition agreement can be a powerful defense for the franchisor.

COVID 19 undoubtedly impacted your business. Franchise systems in a wide array of industries experienced temporary closures, forced innovation in the delivery of goods and services, and altered unit economics. Some of these changes may qualify as “material” changed under state and federal law and will need to be accounted for in an amendment to the 2020 FDD.  The federal and state requirements are outlined below and will help you to determine if and when you need to amend your FDD because of COVID-19.

Continue Reading Do I Need to Amend My FDD to Account for the COVID-19 Pandemic?