The Importance of Franchise Record Keeping
Why Do I Need to Keep Records?
Keeping records gives you an additional reason to check and make sure that the documents are properly completed and fully executed. If a dispute arises, incomplete documents can cause major headaches for franchisors. Having complete records is also vital to running your franchise and enforcing your agreements. Without proper records, you may not be able to prove the terms of certain agreements if they are later challenged. Even more importantly, franchisors are required by federal and state law to keep complete records of their franchise dealings. Violating those laws can result in fines going in to the tens of thousands of dollars, which we generally advise against (sorry, bad joke).
What Records Should I Keep and How Long Should I Keep Them?
When thinking of what records you should keep, there are three main categories to consider: records related to your FDD another other “registration” type documents; records related to your franchise sales and agreement; and “administrative” records. As you might expect, the more documents you retain and the longer you retain them, the more you protect yourself in the event disputes arise. There is far more to cover here than could possibly be done in a single blog, but we are happy to answer any specific questions you have about record retention as it pertains to your specific business.
Registration. You should retain all copies of your FDD (including state-specific FDDs if you have them) and amendments that are made it to it. Additionally, you should keep all documents related to the state registration, filing, or exemption process. This includes any documents you submit, comment letters sent or received, and copies of any permits or registrations received. Some examples may include Seller Disclosure Forms, Consent to Service of Process and audited financial statements. The Federal Rule requires you to retain a copy of each materially different version of your FDD for at least three years after the close of the fiscal year in which it was used. Some state laws impose longer record keeping requirements (up to 6 years). However, for maximum security, it is wise to retain all documents that a franchise sale was based on until the expiration of termination of that agreement.
Franchise Sales. You should also retain all documents that were exchanged during the franchise sales process. If any of those documents contained signature lines, you should retain the signed copies of those documents. This includes the Franchise Agreement itself (you don’t want to be caught without a signed copy), any addenda or amendments, the Compliance Questionnaire, the Receipt of the FDD, and any communications (emails, letter, etc.) with the franchisee as these may be used as evidence in subsequent lawsuits. Like the FDD, the Federal Rule requires franchisors to keep copies of executed Receipts for at least three years. However, it is best to keep all documents related to the sale of a franchise until at least 3 years after the termination or expiration of the franchise agreement.
Administrative. This last category is sort of a catch-all for any documents left out by the other two that would either 1) serve to protect a franchisor in case they ever needed to prove they were in compliance with state or federal law, or 2) provide the franchisor with information to help maintain compliance. These documents may include, but are not limited to, registration tracking information, jurisdictional triggering information, instructions for any state-specific procedures that must be followed, and a regularly updated list of all individuals who may offer or sell franchises in the state. Retaining these documents is not required by law, and therefore does not have a set period of time for retention. But, like the other categories, it is best to maintain them as long as they may apply to any franchise agreement currently in effect.
How Should I Categorize My Records?
Keeping records won’t do you any good if you don’t know where to find or access them, so it is important to develop strict filing controls and procedures among you and your staff to ensure documents are kept in the proper location. You could file them based on the categories listed above, or potentially based on client, state or both. At the end of the day, this is truly up to you, and you should do so in whatever way is best for you and your business.
Mistakes to Avoid as a Franchisor
There is enough advice out there for franchisors to fill many books. But we have a few hints from another perspective. Our corporate department at Drumm Law often gets called in to help franchisor clients sell their business, and this is when many of the franchisors’ weaknesses really come to light. We’ve compiled a list below of best practices for franchisors from the corporate attorneys perspective.
1) Don’t forget to educate your sales team (both internal and external).
*During the negotiation for the sale of franchisors, old oopsies from the sales team can cause the buyer to ask for a reduction in purchase price (sales process oopsies = higher risk for buyer) or even derail the proposed deal altogether.
*Franchising is a very litigious area, and franchisors get sued pretty regularly. If you (franchisor) make a mistake in the sales process (improper disclosure, insufficient waiting time, etc), your business has far more risk for the buyer, and that’s going to be costly for you.
*Solution: make sure you are educating everyone on your sales team about the regulations. Have processes in place, have your attorneys provide training, etc.
2) Be discriminating.
*All franchisors go through periods of time when they just really need to bring franchisees in the system. It’s tempting to accept any prospect who is interested. But keep in mind, you’re not considering dating this prospect. You’re considering marriage (ie, joining as franchisor and franchise).
*Solution: really make sure that your prospect is the right one: do they meet your financial, experience needs? Will you be able to work with this person? And be willing to reject prospects who are not the right fit. This will save you so much pain and suffering (and cold hard cash) in the long run.
*When I am working through the due diligence process of selling a franchisor, this comes up a lot. There are several (or even just one) problem franchisees: my client will have lost money on the franchisees during the franchise agreement. And then to make things worse, when my client tries to sell the system, the buyer wants reassurances about the problem franchisees. I’ve seen deals where the buyer only agrees to buy the franchisor if my seller-client takes all future monetary risk for the problem franchisees (the problem that never ends).
3) Details really do matter. Don’t forget to double check your documents just one more time; Keep good files.
*During normal operations, life gets busy, and it’s hard to attend to all the details. You may not read closely through your franchise agreement or addendum, or you may not keep files of all correspondence with your franchisee. It doesn’t seem like it will matter at the time, but these lapses can and likely will come back to haunt you at some time.
*If you do end up with a problem franchisee, you need to have access to these files. And when you sell your business, the buyer will want to see every document and correspondence.
*Solution: Hire one good person who is in charge of all of these details. This person will double check all agreements to be signed (do you have the correct name of the franchisee, all owners listed? Territory correctly described and not overlapping another territory?). This person will be in charge of maintaining a good consistent filing system. If you aren’t able to handle the filing system on your own, buy a software system to help you out.
4) Spend time getting to know your franchisees.
*I hesitate including this one because it’s so obvious. But it is a mistake I see over and over again. By and large, my franchisor clients are in their businesses out of passion, and they love sharing the business with their franchisees. But the mistake I see is when my franchisor-clients don’t spend time getting to know their franchisees and establishing that connection.
*Solution: the more you can establish a connection with your franchisees, the less likely you are to have disputes (which are time consuming, costly, and make your business less attractive to buyers). Hire team members that work well with people, and make sure the franchisees see the support you are providing and not just the policing.
5) Have compassion, but make sure to be consistent.
*We are called in often to help a franchisor create a strategy when their franchisee has gone off the straight and narrow. Sometimes the franchisee is going through a divorce, or has a death in the family or a health problem. Our franchisors want to provide support, but that can be tricky. Because if you offer a benefit to one franchisee, you have to assume that all other franchisees will find out about it. (For example, if you offer a benefit to a California prospect, keep in mind that all other prospects will receive a summary of the benefit you provided to the first prospect.)
*Solution: anytime you offer a benefit to one person (whether it is to a prospect or an existing franchisee), think through this option on a system-wide scale. Would you be willing to offer it to other franchisees? Other prospects? For example, if a franchisee is going through a health problem, you may want to offer management support or one on one support instead of a royalty waiver. And make sure that you would treat all franchisees in a similar position in the same consistent manner.
If you have any questions, always feel free to contact us here.
Buying an Existing Franchise: Everything You Need to Know
Congratulations! You have leaped into the world of franchising and buying an existing franchise. Here is how a franchise attorney can help you to prepare all the documents and solve legal issues.
Do You Need a Franchise Lawyer to Buy a Franchise?
A franchise lawyer will help you every step of the way in deciding whether or not to buy a franchise. The first order of business is to help you read the fine print of the FDD (franchise disclosure document), and your franchise lawyer will help you understand all the language it contains.
What is Franchise Disclosure Document (FDD)
FDD is a 23-item document that outlines the franchise's tiny little details. Of particular importance is Item 19, which may include financial performance representations that can help you determine whether or not the franchise is likely to make you a lot of money. The FDD also contains the Franchise Agreement. These legal documents are extremely important to the relationship between the franchisee and franchisor, so understanding them entirely is imperative.
Conclusion
A franchise attorney like those at Drumm Law will help you make an educated decision about whether or not you should be buying an existing franchise. If you decide to buy the franchise, your lawyer will help you set everything up and also help intercede for you if something goes wrong through your franchise ownership.
Hire Drumm Law to Help You With Buying an Existing Franchise
Drumm Law is a virtual law firm. Unlike our competitors, we do not have an expensive downtown office and the overhead that comes along with it. . We call, email, text, Skype, chat, “goto,” webinar, Facebook, Linkedin, meet, tweet, and greet our clients. We have attorneys throughout the country. While we have conference rooms available when needed, we prefer to meet our clients over lunch or drinks. Contact us to book a consultation!
Do You Need a Franchise Contract Lawyer to Buy a Franchise?
Yes, you should enter into a contract agreement with a franchise attorney by your side. The particulars of the FDD and Franchise Agreement require someone who can understand the legalese and help you avoid problems even before they arise. Although there are many great lawyers worldwide, you will want someone on your side who can comprehend all the legalese. Here is why you need a franchise contract lawyer to buy a franchise.
How a Franchise Contract Lawyer Can Help
The Franchise Disclosure document covers 23 items you need to understand and agree with before you sign off and purchase a franchise. Several of the essential elements are listed below.
Fees
As you would expect, there are numerous fees when it comes to opening a franchise. Have your franchise contract lawyer review the start-up fees and your economic responsibility for the franchise to run. You can expect to pay royalty fees but also may be responsible for technology fees or branding fees. A well-trained franchise attorney will help you gain a fair monetary agreement before you sign the contract.
Rights
When you purchase a franchise, you will gain the rights to use the branding and models of the business. Your franchise contract lawyer will make sure the rights are outlined appropriately.
Non-compete clause
If you enter a franchise contract, you will likely need to sign a non-compete clause, so you do not try to open a business that is similar in scope while you are working for the franchisor. A non-compete clause will usually last several years after terminating the franchise agreement.
Territory
Your franchise contract lawyer will help you understand the territorial rights or rules when considering the franchise. You may be limited to a specific geographical area, or there could be certain zip codes where you are not allowed to go. Your qualified franchise attorney will help you figure this out.
Get Help Negotiating Franchise Agreements
A franchise contract lawyer like those at Drumm Law can read the Franchise Agreement before you sign on the dotted line and draft a list of items that may be of concern. Many items can be negotiated, and your franchise attorney can make the most of the franchise agreement on your behalf. These items include:
- The negotiation could limit the responsibility incurred, personally, if a franchise closes.
- A franchise lawyer can help you by lengthening the time a franchisee has to open the store.
- An appendix could expand or outline the territory in which you are allowed to open your franchise.
- The negotiation could permit transfers for real estate.
Hiring a franchise attorney like Drumm Law will save you time, money, and hassle as they truly read and understand your FDD and Franchise Agreement.
Hire Drumm Law as Your Franchise Contract Lawyer
Drumm Law is a virtual law firm. Unlike our competitors, we do not have an expensive downtown office and the overhead that comes along with it. We call, email, text, Skype, chat, “goto,” webinar, Facebook, Linkedin, meet, tweet, and greet our clients. We have attorneys throughout the country. While we have conference rooms available when needed, we prefer to meet our clients over lunch or drinks. Contact us to book a consultation!
Owning Multiple Franchise Explained
You have probably heard the phrase “there is safety in numbers.” And this is true, even if you are talking about numbers of franchises. A clever business person can certainly own more than one franchise, and there are several ways to go about this.
Multi-Unit Franchise
A multi-unit franchise is one in which the franchisee agrees to purchase and run several (or many) franchises of the same type. In this model, the franchisee would take a more hands-off approach, since he or she could not serve as the manager for all of the stores. The average number of franchises owned is five, although there are owners who hold more than 1,000 stores for the same company.
One perk of a multi-unit franchise is that often the franchisor would discount the franchise fee after the first one you contract. This perk helps the franchisor because they know they can count on some solid store openings, and it helps you because you are getting a more reasonable price.
You can mix and match the types of franchises you buy if you so desire. Food franchises are the most popular types of franchises to move into the multi-unit realm, but automotive and beauty related franchises are coming on strong. You can own several of the same type of franchises in the same area, since you would understand how to run it very well, or you could diversify and buy a few food and a few automotive franchises, for instance.
Point of Access Franchise
Another way to own more than one franchise is to piggy back them on each other, and use one business to interplay with the other. For example, if you provide senior care in a franchise business, you might decide to start a handyman business because you see the need for that with your clients. If they already trust you to care for their family member, they would be more likely to use a handyman that you recommend as well.
Owning more than one franchise will give you the opportunity to make some money with a less hands-on approach to your business. Although most people think it is the branding that makes franchises so successful, it is actually the idea that the service or product offered with a franchise is constantly being perfected, and if you own more than one of the same type of franchise, that perfection will be even easier.
Commercial Lease Negotiations: Can a Franchise Lawyer Help?
If you want to open a retail franchise, you will likely need to lease some commercial space. And as with anything, you will want to get the best terms for your deal that you can. Hiring a seasoned attorney will give you a stalwart defender who will be by your side and support you in all retail commercial lease negotiations.
Though a franchisor will give you all the tools of the trade, and you will have the business model and training schedule you need to follow, they typically do not help you with a lease agreement. A lease agreement document can be between 40-50 pages, and with all of those critical details that it holds, you will definitely want a competent franchise attorney to work through the process with you! The landlord is trying to get the best deal and have realtors and attorneys on their side, and you should also have someone with your best interest in mind.
There are many ways a franchise attorney can help you negotiate your retail commercial lease, and just having a trained professional by your side will help you to feel more confident. The following are some perks of hiring a franchise attorney.
- They understand the importance of the first round. After years of experience, a quality franchise lawyer understands how important the first round of negotiations is. Anything you want changed needs to be dealt with in this round if you want to make it happen.
- They know what landlords are willing to give up so they don’t waste anyone’s time. Because they have handled so many cases, franchise lawyers understand where to push a landlord, and where he is likely to stand firm. This will save everyone time and aggravation.
- They can help you lower the deposit. Your franchise attorney will try to negotiate a better deposit price for you. Large deposits are not required, but many landlords will still try to get them in order to recoup some of the money they pay out for taxes, etc. There is nothing set in stone, so let your lawyer help you lower the deposit number.
- They will stand by you when you refute the first offer, and the second, and the third. Realtors and landlords are used to many offers and counter-offers, so don’t give up too soon. Whatever the landlord offers first is a lowball offer and you should at least play the game to see how far he will go. Your franchise lawyer will advise you on how to raise your bids in increments, and how to always ask for more than what you want.
- They will let you know the risks of the Lease. Is there a personal guaranty? What if you need to terminate the lease early?
A franchise attorney can help immensely with your retail commercial lease negotiations. Contact us today to see how we can help.
Why Have an Item 19 in Your Franchise Disclosure Document
No one wants to air their dirty laundry in public, but having an accurate Financial Performance Representation in your Franchise Disclosure Documents will help your franchise rather than hurt it. You don’t need to fudge the numbers and make everything look perfect; that is simply not realistic. Certainly there are gray areas in an Item 19, and that is where Drumm Law can help, as we specialize in telling your story. Having a clearly written FPR in your FDD will help match you up with the right franchisees, and give you a stronger chance to sell your franchise to the right people.
Why have an Item 19?
- Item 19 shows the dollars and cents of the franchise.
You need to include the good, the bad, and the ugly. For instance, no one expects a business to get 5 star ratings in every franchise in every location and during every transaction. That is just not realistic. Showing some quality franchise numbers and some that are not so stellar will show potential buyers that the location of the store and the business acumen of the particular owner all matter to the bottom line. - The Item 19 will tell your story.
There are many nuances to running a franchise, and at Drumm Law we can help you tell your story. There is more to Item 19 than just a profit line. The FPR can help a potential buyer to understand the full scope of the business. Do you really want to hustle for your money day in and day out? Or do you want to work a few hours a week for a side gig? The FPR will help you match the business style of the franchise with the business style of your potential buyers. - This document helps you sell your franchise to the right people.
When prospective franchisees read your FPR, they will be able to see the amount of blood, sweat, and tears it would take to run this particular franchise. For example, if you have a busy fast food restaurant with 30 employees that would be a very different experience than having a sandwich shop with 3 workers. You definitely want to get the right franchisor for the job, and if your FPR tells the whole story, you are better able to match a buyer with your store.
Sometimes people are tempted to finagle the numbers on the Item 19 to place their franchise in a more favorable light. But in the long run, allowing a potential franchisor to see your story at the outset will help everyone to be on the same page and ultimately lead to the right franchisees buying into your business.
What do franchisee attorneys do?
Franchise attorneys are with you every step of the way to protect you if you are thinking about buying into a franchise. When purchasing a franchise and signing an agreement to uphold the procedures and policies of the franchise, it is in your best interest to have a franchise lawyer read through the paperwork with you. Franchise attorneys can help you avoid problems before they occur, and answer questions you don’t even know you have. As you go through the process of opening the franchise, your franchise lawyer will also help you negotiate the reality of the daily grind and get your outlet up and running.
- Review the FDD.
The Franchise Disclosure Document (FDD) contains 23 important items that will give you information about the business you are trying to buy into. You should be especially interested in the experience of the franchisor and success of the franchise system, the fees to buy into the franchise, and the startup costs associated with this business. The FDD will specifically outline your obligations as a franchisee, and explain any royalties or advertising you are responsible for. As a trained professional who works with franchise law every day, a franchise lawyer knows the questions to ask, the pitfalls to avoid, and the specific ways to read and understand the document. - Review and negotiate the franchise agreement itself.
It is a known fact that in the franchising industry, the franchise agreements favor the franchisor. But you can counteract this common knowledge by having a competent lawyer in the ring on your side. Even though the favor goes to the franchisor, that doesn’t mean you have to be left out in the cold. A franchise lawyer can write an addendum to the franchise agreement that will clarify your monetary input, your territory, or any termination issues. - Protect the franchisee’s rights.
Believe it or not, some franchisees take legal advice from the franchisor, and that is just asking for trouble. Whose best interests are the franchisor and their lawyer team protecting? Their own! Although you may not want to spend the money, especially if you are already paying all the startup costs of buying a franchise, you need someone fighting for you. - Continue to solve problems as the contract continues.
If you hire a franchise lawyer, they can help you every step of the way. Sometimes a contract might be re-negotiated, or something like a natural disaster (or worldwide pandemic) might crop up that causes the terms of the contract to change. No matter what happens, your franchise lawyer understands the fine print and will work with your best interests in mind.
There are many ways that a franchisee attorney will have your back. Having trained lawyers like the ones at Drumm Law when you are a prospective franchisee is important so that you have the fairest relationship. Your lawyer will also help you weather any storm that comes your way, whether caused by economic issues, disagreements, or actual natural disasters.
What are the benefits of franchising my business?
Once you hit on the successful business model and you are experiencing some success in whatever business you have created, from food to eyelashes, it is time to look into franchising it. The benefits of franchising outweigh the disadvantages, and this is a great opportunity to spread your business model to the country, and even internationally.
1 - Franchisees understand the local flavor.
When you get a local business person to take on your business model, they bring with them a wealth of knowledge to understand the local flavor in the city where they open the business. This will help with branding, advertising, and daily operations as they fit the business into the culture of the town.
2 - More people are aware of your brand.
Every time you franchise your business, you are getting your brand out into the world. The more your business becomes a household name, the more business you will eventually acquire and the more successful you will ultimately be.
3 - Fast growth for your company.
By letting other people take the burden off of you through the franchise model, you will be able to grow your business more quickly with less personal investment. The company itself will flourish, but you will be able to count on other people, their ideas, and their investments, to get your business on the map.
4 - Using someone else’s capital.
One of the most important elements of franchising is that you will be able to use other people’s money. Instead of dumping your own hard-earned money into a new business, franchising your business allows you to use someone else’s capital to gain the notoriety your business will need to succeed. This in turn allows you to pour your money into other aspects of your business that will keep you successful.
5 - Less involvement in day to day operations.
If you have franchised your business, then you have other managers you can rely on
and you will not have to be on site at every location in order to make the business run smoothly. If you spend less time on the daily operations, you can spend more time on the big picture like branding, gaining new franchisees, and protecting your cash flow.
6 - Finding resources to help you.
If you franchise your business, there are many resources available to you that are not available to everyone. Take a minute to set yourself up with a great lawyer so that you have guidance with all of the picky and specific questions of owning a franchise. They will help you stay in the right lane with new laws, cash flow considerations, and any little ownership problems that crop up.
At the end of the day, franchising offers you many opportunities you will not receive if you keep your business as a singleton. Franchising offers you capital, company growth, quality branding, and other people with whom you can share the blessings and the burden of your business. Contact our franchise lawyers to get started.
4 Franchising Tips for a Franchisor
1 - Do your homework.
Find a niche that needs to be filled and a business model in which you can be successful. You will do better if you are passionate about the product, so make sure that your business is compatible with your interests. Once you decide on the type of business you have the wherewithal to run (whether it is food, eyelashes, home improvement, tutoring, or whatever else suits you), find the perfect location and then create your business plan. Make sure you budget for equipment, monthly expenses, and insurance, because there always tend to be a lot of hidden expenses that crop up.
2 - Understand the commitment.
The people that choose to franchise with you are putting a lot on the line, and this is basically like a lease. To keep up your end of the bargain, make sure that your business is running smoothly and that you are turning a profit. Communicate well with employers, vendors, and franchisees. Communication will be a huge part of your success. With your continued success, you can enter into more franchise agreements as well.
3 - Build your brand.
If your goal is to franchise, then your customers will need to recognize your products and services, not only in your local area, but in the broader community. Take time to create a marketing plan that will help you get recognized easily. You need a catchy slogan, some inspiring copy, and a logo that will stand out from the crowd. Then everything you do, every place you advertise, and every move you make will utilize this branding.
4 - Utilize the expertise of an experienced franchise attorney.
The one certainty in franchising is that there are a lot of moving parts when it comes to getting your franchise off the ground. Hiring an experienced franchise lawyer will help you do things like getting your federal trademark and understanding the franchise disclosure document. It is the kind of document that lay people can get lost in, and you need an experienced lawyer to help you navigate through it. The last thing you want is to get surprised by some hidden law or loophole that you didn’t see coming. Set yourself up for success by having a dynamic legal team on board.