Joel Libava
In this exclusive post, I asked 3 top franchise attorneys 6 questions geared towards buying a franchise.
If you’re looking to become the owner of a franchise, make sure you read their answers. They’re real eye-openers.
Bonus: All 3 of these franchise attorneys succeed in debunking a myth that’s been circulating in franchise circles for years. One that anyone thinking of buying a franchise needs to know about ASAP, so they won’t get taken advantage of.
Top Franchise Attorneys Discuss Several Franchising Myths
The 6 Franchise Questions
1. Have you ever told a client not to buy the franchise they were interested in, and if so why?
2. Are all franchise agreements (contracts) pretty much the same, and if not, what are the differences you’ve seen?
3. When you’re working with a client who’s getting close to buying a franchise, who has the Franchise Disclosure (FDD) Document in-hand, are there specific things in the FDD you tell them to focus on?
4. Are franchise agreements negotiable, and if so, what parts?
5. As a franchise attorney, what part (or parts) of franchising annoys you the most?
6. What is your best advice to people who are interested in becoming franchise owners?
Introducing 3 Of The Best Franchise Attorneys In The U.S.
One Of Iowa’s Best Franchise Lawyers: Rush Nigut, Des Moines
Rush Nigut was the first franchise attorney I met through the World Wide Web.
And if I remember correctly, I met him because he read and commented on a post I wrote in the early days of this blog.
Rush is a top franchise attorney and is good people. (And a good franchise lawyer!)
Rush and I have interacted a lot over the years, and here’s a fun fact about him:
He has two very athletic sons which he’s super-supportive of. I’ve been able to watch them grow via all the pictures and videos Rush has shared on Facebook.
One more thing: Rush has a blog. A damn good one. Look
Charles Internacola: One Of The Best Franchise Lawyers In New York and New Jersey
I met Charles, a top franchise attorney, online, several years ago. We started corresponding on a couple of the social channels, and quickly became friends.
It’s been really fun to watch Charles grow his business. He’s very entrepreneurial, and it shows.
As a matter of fact, he’s so entrepreneurial, that in addition to being a good franchise attorney, he’s also a franchisor.
Fun fact: Charles owns Ecomaids, which is a franchise concept that is…shall we say, green.
One more thing: I strongly encourage you to check out his franchise law website and blog.
Josh Brown: One Of Indian’s Top Franchise Lawyers, Indianapolis
Josh Brown introduced himself to me, by phone, several years ago. And we hit it off, right away.
If I remember correctly, Josh had lots of questions about blogging and social media. And as an added bonus, he liked my style. (Or so he said.)
Well, since then, Josh has created a blog, and more, including a very popular franchise podcast.
If you’re a fan of podcasts, you definitely need to add “Franchise Euphoria” to you list.
Here’s a fun fact about Josh: he lives in a house with 4 women. (His wife and 3 daughters.)
And, he’s a good franchise lawyer. Website
6 Franchise Questions Answered And A Myth Debunked
What follows are the questions I posed to Rush, Charles and Josh-followed by their straightforward answers. See if you can figure out the specific myth they ALL debunked.
1. Have you ever told a client not to buy the franchise they were interested in, and if so why?
Rush: I will never tell a client they should or should not buy a franchise. That’s a personal decision based upon the client’s own circumstances. I will point out issues and problems though and I don’t hold back if I see issues that don’t look right. If someone asks what I would do, I will tell them. But it’s not my place to make the decision for them.
Charles: Yes, I have advised clients to not buy the franchise they are interested in if we feel that the franchise isn’t benefitting and in alignment with their personal and business goals. However, the decision is ultimately up to them.
Josh:I have often told clients NOT to buy a franchise they were interested in. Although it is ultimately the client’s decision, they often ask me what I think of the franchise and more specifically, would I buy it? When I tell them know I try to be as specific as possible because I know it is a difficult decision. Every situation varies, but if a franchise does not have an organizational structure in place that is conducive with its growth strategy, I tell clients not to buy. In other words, if the CEO is also the marketing director, HR executive, and the support staff, the franchise is simply not ready to be invested in. If there is no identifiable or quantifiable way to determine when the franchisee’s investment could be recouped, then I advise not to buy the franchise. If the franchisor does not look to have long-term value that they can provide to the franchisee then I advise NOT to buy.
In a nutshell, what I mean by long-term value is value that goes beyond the setting up of the business and the Operations Manual. These are very important, but they are something that should be provided to every franchisee. I am looking for long-term value that goes beyond the Operations Manual so that the franchisee two years in to the business still believes that the franchisor serves a viable and valuable role; and not just collecting a royalty. If there is a lot of litigation listed in the FDD, I review the litigation and depending on the type of litigation may advise NOT to buy. For instance, if the franchisor is filing a lot of lawsuits against its own franchisees or is involved in litigation by the franchisees, I take a hard look at the type of the litigation to determine if the prospective franchisee is going to be buying him or herself a lawsuit. Litigious franchisees are always a red flag for me.
2. Are all franchise agreements (contracts) pretty much the same, and if not, what are the differences you’ve seen?
Rush:While most franchise agreements cover the same issues, there can be major differences in the way an agreement is written. A couple of things I examine with the most scrutiny is whether the franchisor takes on any real obligations to the franchisee and whether will agree to protect their trademark by indemnifying the franchisee in a trademark lawsuit. If the franchisor won’t do that, then really there’s little point in my opinion to buying the franchise. There are also significant differences in the financial representations quite often.
Charles: Both the FDD and Franchise Agreement for franchise systems do have the same sections comprised of 23 items with similar structuring to keep uniformity, including franchisor information, affiliates, litigation, and bankruptcy, to name a few. However, the documents differ depending on each system’s particular information including their own initial fees, advertising fees, territory, etc. As of 2018, Item 19 in particular, will be uniform for all systems, where in the past that wasn’t a requirement.
Josh: NO, franchise agreements vary from business to business. Though the FDD is required to be uniformed in that each one includes 23 mandated items, the information that franchisors put in their FDD’s vary. It is the information included that matters and sometimes the information that is not included that matters the most. Some agreements identify specific territories for franchisees, and others don’t. Some include reasonable In-Term and Post-term Covenants (i.e. non-competes, non-solicitations, etc) and some do not. These also vary by state and whether the state that a franchisee is purchasing in has State specific franchise laws.
A big mistake prospective franchisees make is that they assume that all franchise agreements are the same and that they are non-negotiable, and they decide they don’t need legal assistance prior to purchasing a franchise. This is simply wrong. The key is not always what you can change in the agreement, but rather understanding what is actually in the agreement. And just because the prospective franchisee read the document, does not mean they understand it. It is a very complicated legal document. The key is understanding what you are buying into before you sign the documents and deposit your franchise fee. It is very hard to ever get that money back after you enter a franchise system.
3. When you’re working with a client who’s getting close to buying a franchise, who has the Franchise Disclosure (FDD) Document in-hand, are there specific things in the FDD you tell them to focus on?
Rush:The things I mentioned in No. 2 above and also restrictions on sources of products and services in Item 8. If there is litigation disclosed that may be significant as well.
Charles: When we speak with our clients, besides all of the legal information, one of the first things we talk about are their goals and expectations for their business. Also, we also stress the importance to do their due diligence and to call past and present franchisees to get a better understanding of what their life will be like when they buy that particular franchise.
Josh: Yes. All of the 23 required FDD items are important, but I focus more on Items, 1-4, 7, 9, 12, 13, 17, 19, and 20-21. So many reasons to focus on these items and far too long to include in this response, but these are the items that you want to make sure to really understand, while ensuring that you are comfortable with the other items. I focus on the items listed above because it is important to know the history of the franchise, the history of the operators, the legal background of the business, the financial aspects of the business, the territory you will be getting, the Mark you are licensing, the outlets that are already in existence, soon-to-be in existence, or going out of business so you can identify trends, what happens if something goes wrong, and your responsibilities as a franchisee.
4. Are franchise agreements negotiable, and if so, what parts?
Rush: Yes. Much of this often depends on how long the franchisor has been in business and how badly the franchisor wants the franchisee. A multi-unit franchisee May often be able to get more concessions than someone buying just one franchise. The ability to walk away from a deal may result in concessions as well. But all too often I see prospective franchisees who are intent on signing the agreement before they even see me. Some are just looking for some sort of affirmation from me rather than any real legal advice and help.
Charles: Yes, franchise agreements are negotiable, however, each franchisor is different in terms of negotiating. It depends on the franchisors opinion and the requested changes. We like to understand the prospective franchisee’s individual and business goals and try to help align terms of the franchise agreement in a fair way. When modifying the franchise agreement, we focus on negotiating terms to provide the franchisee with more protection including getting a Protected Area, for example.
Josh: Yes. I find that the parts relating to State specific laws are negotiable when the franchisor has an agreement that does not comport with the state laws in the state in which they are hoping to sell a franchise. Sometimes the up-front franchise franchise fees are negotiable. Often times a new franchisee can negotiate a deferment of royalties for a period of time at the outset of the franchise. I have negotiated many aspects of franchise agreements, but it often depends on the specific franchise, the location and how long the franchise has been in business and how many locations it has open.
5. As a franchise attorney, what part (or parts) of franchising annoys you the most?
Rush: The (mis)representation that a franchise is more likely to succeed than an independent business. The reality is that both business opportunities fail at approximately the same rate. In addition, I really think franchisors do a poor job generally in dealing with franchisees who are struggling financially. There is little relief given to these franchisees or assistance in helping them perform better.
Charles: Franchise development consultants who pretend to be lawyers and tell business owners (who are not ready to franchise) to franchise just so they can collect a fee.
Josh: I hate seeing franchise systems that prey on unsuspecting franchisees; that have no viable way to be successful; and ones where the franchisor is only about the money, and not about growing a great business. Likewise, I get annoyed when prospective franchisees call me for advise and then tell me that they have read the franchise agreement and feel pretty good about it. At that point, I usually ask them why they called me ☺.
In other words, these are complicated legal documents and relationships, just because you read the agreement does not mean you understand it in a way that you need to before you buy a franchise. Finally, I hate when I hear someone describe franchising as buying a “business in a box.”. Just because you are buying a business that in theory has been proven in other territories, does not mean that you do not have to work the business, be present, and strategize for success.. There are no shortcuts to business success……even in franchising.
6. What is your best advice to people who are interested in becoming franchise owners?
Rush: Don’t buy yourself a job. Look at franchise opportunities that will allow you to make a significant return on your investment. If you don’t have the capital to buy the franchise and have extra funds to weather the start-up phase of at least a couple of years, I really question whether a person should do it. And finally, really examine what you are receiving for your investment. Would you be better off in an independent business without franchise fees and royalties? If the franchisor has little name recognition and doesn’t do much for you, why buy it?
Charles: To do due diligence on franchise systems prior to moving forward and committing.
Josh: Best advice: 1) Figure out if you fit the personality mold to become a great franchisee. Not all people should become franchisees, it is important to know whether you are one of them; 2) Don’t buy a system because you have seen it be successful elsewhere, buy it because you see how YOU can make it successful with a well thought out strategy, plan and system to make it work; and 3) Take your time and seek out good counsel from a lawyer, accountant, advisor and banker before you buy a franchise.
These Top Franchise Attorneys Stepped Up
Rush Nigut, Charles Internacola, and Josh Brown deserve a big “thank you” for taking the time to answer the franchise questions I asked.
You’re used to getting straightforward information here, and they were definitely supplied.
I especially liked the fact that ALL 3 lawyers debunked a huge myth that’s been circulating for years.
This one: “Franchise agreements aren’t negotiable.”
Buying A Franchise?
If you’re going to buy a franchise, do yourself a favor, and hire a franchise attorney before you make a “yes” or “no” decision on the franchise opportunity you’re interested in.
A good franchise attorney, like the 3 featured in this post, can help prevent a lot of potential headaches.
In addition, they’ll make sure you completely understand the FDD, the franchise agreement, and what being a franchise owner will mean for you going forward.
Finally, and this is key, a good franchise lawyer may be able to negotiate something in the agreement that you’re uncomfortable with.
Questions?
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Unicorn image, courtesy of Tomais Ashdene, Flickr
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