Tom: Patrick, thanks for putting this together. We really appreciate, the opportunity to at least meet people virtually and talk a little bit about franchising. A little bit of background on myself and our firm, the franchise attorneys. We’re 13 attorneys based here in Philadelphia, but we have a nationwide practice. We’ve done deals in Florida, California, Texas, and just about everywhere. And Angie mentioned Nebraska a couple times. I don’t know that we’ve actually done that yet.
Spadea Law Background
My background prior to starting the law firm and becoming a lawyer, I’ve been doing this for many years, we’ve had the firm for seven years. We’ve grown every year. My background is in franchise sales and development. I actually was a franchise consultant and broker. That’s how I got into the franchising space. So we sort of take a business approach and really understand why people are getting into franchising to represent both franchisors and franchisees. And obviously, for purposes of this, we’re going to talk about the representation of new franchisees, people who are looking at franchising for the first time.
Franchise Disclosure Document
So we call this the “Franchise Disclosure Document Basics.” For those of you who are new to franchising, that’s really the governing document that’s going to give you the information that franchisors are required to put together. So we’re going togoing talk about, franchising is regulated. welcome to the United States. We have a lot of laws here that sort of coincide. I think for most people who go through this process, they need sort of a franchise and business attorney and also the immigration Attorney.
Angie and I in our office…we’ve worked together. So, on this presentation, a very high level. I have some more information and some videos and data on the website. And as Angie said feel free to email or call us and reach out. I should also mention one of our team members Tony Lopes, who does a lot of the deals with Visa Franchise speaks Spanish and Portuguese. So although these contracts are all in English, I think that’s really helpful for some of our clients whose native language maybe is not English.
Franchise Agreement vs. Franchise Disclosure Document
So let’s get right into the presentation. We’re going to talk about as I said franchise regulations. Then we’re going to talk about the FDD and the Franchise Agreement, what those documents are, how you really should be approaching them as a prospective franchisee. And then we’re going to talk about the role of the franchisor and franchisee. I think it’s really important. As Angie had mentioned in a lot of her points, control of the business, you’re in business, and you are in your own business as a franchisee but you’re within boundaries. there’s some boundaries there that you have to think about and what that is.
So I won’t bore you with the specifics here but I think it’s important to know that this is all regulated at the federal level under the franchise rule. So you have, for those of you coming into the country, our system of government is really multi-layered. We have the federal laws, which is the federal government. All the immigration laws fall into that. And there’s some rules and regulations that franchisors must follow at the federal level. But then we have a state level that drops down. For instance, if you create a corporation or an LLC, which we would recommend as part of the business, that’s under state law. And by the same token, certain states, New York, Illinois, California, they have specific state franchise regulations. And those are called registrations. The franchisor must send their documents to get approved just to keep that.
How do you Define a Franchise?
So the overview of the franchise rule, it defines what a franchise is. All of this stuff started. You roll back to the 1970s and McDonald’s, Wendy’s some of the first franchises out there. There really was not a lot of rules, not a lot of regulations. One-page agreement, “Hey, pay me,” “20 grand and pay me a percentage of your sale.” And a lot of the states started feeling that there was a lot of fraud, there were things going on there. They were getting uncomfortable. So some of the more regulatory heavy states, California, and New York, Illinois, they started regulating and telling people, “Hey, if you’re going to sell a franchise in our state, you need to follow these rules.” So the federal government got involved and the regulations we have today are an offshoot of that. Anyone who’s looked into this know that the crux of franchise regulations is the FDD. It’s about, for a start-up franchisor, a 60-page or 70-page document with another 60 pages or 70 pages of the actual franchise agreement. So, you’re talking about a 130-page, 140-page document that a franchisor is required to give you.
Now, the good part about this is it really flushes out a lot of details that you’re going to need from an immigration status. So, you basically have this business in a box and business plan in a box that you’re able to acquire. You can show the investments you’re going to make and that. It’s a light regulatory approach though. And I think this is an important piece that when you’re looking at coming into the country on buying a franchise, you’re really making two decisions. obviously, people are doing this because they want the immigration status and they wanna get here and they want all of the, positive business attributes. But we always implore people don’t lose sight of the fact that this needs to be a business that you’re going to be successful in where you’re going to have a chance of success. Your visa depends on it. Your livelihood depends on it. You’re probably investing a lot of money. So you really should analyze this, just as if you were a U.S. person and you were going into business, you should take, that approach.
How is the Franchise Industry Regulated?
So the approach from the federal government is a light regulatory approach, meaning that the franchisor is really free to do what they wanna do in the relationship. They just have to tell you what they’re doing. So, what we do as lawyers as we go through what that means and for entrepreneur-minded people, it’s a bit of an adjustment to know that, “Hey, there’s things you can do and things you can’t do. Even though it is your own business, you have to recognize you’re part of a system. You’re part of a franchise.” I like to say it’s almost like renting a house versus buying a house. You’re renting the business model buying the business, but you’re renting the business model. When you rent a house or an apartment, you may not be able to change the kitchen. You may not be able to change the windows or the roof because you have to return it in the same format.
And I think that’s a good analogy. And no private right of action. That just simply means that just because a franchisor gives you a document that maybe is out of date, it doesn’t mean that you can automatically get out of that under federal law. So you have to be really careful and obviously have a trained professional go through that document and make sure it is up to speed and you’re getting the information that you are entitled to. So the state regulations are a little bit more detailed. So if you’re looking at going into one of these regulatory states, and I will actually have the map on my wall there and I’m going to show the map, we live and breathe in this stuff, if you’re in a specific state, the franchisor needs to get an approval from those states. New York is an example of that. Maryland is an example of that. And those states have laws that override what’s in the Franchise Agreement. There are certain rights you get as a franchisee like you have a private right of action. If they give you certain information, you could get out of it.
State Laws for Franchising
Now, we don’t want to start there because we’re looking at getting into business, but it’s important for you to have a thorough understanding of what your rights and responsibilities are as a franchisee. So as a franchisor, you obviously have to comply with these laws. As a franchisee, you just have to be aware of these laws. And for the consultants on the phone and the brokers or people looking at a business, this time of year, within 120 days after the close of their fiscal year. So for the majority of franchisors, by the end of April, they need to update their FDD. And when they’re in one of these red states, call it Maryland, and New York, California, they need to submit those documents to get approved. And sometimes there’s a little bit of a hiccup because they send in the document and it doesn’t get done. And then the franchisor can’t execute the document.
Now, that doesn’t mean you should run away. It doesn’t mean you should be, afraid of the franchisor. It doesn’t mean they’ve done anything wrong. It just means that there’s a backup and they didn’t get it in on time, and for some reason or another, they can’t sign that agreement for a couple of weeks. Now, if you’re using our office and Angie and [inaudible 00:08:20], we’re going to manage that process, be aware of that. And there might be some advantages to wait for the new document. So I say this just simply for the educational purposes to know that there are federal regulations and state regulations. For those people coming from outside the country, they have to know that those laws are very specific. And I have this map and it’s on our website if someone wants to download it.
So now we get into the really…meat of this. And this is the FDD and the Franchise Agreement. The Franchise Disclosure Document under federal law and then as approved by states is the picture in time. It’s the information that you’re required to get. think of an investment that you make and they send you all this background information. And if you’ve ever invested in, say, the stock market or in a mutual fund, they give you all this disclosure information about the principles, about their strategy and all that. The FDD is very similar. It’s 23 items. It allows you to compare, say, a Subway restaurant, to a cleaning franchise, to a landscaping franchise, to a painting franchise, to a McDonald’s. Franchisors must put that information in a uniform way.
What is the Franchise Agreement?
Second piece of that is the Franchise Agreement itself. That is the contract. That’s in the second half of the FDD. And I think people sometimes get it backwards. you should be focused on the Franchise Agreement because that’s the contract that binds you. The FDD is just the information you’re going to use to understand the investment you’re making. So we go through that with you. Attorney review, I think it’s really important that it’s not an attorney that’s never looked at an FDD. I can’t imagine the bill you would get sending an attorney, a 200-page document to go through and markup. if you’re not understanding franchises, you don’t understand where to look. And obviously, we do a flat fee and we keep it very economical and simple.
What Can I Negotiate?
And negotiating changes, there are changes. Every franchisor says, “We won’t change our document.” It’s not true. We’ve been doing this a long time. We represent franchisors. There’s certainly some things when you’re applying for a visa about escrowing fees and nuances that you really need to protect yourself. And when we can talk to franchisors and explain to them what you’re going to need to do this deal and you’re not being difficult, you’re going to follow brand standards, we’re typically pretty successful. you’re not going to change royalties or system things or brand funds, but certain nuances you can change.
So as I mentioned, the Franchise Disclosure Document is a picture in time of the system. It’s going to outline major fees, the structure, all the things that Angie was talking about. The money you need to spend, you can get down that path and put your business plan together with the information you’ll get in the Franchise Disclosure Document and allowing you to compare. But it’s not a contract. People get very confused about that. “Oh, my FDD said X.” Well, that’s not what you’re going to be beholden to once you become a franchisee. That’s the Franchise Agreement. Very, very important you understand the distinction. The FDD is a picture, it’s information, it’s required disclosures, but it is not a contract. The contract is the Franchise Agreement and that governs the relationship.
Essentially, it’s a license agreement. Franchising is really a license agreement for use of the Trademark and the Intellectual Property, the IP you’ll hear commonly said. So it’s a license agreement for you to use their trademark, their brand within certain guidelines of how to run the store. And they’re going to teach you that with an operations manual and all that. And some terms can be overwritten by state regulations. However, you don’t wanna depend on that. You don’t know what you’re getting in the contract, because obviously, keeping that franchise agreement, there’s going to be a non-compete provision. So if, you’re in a bakery and you no longer have the franchise agreement, you can’t open an independent bakery. And that could really compromise your immigration status. So it’s very important we understand what we’re getting into on this franchise. And as I say in the bottom there, it’s more important than the FDD. Really important to understand that.
So an attorney review, obviously, this sounds biased. I don’t mean it to. But the reality is, this a super important document and you should have an attorney review it. And I think Angie would say and most immigration attorneys we know and work with or family attorneys or general business attorneys know that they’re not franchise attorneys and they don’t, they don’t have those nuances and know what they can change and what they couldn’t. as I said, we’re not negotiating business terms. We’re efficiently and effectively explaining to you. And two-thirds or more of our review is to give you an unbiased education. I love the guys with Visa Franchise. I love my franchisor friends. But look, we’re trying to fit you into a business that’s going to make sense for you and going to allow you to go here.
How We Work?
We’re the break. We’re the guys who say, “Tony, he’s going to work with you, especially if you’re from Brazil or Portugal. Tony’s going to sit down. He’s gone through dozens if not hundreds of these agreements, and he’s going to say, ‘This is what it means. This is what you’re really agreeing to.'” It’s not good or bad. It’s just an explanation. It’s an unbiased… You’re going to pay our flat fee, typically, of $2000 to review this document, whether or not you sign it or not. So, we’re giving you that unbiased review. We’re going to go through it, give you that unbiased education of exactly those steps of what you’re getting into in the Franchise Agreement.
And we’re going to negotiate changes. As I said, the best practice is through an addendum. What that means is we’re not going to take the Franchise Agreement and mark it up like [inaudible 00:14:06]. We do a lot of real state work. We do a lot of partnership agreements. We do a lot of business resale to buying an existing business. Completely different. we take a much broader approach to that, a much more detailed approach to that. We may [inaudible 00:14:20] 40, 50, 60 things in your interest. You can’t do that on a franchise agreement. We know that. We’re general business attorneys in franchising.
With the Franchise Agreement, you have to take a surgical approach. We’re going to [inaudible 00:14:32] like, escrowing of the franchise fee until you get the visa approved. That’s a really important part. time to cure. Since you have so much riding on this, we have to really look at what are the, what are the instances here of you losing the franchise. So there’s a lot of things that are very specific to your case that we’re going to pick our battles. And it’s really six, eight, nine things. As I said, a lot of what you’re hiring us for is that unbiased education. But at the end, we’re going to take that surgical approach. We’re going to answer things that are really important, that matter to you and your family. And those changes have to be specific, not systemic. We’re not going to change the system.
And I always like to tell people, “Beware of the franchisor that changes too much.” Ultimately, you are investing your money and your time and your effort in a system and it has to be a strong system. If your neighbor down the street is not following the system and is not brand compliant, you want your franchisor to be strong and to be able to enforce that. If you’re not going to follow brand standards and you’re not going to be part of the team, you really should think about a different franchise that you can enjoy and you can like and you can follow. So I think that’s an important part, beware of the franchisor that’s too weak and gives away the store. That franchisor is probably not going to be around awhile.
So it’s a three-party thing if you think about it, the franchisee, the franchisor, and the system in general. And this is an important slide here. If you really were to think about franchising and when you go through this process…and I know that Visa Franchise does a great job, and Patrick and his team, to explain what you’re getting into here. But the role of…I’ve been in franchising now…I don’t know 15 some years on the corporate side as a lawyer. I’ve represented hundreds of franchisees and dozens of franchisors. And the most successful brands are those who understand the relationship. The franchisor is the leader of the brand. You’re going to develop the system and create an environment for success.
Role of the Franchisee
But at the end of the day, this is your business. You’re not buying a job. You’re the boots on the ground. You’re going to run your business within the boundaries. In every system, I see high performers, middle performers, and low performers. The separating factor is the franchisee themselves. And if they can understand what their role is and their success and what they’ve gotten themselves into, they’re going to have a better time. They’re going to make more money and be more successful. So, I think understanding that role, doing your due diligence, talking to other franchisees in the system is going to set you up for success. And then knowing what you’re getting into, hiring the right professionals, doing a webinar like this to educate yourself.
coming into the United States, franchising is probably the best way to come into a new culture and market because you’ve essentially paired up with someone who already understands the culture who’s going to give you that groundwork, who’s going to give you a playbook to then go out and execute to your strengths so that you can build a business, and you’re not learning both the business and the culture at the same time. So, I think that’s important and why franchising has been so successful from a visa standpoint.
So, I appreciate the time. My email and phone number is here, our website is there. I love doing these things. I really am looking forward to working with you. And as I mentioned, we have a full team here. Tony really heads up most of our international practice so, you’ll connect and enjoy working with him. we’re very responsive. We understand that the time zones, as Patrick said, “Good morning. Good afternoon. Good evening,” to whoever’s on the call. We’re flexible about that. We believe in responsiveness and really looking out for your best interest as you go on this wonderful journey of becoming a business owner in the United States. So thank you very much.