Tom: Patrick, thanks for putting this together. We 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.
Spadea Law Background
Background before 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 was a franchise consultant and broker. That’s how I got into the franchising space. So we sort of take a business approach and understand why people are getting into franchising to represent both franchisors and franchisees. And, 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
We call this the “Franchise Disclosure Document Basics.” For those of you who are new to franchising, that’s the governing document that’s going to give you the information that franchisors are required to put together. So we’re going to going talk about, franchising being regulated. Welcome to the United States. We have a lot of laws here that sort of coincide. I think most people who go through this process, need sort of a franchise and business attorney and also the immigration Attorney.
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 helpful for some of our clients whose native language maybe is not English.
Franchise Agreement vs. Franchise Disclosure Document
You have, for those of you coming into the country, our system of government is multi-layered. We have the federal laws, which is the federal government. All the immigration laws fall into that. And there are 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, and California, 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?
The overview of the franchise rule defines what a franchise is. You roll back to the 1970s and McDonald’s, Wendy’s some of the first franchises out there. There were not a lot of rules, not a lot of regulations. And a lot of the states started feeling that there was a lot of fraud.
Some of the more regulatory-heavy states, California, New York, Illinois, the regulatory-heavy started regulating and telling people, “Hey, if you’re going to sell a franchise in our state, you need to follow these rules.” The federal government got involved and the regulations we have today are an offshoot of that. Anyone who’s looked into this knows 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 flushes out a lot of details that you’re going to need from immigration status. You have this business in a box and a 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 making two decisions. people are doing this because they want the immigration status and they wanna get here and they want all of their positive business attributes.
How is the Franchise Industry Regulated?
The approach from the federal government is a light regulatory approach. Meaning that the franchisor is free to do what they wanna do in the relationship. They just have to tell you what they’re doing. 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 there are 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.
State Laws for Franchising
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.
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 uniformly put that information.
What Can I Negotiate?
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 are certainly some things when you’re applying for a visa about escrowing fees and nuances that you 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.
The Franchise Disclosure Document is a picture in time of the system. It’s going to outline major fees, and the structure. With 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.
Licensing Agreement
Franchising is a licensing agreement for the use of the trademark and intellectual property. It’s a license agreement for you to use their trademark and their brand within certain guidelines of how to run the store. They’re going to teach it to you with an operations manual. And some terms may be overwritten by state regulations.
However, you don’t want to rely on that. You don’t know what you’re going to get in the contract, because, keeping that franchise agreement, there’s going to be a non-compete provision. If you’re in a bakery and you no longer have the franchise agreement, you can’t open an independent bakery. And that could compromise your immigration status.
How do We work?
We are the breakup. We’re the ones who say, “Tony, he’s going to work with you, especially if you’re from Brazil or Portugal. Tony is going to sit down. He’s been through dozens, if not hundreds, of these deals, and he’s going to say, ‘This is what it means. This is what you’re agreeing to.'” It’s not good or bad. It’s just an explanation. It’s unbiased. You’re going to pay our flat fee, usually $2000 to review this document, whether you sign it or not. So, we’re giving you that unbiased review. We’re going to review it, and we’re going to give you that unbiased education of exactly those steps of what you’re entering into the Franchise Agreement.
And we’re going to negotiate the changes. As I said, the best practice is through an addendum. You can’t do that in a franchise agreement. We know that. We’re general business lawyers in franchising. With the franchise agreement, you have to take a surgical approach. We’re going to respond to the things that are 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.
Buyer Beware
And I always like to tell people, “Beware of the franchisor that changes too much.” Ultimately, you’re investing your money, your time and your effort into a system. And it has to be a strong system. If your neighbor down the street doesn’t follow the system and doesn’t comply with the brand, you want your franchisor to be strong and be able to enforce compliance. If he’s not going to follow the brand standards and he’s not going to be part of the team, he should be thinking about another franchise that he might enjoy and like and can follow. So I think that’s an important part. Be wary of the franchisor that’s too weak and gives away the store. That franchisor is probably not going to be around very long.
It’s a three-part thing if you think about it: the franchisee, the franchisor, and the overall system. I’ve represented hundreds of franchisees and dozens of franchisors. And the most successful brands are the ones that understand the relationship. The franchisor is the brand leader. He or she is going to develop the system and create an environment for success.
Role of the Franchisee
After all, this is your business. You are not buying a job. You’re going to run your business within limits. In all systems, I see high-performing, medium-performing and low-performing businesses.
The separating factor is the franchisee themselves. And if they can understand what their role and their success is and what they’ve gotten themselves into, they’re going to have a better time. They’re going to make more money and they’re going to be more successful.
I think understanding that role, doing due diligence and talking to other franchisees in the system is going to set you up for success. Coming to the United States, franchising is probably the best way to enter 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 you can build a business.
