Orange County Franchise Law Blog.
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Tuesday, June 3, 2014.
Franchisors must register their franchise offering with the California Department of Business Oversight in order to sell franchises in California. If a franchisor was properly registered and properly sold a franchise, but has since become not registered (by not renewing its registration), this means that franchisor can not sell any future franchises in California. It does NOT mean they can not enforce a franchise agreement with an existing franchisee in California. Having said that, if a franchisor is incorporated out of state and failed to register to do business with the California Department of Corporations (and file California tax returns, and pay California taxes), then such company can NOT bring an action in California against its franchisee for any reason. California has laws to protect its citizens, and any company who is doing business in California, without properly registering its corporation or LLC, can not avail itself of the laws and protections afforded by the California Courts. Having a California located franchise IS doing business under California laws since that franchisee pays royalties or other fees, in exchange for the franchise, license and related services. If you are a California franchisee with an out of state franchisor threatening legal action, an experienced California Franchise Attorney, such as myself, can help you determine your rights and options.
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Sunday, June 1, 2014.
A recent client came to me with the issue that their Franchisor is “forcing them” to participate in a network wide Groupon ad, which will in effect cost my client $5000 in lost revenue, and in which she absolutely does not want to participate. Further, the Franchisor claims he (the CEO) can sign for my client if she refuses to sign. She (and many of the other franchisees) are up in arms about this. After reviewing her Franchise agreement and the Franchise Disclosure Document, I confirmed that there is nothing in either document which states this obligation. The Franchisor’s position is that this is “marketing method” that they have every right to require. Not so fast. Contractual obligations must be in the contract I.e. the franchise agreement, or at a minimum disclosed in the Franchise Disclosure document as being something the franchisor may require. Furthermore, signing the franchisee’s name to something which the franchisee is (allegedly) required to sign, must also be authorized in the franchise agreement. In this situation the franchisor is way out of line in both its position and its claim for authority to sign on behalf of the franchisee. Unless there is a specified contractual obligation, any discounted programs or promotions in a franchise system MUST be optional and for “participating locations only.” Franchisees may not be “forced” to participate in a discount or promotional program without their agreement, or if part of a cooperative advertising group, in accordance with the rules of that cooperative. And the Franchisor simply can NOT sign a franchisees name to something, without an express power of attorney or other authorization. Do not be intimidated by a franchisor’s insistence they are correct. Seek counsel from an experienced franchise attorney to determine your rights.
Continue reading Can My Franchisor Make Me Participate in Groupon?…
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Friday, May 30, 2014.
A first right of refusal is an option retained by the franchisor, to meet the purchase price and terms of a potential sale that a franchisee enters into with a potential buyer. In other words, say a franchisee negotiates to sell his franchised business at a certain price on certain terms, the franchisor can choose to exercise it’s option and become the buyer, effectively knocking out the original buyer. Why would a franchisor do this? Generally for 2 reasons. Unlike the previous blog on an overpriced sale, the situation where the price agreed to is so under market and so low as not supported by any stretch of the imagination given the sales of the company and the asset to debt position, and the franchisor simply does not want the franchisee to “give away” the business, and will choose to meet the price and terms, to either retain the unit as a company owned, or to re-sell it at market price. The other reason would be that the franchisor is simply trying to build up its company owned set of units with already existing base of sales. It is also possible that the franchisor does not want a particular buyer as an owner in its system, such as someone related to a competitor. In general franchisors do not frequently exercise this option although it is in virtually all franchise agreements, just in case. Usually there is a time period allowed for the franchisor to make this decision. If the franchisee and buyer seek to close the transaction sooner, they can ask that the franchisor waive its right of first refusal right away. It is important to consult a franchisee attorney to assist in the sale of a franchise in order to avoid any surprises which the franchisor may have the right to insist upon. I am a California Franchise attorney with over 25 years experience in the purchase and sale of franchises and will protect YOUR interests.
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Thursday, May 29, 2014.
Recently I answered the question from a franchisee looking to sell his franchise, can a Franchisor’s not approve a qualified buyer on the basis that the franchisee’s price was “too high”? The franchisee was virtually dumbfounded that a franchisor would nix a sale based on a too high price when the buyer was very qualified. While this seems at first to be shocking and unreasonable-how can a franchisor dictate what price a buyer and seller agree on, I went through the scenario as I believe was the franchisor’s position. First, all franchise agreements do require the franchisor’s consent to any proposed sale. The franchisor wants to be sure the buyer has the financial qualifications and resources to not only complete the purchase but to operate the business as a new owner taking time to get up to speed. The franchisor is aware that the new owner will likely lose a percentage of customers who had personal relationships with the departing owner, so there could be an initial dip in sales which may not recover right away. In the situation of this franchisee, the Franchisor may have been more aware of the financial strain the monthly debt financing of a very above market price could have on the cash flow of the day to day operations. Additionally the Franchisor would likely have been concerned with liability from the BUYER down the road when cash flow could not be improved fast enough, for approving the sale knowing the price was so much higher than it should have been, and how that debt financing would impact the buyer’s probability of failure. Franchisor’s will very rarely deny a sale of a qualified buyer since it is in everyone’s best interests to have a sale proceed with a new, eager franchisee. But when the price is so far out of “reasonableness” the Franchisor has to take a step back and make that difficult decision, since if it approves such a sale, the chances of failure are too high. On the other hand, if the price were just a bit high or a “top price” that is probably not enough to justify a Franchisor denial, absent other facts that would support the denial. If you are a franchisee needing to sell and have a buyer that your franchisor is denying for what may be an unreasonable basis call an experienced franchise attorney, such as my self, right away to go over your specific situation.
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in FDD on Thursday, May 8, 2014.
Another common issue between franchisors and franchisees is “encroachment”. In the Franchise Disclosure Document or FDD, there should be a provision that describes the integrity of the franchisee and the protections (geographical, electronic, product and service offering) that will be put in place to ensure that the actions of the franchisor do not infringe on the territory or integrity of the franchisee and affect the profitability or viability of the franchisee’s business. In reality, many franchise markets become overdeveloped and franchisees can be placed too close to one another. Another common scenario involves the development of an “area” or “region”, and the franchisor becomes disturbed by the lack of speed in the opening of franchises within the area, or the number of them and decides to place others within that area to increase market penetration.
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Tuesday, May 6, 2014.
One of the largest areas of disputes between the franchisor and franchisee relates to what are known as “earnings claims” – the estimate of what the franchisee will earn by purchasing the franchise. When things don’t go quite according to plan the relationship between the franchisor and franchisee becomes strained. Franchisees will often point to claims made by the franchisor or their representation during the time of their initial discussions prior to the purchase of the franchise itself. They may claim that the franchisor or their representative(s) overpromised or exaggerated earnings estimates, and attempt to use this as the basis for a lawsuit.
Do I have to go to arbitration in my franchisor’s home state, across the country?
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Saturday, April 26, 2014.
Will an arbitration case be in the home state of the franchisor instead of California? Not always. Many state’s laws trump what’s in the franchise agreement. Depending on the state the franchisee is located, that state law may overrule arbitration required locations outside the franchisee’s state, regardless of the franchise agreement says. It is imperative that you have an experienced franchise arbitration attorney review both your franchise agreement and your states franchise laws once you are notified of a new arbitration against you. If the franchisor has to come across the country because of your state’s laws, they may not want to do that, particularly if they have to drag 3 corporate witness and stay for 2 nights. If your state favors local arbitration and you have defenses and claims perhaps YOU as the franchisee may want to initiate an arbitration rather than having to react to a franchisor’s demand for arbitration in an inconvenient location. If your state law is not in your favor, there are still potential solutions that may allow you to stay put such as determining if the franchisor potentially violated registration or disclosure laws Franchise law is highly regulatory and attention to detail is necessary. Sometimes those details are missed. This gives you the franchisee alternative arguments, for example where the franchisor has not given you a proper Franchise Disclosure Document with some state required extra language, or contains the required audited financial statements, or other current information which may contain errors. You may have more alternatives that you think on your side. Call me today for a review of your situation.
What is arbitration anyway?
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Friday, April 25, 2014.
Arbitration is an expedited and less expensive process for a dispute to get resolved. Mandatory arbitration is used in many industries and becoming the norm for franchise agreements. Franchisors utilize arbitration as a quick and easy way to perhaps collect its past due royalties. A franchisee may also seek to use arbitration to resolve a dispute with a franchisor. Many times the franchise relationship does continue even though there is an arbitration preceding in process. Depending on the arbitration tribunal indicated in the arbitrate clause, your dispute will be heard before an experienced attorney or a judge or retired judge. There may be more than 1 arbitrator required by your agreement. In general, the matter will be scheduled for hearing in about 4-6 months after the initial case is filed, much quicker than traditional litigation. In addition arbitration is much more informal, no courtroom, no jury no bailiff, no court reporter, just a conference room everyone sits around. Both sides call their witnesses and present their exhibits, and there is cross examination. However the atmosphere is less formal, the rules of evidence are less formal, and generally witnesses can say what they want, without objection. The arbitrator hears the evidence and testimony and makes a ruling, generally within 14-30 days after the end of the hearing, and the ruling is binding, unless there was some kind of provable arbitration misconduct or bias. Arbitration is an efficient method of resolving disputes. And the disputes many times resolve themselves before the hearing. If you are contemplating arbitration or have been given a demand for arbitration call me today to discuss your situation and strategy.
I want to sue my franchisor, and don’t want to go to arbitration.
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Wednesday, April 23, 2014.
Can you sue your franchisor without having to go to arbitration first? Many franchise agreements do have mandatory arbitration clauses, however state law will dictate which state governs, and which laws are not subject to arbitration. Additionally the franchise agreement itself will have exceptions for the issues that may be arbitrated. Although you may believe your rights best lay with litigation, it is always prudent to have an experienced franchise attorney first look at both your agreement, the state’s laws where both the franchisor and the franchisee are located, as well as the registration documents for both states compared to what you received. This will give the full picture of the available remedies based on potential state law violations, which happen more often that not, and will determine potential remedies and options that you may not know even exist. Franchise law is highly regulated and if your Franchise Disclosure Document was deficient in any manner (and many are) then you have more options. Have a franchise expert review your situation before deciding on a course of action.
How can I prevent someone from using my trade name?
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Trademark on Monday, April 21, 2014.
Is your trade name, the name of your company, protected across the US? What is a trademark and is this something that is important for your business? Lets say you have been in a business for some time and find out there is another business by your exact name name doing what you do, perhaps in a different state? The good and the bad of the intent is that anyone doing anything can make a website or internet listing that will come up when the name is searched, and you find out that you are not the only one with the interesting name you “made up.” Filing for a trademark can give you that edge you need. A federally registered trademark covers the whole United States. Once registered you will have superior rights to send out your cease and desist letter to the other business. While there are rare situations that can defeat a trademark (for example the other business has been around many more years that yours and had an established reputation in at least it’s local community, there are what’s “called common law rights.” But again with the internet there is generally no more “local community” for businesses that gain the majority of their business from the internet. What if you don’t have a trademark, what can you do. There are no cross referenced by state for corporate names for example, so it is possible that there can be 50 different companies all with the same name one in every state. Even the internet has conflicting URLs with the .com and .net. It is difficult to claim ownership to the main name absent the extension. Trademark law and conflicting names is tricky. Call me today for a consultation on your specific situation.
I want to sell my franchise, do I need an attorney?
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Sunday, April 20, 2014.
The sale of any franchise or business would be less than prudent if the seller did not have the protections outlines in a detailed Buy-Sell agreement. As a Seller you purportedly do not want to remain on the hook for more than absolutely necessary. Its not just about getting your purchase price, it is about becoming legally absolved from further liability where you can. And if you are carrying back a note for some of the purchase price, then you are still tied to the business, and potentially tied to the success of the business. Careful documentation of the details of a cary back note and obtaining security are critical, since if the business has cash for problems, you may be the first to NOT get paid. You definitely want to have security separate and apart from the business—do you really want to take back over the business? If so, this needs to be properly documented not only with the Buyer but with the Franchisor. Having legal counsel assist you with the documentation is critical since years later debtors of your buyer may start calling you again if the buyer defaults. Having a business broker is not enough, even if they provide a “form” assets purchase agreement. These are woefully deficient. There is no substitute for real legal counsel. The small investment today will save huge headaches and potential litigation in the future.
My franchisor will not approve the sale of my franchise to a qualified buyer.
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Friday, April 18, 2014.
The franchise agreement contained in the Franchise Disclosure Document or FDD generally has detailed provisions for the approval process of a buyer of your franchise, but a franchise agreement can be more vague and just say within a reasonable period of time. Sometimes the franchisor will take more than a reasonable time in attending to this matter for a multitude of reasons. Perhaps the buyer is not exactly what they want but can not really deny the qualifications. Perhaps the longer the franchisor delays the more fees you rack up they will demand at closing. Perhaps they want to buy the franchise back from you but do not like the terms they would have to meet and want your buyer to go away so they can make you a lower offer. All of these actions are unreasonable actions potentially causing a franchisee damages. If this is happening to you, an experienced franchise attorney can help you make the appropriate demands onto the franchisor and outlining your rights and potential damages. Franchisors generally will not take your complaints too seriously when coming from you the franchisee, but should take those demands from an experienced franchise attorney representing you very seriously. Where there are very real damages (lost a good buyer), the matter becomes must more serious and the Franchisor does need to understand the legal ramifications of the inaction.
If my franchise agreement is terminated can I stay in the same business?
By Janet Martin, Attorney at Law of Janet Martin, Attorney at Law posted in Franchise Law on Wednesday, April 16, 2014.
Most franchise agreements have some sort of post termination non-competition clauses. This is where a franchisee’s particular state laws, most notably California laws, favor franchisees (ex-franchisees). California Business and Professions Code §16600 voids any provision in a contract which is a restraint on trade meaning, If you are a California ex-franchisee, the franchisor can not enforce the non-competition clause in your franchise agreement. They should not even be threatening to do so, and certainly can not bring an action against you for being in a similar business. So you are free to engage in the same or similar and competing business after the term of your franchise agreement. Be aware however, other prohibitions such as prohibition against soliciting clients of the former franchise, or against soliciting employees of the former franchise or of another franchisee, or against using any proprietary information gained by being a franchise, are very much enforceable. If you are intending to be in a competing business or are in one after your franchise agreement is terminated, it is wise to seek legal counsel to be sure you stay within the laws and not buy yourself a lawsuit which can potentially put you out of business for good. Caution is also recommended that you do not start up the competing business while your franchise agreement is still in effect.
How Can I Get Out of My Franchise Agreement or Terminate My Franchise Agreement?.
Franchisees very often want to end their franchise agreement relationship for any number of reasons. Sometimes it is because they simply run out of money and can no longer afford to pay the ongoing fees, sometimes they need to sell their franchise and every buyer that comes along wants the business but not the franchise, sometimes it is because the franchisee and franchisor simply do not see eye to eye anymore on the direction of the business. Franchise Agreements are written very one sided in favor of the franchisor, giving the franchisor all the rights to terminate the agreement, but rarely is there a provision for the franchisee to terminate the franchise agreement. Seek advice from a California Franchise attorney such as myself who has walked the walk as in-house counsel to an international franchise system. There are various options the franchisee would not necessarily think about or know about. It’s not all about threatening litigation against the franchisor based on either perceived or very real shortcomings of the franchisor in an effort to intimidate the franchisor. That is standard practice and response of a litigator. I am not a litigator. I am a problem solver and will solve your problem and advise you of the options and how to implement a solution.
What Can I Do When My Franchisor is Competing Against Me?.
Competition from a franchisor can be devastating to a franchisee, whether it’s from distributing competing services or products through alternative channels, or from placing other franchised or company owned locations in an area too close to the franchisee. In these situations it is imperative you have a California Franchise Attorney review the franchise disclosure document you received, as well as reviewing the actual facts of your situation. Even the most “air tight” franchise agreements” which allow the franchisor to compete in the way that is happening, does not end the story. Every contract carries with it a “Covenant of Good Faith and Fait Dealing” which means that despite what the contract states, if the actions are such that they are carried out in a manner that either significantly impairs or interferes with the purpose of your contract, the franchisor can be held liable for your damages. If this is happening to you, do not hesitate to call me to determine your rights and options. There are solutions which you will allow you to maintain your franchise business and get paid the fair royalties on the competing actions, or you may seek to terminate your franchise agreement. Call me today for a strategy session to see how I can help you.
What Happens If My Franchisor Changes the Franchise System?.
Franchisors will change the system of doing business which you purchased, whether it is for style and design changes, or to change the required equipment package, or other required elements of operating the franchise. The question is, how much is too much too soon, and what does the existing franchisee have to do to. There are various options when this happens and depending on the changes,and the cost and why the franchise agreement states, will depend on your options. If the franchise agreement is silent about updates to the franchise system in terms of cost or frequency, then there is always room to negotiate with the franchisor about timing of implementation or reductions in fees to fund the cost of improvements. Franchisors are generally willing to work with a franchisee in order to have the updated system reflected in the network. However if the franchisor will not work with you and the updates are unreasonable in cost, timing of implementation or are not being required of every franchise similarly situation, you have rights in not being forced to expend unreasonable sums in an unreasonable timeframe. If not all similarly situated franchisees are being required to make the updates, this is called selective enforcement and is similar to discrimination. In a nutshell, selective enforcement in this manner is completely improper. I can help you negotiate a workable solution or if necessary negotiate a termination of your franchise agreement.
I Want to Sell my Franchise Business Without the Franchise
Many times a franchisee will want to or need to sell his franchise business but without the franchise. This action is always against the strict requirements in the franchise agreement. Franchisors do not want to lose a unit from the network no matter what the reasons are, because that decreases the total number which is a negative statistic for franchisors, and sets a precedent, which the franchisor does not want to set. However, there are ways to negotiate with the franchisor to either mutually terminate your franchise agreement, or buy out of that provision, or otherwise negotiate the issues and address the problem. Sometimes the problem is the franchise brand for some reason is negatively viewed in your area. Sometimes it is the fees associated with a buyer having to sign a new franchise agreement with much higher fees. Sometimes it is the substantial updating that the franchisor would require for the seller or the buyer, which makes the sale unworkable. Whatever the issue is, there are options I can explore with you to determine the best course of action for your situation. Everything is not as black and white as it seems. There is always a solution. Call me today to find yours.
I Can Not Afford to Pay My Franchise Anymore..
Running out of money is an unfortunate common situation among franchisees whether new or existing many years. The obvious solution for the franchisee is to pay the most important creditors first (payroll, vendors, rent, etc) and generally the franchisor takes a back seat when the franchisee is in financial strain. The key is work out a solution to the underlying business problem before the debt to the franchisor becomes insurmountable. Most franchisors will work with a struggling franchisee, even offering additional resources earmarked for such situations, like additional marketing assistance. Communication is the key. You need to stay in constant contact with the franchisor, and keep requesting specific assistance, and don’t ignore the franchisor’s collection calls. That will be seen as being non-cooperative. I have negotiated debt settlement agreements that reduce the franchisees debt over time based on other performances by the franchisee, showing that the franchisee is willing to implement the franchisors recommendations. It takes a creative attorney to fashion a creative solution to the issue at hand. If you are at the point where you believe all hope is lost, we can negotiate a mutual termination to the franchise agreement. In any case, do not clay in calling me to assist you in resolving your problems.
What Is a Trademark and Is a Trademark expensive?.
A trademark is a federal registration of a name, slogan, logo or design that, when issued, gives you what’s called “infringement rights”–a set of rights to be able to prevent almost all others in the entire country from using the same name, slogan, logo or design in a similar manner or any confusingly similar manner. In addition, a trademark registration is an asset, which can be sold or transferred, used as collateral, or , handed down to your heirs. A California Trademark registration is not the same as a federal trademark registration in the United States Patent and Trademark Office in Washington D.C. and does not afford you the same rights as a federal registration. A Trademark need not be expensive to obtain. As an experienced Franchise attorney who deals with trademarks all the time, I can guide you through the options and choices you have for obtaining a federal trademark registration. In many cases the total fees are well less than you would imagine. You may only need a single class of product or service to protect you which can cost as little as $275 filing fee plus preparation of the application and/or search for similar marks. Find out today if your name is a good candidate for trademarking.
Do I Need a Trademark to Franchise My Business.
In general yes, since the California Franchise definition of a franchise includes payment for your trademark used in connection with your system or in connection with a marketing plan. If you have a name or a logo that you want to be part of the system you are going to license as a franchise then you ultimately need to and should have it trademarked. This affords you the protection of no one defeating YOUR use of the name and your right to license it. Having the federally registered trademark also gives you the right to determine under what conditions you will license (franchise) the name. This is why franchise agreements seem so one sided in favor of the franchisor. That’s because it is the franchisor’s property, the trademark, that needs to be displayed in accordance with exact specifications and conditions so as to promote the good will of the brand as a whole.
Can Anything Be Trademarked?.
You name, slogan or Logo must be used in interstate commerce. These days just having a website is in most cases enough. Descriptive phrases are generally not afforded principal trademark registration status, but in most cases, the United States Patent and Trademark Office will allow a descriptive phrase to be registered on the Supplemental Register, which still affords you most of the rights as on the Principal register, but there are subtle differences. You can still use the ® next to your name, slogan or logo, etc, which is what you want to show the world that you have the trademark registration. When submitting an application, you may be denied if your name, slogan, logo etc is similar to another registration, “confusingly similar” which is pretty much a subjective opinion of the examiner to whom your file is assigned. A franchise attorney with trademark experience can help argue the points in your favor to help persuade the examiner, but if it is denied, there is an appeal process.
Can I get a Trademark on a Name I am Not Using yet?.
Yes and No. The United States Patent and Trademark Office has an application called an “Intent to Use” application which gets you on file before you actually start using the name, slogan or logo, but you eventually do have to start using the name, slogan or logo and submit proof of the use, to have your application converted to an Actual Use application and processed to registration. Generally you have about a year but can seek several successive 6 month extensions. There are more fees associated with an Intent to Use application because there are more processes it has to go through. If you are close to actual use in interstate commerce (your website is almost done and you are advertising services through the site), that will be interstate commerce (Actual Use). The timeframe is significantly longer with an Intent to Use application as well. But it is a way to get your name of record so to speak, and potentially prevent others ultimately from registering the same name.
As a New Franchisor, What Do I Put in My Franchise Disclosure Document if I Don’t Yet Have a Trademark.
New California franchisors should apply for an Actual Use registration if they are already using the name even before being registered to sell franchises. The Franchise Disclosure Document Item 13 is where we describe the trademarks associated with the franchise business. If you application is on file, you need to disclose this and some related language. Your new franchise agreement should also contain language addressing the fact the application is on file and to reserve the right to change marks in the event your application is denied. An experienced franchise attorney can help word these sections in both the Franchise Disclosure Document and the Franchise Agreement to fully protect you. Additional Trademark language that reserves the right to change marks and logos is equally important. Do not skimp o this area as it is critical both at the beginning and in the future.
Can I Franchise My Business?.
What makes a business a good candidate for Franchising? Almost any business can be franchised. Franchising is basically licensing the methods, processes and systems that make up your business. As an experienced California Franchise Counsel,I tell my clients who are wanting to franchise to make sure you have or create these systems of doing business and physically write them down- EVERYTHING: Determining a suitable location, size of site and type of building, negotiating the lease, hiring contractors for the tenant improvements, creating the exact specifications for the layout, design and furnishing of the location, finding the appropriate vendors and suppliers, determining how much inventory to maintain and operate, how to hire and fire employees, how to manage the books, how to market, promote and advertise the business, how to handle returns or refunds, how much insurance to get and types, how to budget for fixed expenses and variable expenses, and about a hundred other things that the client has learned over time with trial and error in establishing their own business. That is the first key to being able to franchise your business, to be able to duplicate it over and over with people other than YOU operating those businesses. Once you must have all your business systems well documented such that you can teach those systems and methods to others, you are in an excellent position to be able to license your business systems. Basically franchising is a teaching business-you will be in the business of teaching others how to do what you have done well.
What Are the Pros and Cons of Franchising My Business?.
Like any venture worth while, there are benefits as well as risks. First the Risks: You are starting a new business. Not the business you are in which you are already successful at, but a new business of franchising your business, I.e. Licensing to and teaching others your business systems, and making sure they implement those systems correctly, efficiently and legally. This is a full time business, so it will be difficult to also run your separate individual business by yourself or the same family members operating the original business.. You will definitely need staff and resources for both businesses so there will be significant investment needed before you tart recouping the franchise fees and royalties. Now the Pros: Franchising is an excellent way to expand your business name, brand and concept through many franchisees, without the mega investment to build out all separately personally owned locations. The Franchisees provide all the investment and you get your brand awareness very quickly, which in turns promotes your original business. Your brand and business is leverages with each new franchisee that opens a franchise of your business. And you get on ongoing stream of royalties for many years without significant further involvement.
Can You Franchise a Service Business?.
Absolutely! More and more service business franchises are popping up, everything from home care to painting to handyman to computer repair to accounting, ever hear of H&R Block? The original service franchise. It’s a bit trickier because the technician employees ARE the product you would be selling, so franchising a service business is in effect franchising the business model of providing technicians. All the same requirements of having systems for your business apply to the franchise model for device businesses, excel instead of franchising how to ordering product from suppliers, you are franchising how to contract with or employing technicians to provide the services of the business. Since the technicians need to be skilled, the business model will be focused more on how to find the right technicians, as well as managing them. As an experienced California franchise attorney I can help you navigate the differences in how to put together your business model for franchising your service business.
How Do I Begin Franchising My Business?.
In order to sell franchises in the State of California you need what’s called a Franchise Disclosure Document (FDD). This is a document with 23 required Items of Disclosure all about your business, the franchise business being offered and the contracts you will require a franchisee to sign. So the first legal step is to have this FDD created by an experienced California Franchise Attorney. Part of the FDD is a description the Training Program as well as the Table of Contents of the Operations Manual. These two items are critical, and should be created with care. Once the FDD is created, you will need to register as a new franchisor with the California Department of Oversight.This is a multi-page application and must be properly completed and submitted or your application will be significantly delayed. The FDD must be complete in accordance with CA laws and federal laws. The whole process takes several months so be prepared for this lead time. You can not sell or even offer to sell a franchise until your registration is approved by the State of California. As a client I can assist you with expediting this process by attending to all the detailed requirements timely.
When Should I Go to Arbitration with My Franchisee.with My Franchisor?.
In most franchise agreements there is a provision for dispute resolution requiring mandatory arbitration. Arbitration is usually quicker, cheaper and less complicated than litigation. Either party may initiate an arbitration proceeding. The result is binding and may/will be entered as a judgment by the prevailing party against the party who loses. Counterclaims are allowed and should be brought in arbitration if they exist. In California, the Franchise arbitration law requires arbitration to take place in California if the franchisee is located in California, regardless of what the Franchise Agreement says, and even if the out of state Franchisor attempts to start an arbitration elsewhere. Conversely a California Franchisor may be forced to arbitrate our of state if the franchise law of the state where the franchisee is located also provides a similar law (and there are several). Arbitration can be an effective way to get to a settlement when there have been poor communication attempts at negotiation of a dispute. Even after an arbitration is filed both parties are free to negotiate and settle a matter even in the middle of the arbitration hearing. Even after the hearing is over before the award is handed down. Settlement is always encouraged. Sometimes it takes a more serious knock at the door before both parties can see and understand the other party’s point of view. Whether you believe you have been seriously wronged by the other party or you just want to get their focused attention on your issues, I am committed to a fair playing field for all. If you are my client I will simultaneously pursue your position while at the same time offer realistic, pragmatic, and economic solutions.
My Franchisor is Suing Me (or arbitrating) for Money I Know I Own But I Just Don’t Have, What is My Option?.
When a Franchisor sues or arbitrate merely for collections, there is a 100% chance they will be open to payment plans in Settlement that will work for you. Ignoring the situation only makes you appear uncooperative. Paying a little even though it seems useless generally shows you are trying and Franchisors will shift focus to others who are paying nothing hence “uncooperative.” Negotiating a settlement that you can not possibly fulfill is not recommended either. As a former in house franchise counsel, I can tell you that once you have a heart to heart conversation with one of the Franchise officers or a high profile rep explaining the specific operations issues, generally the Franchisor will be more attuned to offering specific operational recommendations, which you must be open to receiving and following through, in order for the Franchisor to hold off on legal action. Again it is all about the appearance of cooperation. The franchisor will figure out you don’t have the money and will work with you to improve your business so you do have the money. The goal of you both is to stay in business and make money. If you close the Franchisor knows it will have no chance of getting paid. But a Franchisee who will not return Franchisors calls only hastens the day where they will be put out of business by the Franchisor. There are many ways to structure a payment plan that can work for both sides. We just need to be create. An experienced franchise attorney can assist in the process, if kept to a friendly level.
When is an Impound Account Required by a New Franchisor.
In California, typically a new franchisor will be required by the Franchise Department to “impound” the upfront franchise fee. Impounding means the fees must be deposited in a State Mandated Escrow Type Account, until all the franchisor’s pre-opening obligations have been satisfied. Then the franchisee has to certify that all of the franchisor’s obligations have been met before the State will release the funds to the Franchisor. Franchisors obviously don’t want to see their fees impounded because it delays access to their money. From a legal perspective,the Franchise Disclosure Document must clearly specify what a franchisor’s pre-opening responsibilities are, and how they will be met. It’s usually upon the physical (or virtual) opening of the franchise. In many cases this is simply a matter of training. In a brick-and-mortar situation it usually coincides with the physical opening of the business. The key to reducing the time you sell a franchise and the time you collect the upfront franchise fee from an impound account, is to minimize the pre-opening responsibilities. I advise my clients how best to position their pre-opening obligations to meet the legal requirement as well as the franchise business requirements. There are ways to avoid the impound requirements.
How Do I Get Out of the Impound Requirement Imposed on a Franchisor?.
Registration states such as California will require impounding if the financial information disclosed in the audit shows a negative cash position, negative net worth or other financial numbers that lead them to believe that the Franchisor will not be able to meet your obligations. How much money is not enough money in your cash account? In my work during the preparation of the FDD, and while we are preparing for the financial audit there are strategies that I can provide which may avoid the impounding requirements, allowing my clients to access franchise fees much more quickly. If impounding is required, it is possible to satisfy the state using 2 or 3 different alternatives less restrictive than impounding. This is important for franchisors to control the inflow of their upfront fees.
Why Do States Require Impounding for Franchisors?.
Each State has their own requirements for the financial strength of a potential franchisor including net worth, long term liabilities, short term liabilities, and the strength of the audit statement. All of these factors and more will affect this decision. Financial viability can affect impound requirements. During phases of rapid growth or investment in new product development or other business challenges, cash flow and net worth can be quite volatile. In cases where a franchisor may appear to the State to be undercapitalized or in a negative cash position or negative net worth the State generally will require impounding. There are strategies that an experienced and effective California franchise attorney can work with the State and with clients to help clients potentially avoid impounding of the upfront franchise fee.
What is a License? (Or Is a License a Franchise)?
A License is where you give another the right to use some tangible or intangible property or intangible that you own, or claim ownership rights. You can license another to use your name, your trademark, your business model, your intellectual property or your hard assets. Think of it as “renting” something of yours to another…generally with conditions on their use, and generally with some type of payment. A franchise is a license but not all licenses are franchises. Licenses of intellectual property without licensing a trade name, would not be a franchise, and therefore not subject the CALIFORNIA FRANCHISE REGISTRATION AND FRANCHISE DISCLOSURE LAWS. Many companies that own patents, or writings, or media license the use of that property to other companies or individuals to use, without displaying the owner’s business name. Music is licensed all the time to office buildings, on telephone systems, in department stores, as a common example, where fees are paid to the owner but the owner’s name is not displayed or announced. Books are licensed to libraries and to electronic stores such as Kindle and Amazon. Patents and other technologies are licensed to individuals or other companies, all without disclosing the patent owner. Conversely one can license their trademark or logo only without any other specific property, as in the case when one lends their name to a series or products manufactured by other companies, such as the toys in the McDonalds Happy Meals with the Disney characters and logos, or Celebrities licensing their name to events. These are all licenses of property for a fee, with some conditions on use.
What is a Distributorship? (Or is a distributorship a franchise)?
A Distributorship is an arrangement whereby the manufacturer/owner of property (services or products), gives another the right to re-sell the owners property, generally tangible products or services whether or not associated with a known trade name. In the distributor arrangement, the distributor purchases property from the owner at a wholesale price and then marks it up to sell to the retailer or the public. A distributor is not a franchise because there is no mandated system of operations or marketing plan the owner requires for the distributor to re-sell the property. The distributor markets and resells the property in any number of ways at the distributor’s choice. If however the owner mandates a very specific marketing plan or operational plan, then the arrangement is in fact a franchise subject the CALIFORNIA FRANCHISE REGISTRATION AND FRANCHISE DISCLOSURE LAWS. Common examples are retail stores that purchase and hold inventory of products for sale to the public, which have been manufactured by another party. However, by definition, distributors are commonly the middle man between the manufacturer and the retail store.
IS a Multi Level Business a Franchise?
At first blush it would seem that a MLM is a franchise. In reality it is a combination of a License and a Distributorship; the party “signing up” for the MLM program (distributor-Licensee) is agreeing to procure orders of the manufacturer’s products/services, for a commission paid by the Manufacturer. In order to fall into the definition of a California Franchise, there are three prongs that must be present: 1-the owner (franchisor) allows another (the franchisee) to use the franchisor’s business name; 2-the franchisor provides and mandates the franchise market and/or operate his business according to a proscribed plan, and 3-the franchisee pays the franchisor for the use of the franchisor’s name and business system. If you delete one of the prongs you are not a franchise subject the CALIFORNIA FRANCHISE REGISTRATION AND FRANCHISE DISCLOSURE LAWS. The MLM business is not a franchise because technically all 3 prongs are not really present. While the Manufacturer allows the MLM distributor-Licensee to utilize the Manufacture’s business name, that is only for reference to the products, not to the business. The distributor-licensee can NOT use the manufacturer’s name in his or her business identity, but must reference themselves as a “representative of XXXX.” Next, while the Manufacturer may have boat loads of marketing materials and business operations plans, none are mandated or required to be used by the MLM distributor, who is free to utilize any method of procuring orders. Finally, usually the MLM distributor-licensee does not pay a fee for the pleasure of being in the MLM, rather the Manufacturer pays the MLM distributor-licensee commission on sales and recruits sales. Fees a MM distributor pays for supplies, marketing materials, training sessions, starter kits or inventory, do not rise to the level of a “fee” for purposes of the definition of a franchise.Even where there is a separate stand alone fee to enter the MLM, when the 1 or both of other 2 prongs are still missing, the MLM business is not a franchise.