SYMPOSIUM - International Franchise Association...A financial performance representation, or FPR, includes any oral, written, or visual representation to a prospective franchisee (including

IFA’s 45th Annual

LEGAL SYMPOSIUM

LEGAL SYMPOSIUM IFA’s 45th Annual

Laws Governing Franchise Disclosure

• Federal FTC Rule – Disclosure only – No filings – All 50 states and territories

• State laws – Registration and disclosure – Select states


Franchise Registration States Franchisors cannot offer or sell in the following states

unless registered: California New York Hawaii North Dakota Illinois Rhode Island Indiana South Dakota Maryland Virginia Michigan Washington Minnesota Wisconsin


Time for Making Disclosure

• FTC Rule: – 14 Calendar Days (don’t count delivery or

signature dates) • State Laws:

– 14 Calendar Days (CA, HI, IL, IN, MD, MN, ND, SD, VA, WI)

– 10 Business Days (MI, WA) – First Personal Meeting / 10 Business Days (NY, RI)


Signature Ready Documents

• 7 Day Rule – If Franchisor makes unilateral/material changes to

agreements, execution ready versions must be furnished at least 7 calendar days before execution.

• Changes made at prospect’s request do not trigger 7 day rule.

• Filling in blanks does not trigger 7 day rule.


FTC RULE EXEMPTIONS • Fractional Franchise • Petroleum Marketers covered by PMPA • Payment of fees less than $500 (1st 6 months of operation) • No Written document • Sophisticated Investor Exemptions

– Large Investment ($1 million excluding unimproved land/financing; franchisee must sign acknowledgment )

– Large Franchisee ($5 million net worth; 5 years business experience)

– Insiders (50% purchaser, within 60 days: (i) officer/mgmt for 2 years; (ii) owner of at least 25% of franchisor for 2 years)


Relationship Between FTC Exemptions and State Exemptions

• FTC disclosure exemptions confined to 35 non-registration states.

• FTC exemptions unavailable in the 15 registration states unless registration state has identical exemption. – State exemptions usually exempt franchisor from

registration requirement, but not disclosure.


FDD

• Broken down into 23 Items. –Revised Rule contains step-by-step

requirements for completing each of the 23 Items.


3 Golden Rules

• Mean what you say • Know the law • Don’t play “fool the regulator”


FRANCHISE DISCLOSURE DOCUMENT COVER PAGE

• Use exact language provided by the Rule • Use numbers from Item 5 and Item 7


STATE COVER PAGE

DO: • Include risk factors required by state

examiners DON’T: • Create your own risk factors as litigation shield


Cover Page

Describe the franchise being offered


State Cover Page

“ON FEBRUARY 13, 2012, FRANCHISOR PROVIDED TERMINATION NOTICE OF OUR RIGHT TO OPERATE A REGIONAL FRANCHISE, TO WHICH WE ARE OBJECTING. IN THE PENDING LITIGATION BETWEEN FRANCHISOR AND US, WE ARE SEEKING INJUNCTIVE RELIEF TO PREVENT FRANCHISOR’S ATTEMPT TO TERMINATE OUR AGREEMENT WITH THEM”

Sample Risk Factor


ITEM 1. FRANCHISOR , PARENTS, PREDECESSORS AND AFFILIATES

• WHO ARE YOU AND WHAT DO YOU DO?


Item 1

Avoid a comment letter by adding:


Item 1

“Refer to the below photographs which highlight the differences in atmosphere between the brands:”

Should

photos be used in the FDD?


Item 1

“From November 1998 until February 2000, J worked for KPMG as an accountant and staff auditor. In the summers of 1998, 2000 and 2001, J was a member of the A-League’s Charlotte Eagles in Charlotte, North Carolina and, from September 2001, until March 2002, he was a member of the Major Indoor Soccer Leagues Harrisburg Heat in Harrisburg, Pennsylvania.”

Where in the FDD should this text be placed?


ITEM 2 – BUSINESS EXPERIENCE

• WHO ARE YOUR EXECUTIVES? • 5 YEARS OF EXPERIENCE • AVOID TREATING THIS SECTION AS A SALES

PIECE


Item 2 “In addition to her exceptional achievements as a successful

business woman, B has also been recognized for her dedication to her community. For years, she has fostered work-readiness, entrepreneurship and financial literacy skills to inspire young people through her involvement with Junior Achievement. Her dedication to children is inspiring. Through her roles as a PTA President and family resource center coordinator, B partnered with big business to bring programs and services to the local community. B has arranged for major companies to feed and clothe hundreds of needy families. B has given her time and energy to support the efforts of the United Way, DARE, Boys & Girls club of America, Girl Scouts, and the American Heart Association. B is an active member of her church and is dedicated to outreach and has a passion for missions.”


ITEM 3 – LITIGATION

• WHO HAVE YOU SUED LATELY AND WHO HAS SUED YOU SUCCESSFULLY?

• HELD LIABLE STANDARD


Item 3 Quizno’s shareholder lawsuit


Item 3 SEC Enforcement Action


Item 3

Stop Order issued in California

FTC Rule & State Law is about disclosure & investor protection


ITEM 4 – BANKRUPTCY

• HAVE YOU/YOUR EXECUTIVES BEEN IN BANKRUPTCY?


Item 4

No bankruptcies are required to be disclosed in this item

OR There are no proceedings under US or foreign

nations relating to bankruptcy to disclose


ITEM 5 – INITIAL FEES

• WHAT ARE THE FINANCIAL BARRIERS TO ENTRY FOR THE FRANCHISE?


Item 5 Triggers Item 19


ITEM 6 – OTHER FEES

• WHAT ARE ALL THE COSTS TO BE PAID IN CONNECTION WITH THE FRANCHISE?


Item 6

State law determines


ITEM 7 – ESTIMATED INITIAL INVESTMENT

• WHAT WILL A FRANCHISEE PAY OVER THE INITIAL OPENING PERIOD, I.E., 90 DAYS?


Item 7

Cover Page:

Make sure totals match


ITEM 8 – RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES

• WHAT IS THE FRANCHISEE REQUIRED TO BUY AND FROM WHOM?

• DO YOU OR ANY OF YOUR EXECUTIVES HAVE OWNERSHIP IN APPROVED SUPPLIERS?


Item 8

“We and our affiliates may be an approved supplier; however, we are not currently an approved supplier. Our affiliate, M Costumes, is currently one of our approved suppliers. Our Chairman, M, owns an interest in M Costumes. M Costumes is not the only approved supplier for any category of products or services, and you are not required to purchase any products or services from M Costumes. In the year ending December 31, 2011, M Costumes’ revenues from the sale of products to franchisees was $20,575,000.”

Include affiliate’s revenue


ITEM 9 – FRANCHISEE’S OBLIGATIONS

• WHAT ARE THE FRANCHISEE’S OBLIGATIONS UNDER THE AGREEMENT AND WHERE ARE THEY SET OUT?


ITEM 10 - FINANCING

• WHAT FINANCING DO YOU OR YOUR PARTNERS PROVIDE TO FRANCHISEES?


Item 10

Note: In California only the franchisor is exempt from lender licensing laws. So this affiliate must hold a valid CFL (California Finance Lender) license.

* Fitness club concept where franchisee and franchisor are both managing members of the LLC:


ITEM 11 – FRANCHISOR’S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS AND

TRAINING

• WHAT ARE YOUR OBLIGATIONS UNDER THE AGREEMENT?


Item 11


ITEM 12 - TERRITORY

• DO YOU PROVIDE ANY EXCLUSIVITY TO FRANCHISEES?

• INTERNET DISTRIBUTION AND COMPETITION FROM FRANCHISOR


Item 12

“Except as provided in subparagraph (4) below, we may not during the franchise term establish and operate, or grant to others the right to establish and operate a franchise physically located within the territory

(4) We retain the right to establish and operate, and grant to others the

right to establish and operate a franchise at mass gathering locations within your territory and otherwise to provide, and grant to others the right to provide, services at mass gathering locations within the territory. Mass gathering locations include casinos, hotels, resorts, cruise ships, military bases, mass transportation facilities (like train stations and airports), sports arenas and other sports facilities, and similar venues.”

Exclusive Territory?


ITEM 13 - TRADEMARKS

• WHAT ARE THE TRADEMARKS FOR THE FRANCHISE?

• FRANCHISEE’S OBLIGATION TO PARTICIPATE IN TRADEMARK CASES AND TO INCUR COSTS


Item 13

“No agreements limit our rights to use or license the use of our Proprietary Marks; however, our Proprietary Marks have been pledged as security, together with other assets, for repayment of a loan franchisor received from lender. All required affidavits have been filed.”

Likely to trigger a risk factor on State Cover Page


ITEM 14 – PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION

• DO YOU HAVE ANY OTHER INTELLECTUAL PROPERTY?


ITEM 15 – OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE

BUSINESS

• ARE FRANCHISEE OWNERS REQUIRED TO PERSONALLY PARTICIPATE IN THE OPERATION OF THE FRANCHISE?


ITEM 16 – RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL

• WHAT CAN’T THE FRANCHISEES SELL?


ITEM 17 – RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION

• WHAT ARE THE FRANCHISEE’S RIGHTS TO RENEW, TERMINATE AND TRANSFER?


Item 17

OR


Item 17 Do not edit the FTC’s suggested language in a way that can be construed to change its meaning:


ITEM 18 – PUBLIC FIGURES

• DO YOU USE ANY CELEBRITIES OR PUBLIC FIGURES TO SELL FRANCHISES?

• CELEBRITY FRANCHISES, LIKE WOLFGANG PUCK


Item 18

Appropriate for a Christian coaching franchise?

“Franchisor does not currently use any public figure, beyond the King of Kings, Jesus Christ, to promote is Franchise as its policy is to use internal community spokespeople whenever possible and not to incur expenses associated with sponsored affiliations. We reserve the right, however, to selectively enlist such spokespeople in the future if it is deemed to be in the best interest of franchisees and members.”


ITEM 19 – FINANCIAL PERFORMANCE REPRESENTATIONS

• DO YOU SHARE INFORMATION ABOUT COSTS, EARNINGS OR FINANCIAL PERFORMANCE OR FRANCHISEES?


Item 19

The definition of FPR essentially covers every aspect of financial information that a prospective franchisee might request or a franchisor might provide during the franchise sales process.


Item 19 - Definition

A financial performance representation, or FPR, includes any oral, written, or visual representation to a prospective franchisee (including a general dissemination in the media) that states or suggests a specific level or range of actual or potential sales, income, gross or net profits, or "break-even" figures.


Item 19 “In addition to the financial performance representations in this Disclosure

Document, we intend to furnish to you in writing a Supplemental FPR. The Supplemental FPR will be based upon certain information you will furnish to us relating to your actual purchases during the last calendar year. The information you will furnish to use will include your purchasing history, i.e., historical purchasing and earnings data for the previous 12 month period, current pricing, current terms with suppliers, any rebates earned, and your current price book.

From this information, we will calculate how much money you would have

saved if you had been our franchisee during the last calendar year, and made purchases through our purchasing system, assuming you purchased all of your goods from our suppliers, and to the extent those goods were in fact available from those suppliers.”


Item 19

“For the 3 stores operated by our Predecessor (Columbus, Toledo and Westerville), we added the Royalty Fee and NMF fee to their statements so that their expenses and net profit reflect what their expenses and net profit would have been if the Predecessor had paid us these fees.”

Franchisees, Affiliates and/or Company owned stores

Compare apples to apples


Item 19 Note 13 to the Audited Financial Statements

triggered an Item 19 disclosure:


ITEM 20 – OUTLETS AND FRANCHISEE INFORMATION

• HOW MANY UNITS HAVE BEEN OPERATED, ADDED, TERMINATED, NON-RENEWED, OR TRANSFERRED OVER THE LAST 3 YEARS?

• SIMILAR COMPANY OWNED OUTLETS UNDER DIFFERENT MARKS


Item 20

All 5 Tables must be included within the UFDD


Item 20

Tables 2,3 & 4 missing Table No. 5


Item 20

Do not create tables for licensees


ITEM 21 – FINANCIAL STATEMENTS

• PROVIDE AUDITED STATEMENTS FOR THE LAST 3 YEARS

• GUARANTY OF COMPANY PROVIDING FINANCIALS


ITEM 22 - CONTRACTS

• WHAT CONTRACTS ARE INCLUDED IN THE FDD?


FRANCHISE DISCLOSURE DOCUMENT

• ITEM 23 - RECEIPTS


Sales Agents Disclosure Forms

• Use the NASAA Form • Do not modify the NASAA Form • Make sure the NASAA Form is legible • Pro-actively identify any sales agent who is

disclosing any “bad acts” in paragraphs 2A-C