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E R I C C . P E R K I N S , E S Q.
P E R K I N S L AW, P L L C
4 8 7 0 S A D L E R R OA D
S U I T E 3 0 0
G L E N A L L E N , VA 2 3 0 6 0
W W W. E R I C P E R K I N S L AW. C O M
( 8 0 4 ) 2 0 5 - 5 1 6 2
Prospective Franchisee Boot Camp
October 24, 2014
Franchise System Experience
(Zor or Zee):
SMARTBOX Portable Self Storage - sweetFrog Premium Frozen Yogurt - Super Cuts - The Grout Geeks - 9Round - 1-800-GOT JUNK - The Sparkling Image - Jet Black - Anytime Fitness – Zoup! –Michelle Lea Massage Therapy –ComForcare Senior Services–Tropical Smoothie Café – The Entrepreneur’s Source – Apple Spice Junction – Dominic’s of New York – Sparkling Image – The Cleaning Authority – Edible Arrangements – Faces Cosmetics –Wild Birds Unlimited – Copper Penny - Omega Learning Center –LA Boxing – Pure Barre – CKO Kick Boxing – Jump Bunch –Baskin Robbins – Spring-Green Lawn Care – Five Star Painting –Money Mailer – The Alternative Board – Dream Dinners – Salad Creations – Salsarita’s Fresh Cantina – Minuteman Press – etc.
Three Definitions of Franchising
Common Sense Definition
Definition by Example
Legal Definition
Three Great Things About Franchising
You don’t have to reinvent the wheel
You benefit from a built-in support structure
You have special laws to protect you
Three Things About You
Can I afford this?
Can I follow someone else’s rules?
Am I good with people? Internal leader/manager
External Sales
Three Bad Things About Franchising
Failure is possible
Your long term success is still largely up to you (and other factors beyond your control)
It is not cheap
Three Things to Know About the Legal Side of Franchising
It’s a contract
Federal law regulates franchising
State law regulates franchising
Three Things to Look for in the FA
Exclusive/Protected Territory
Term and Renewal
Transfer Restrictions
Three Reasons Zees Fail
They make emotional decisions, not business decisions
They have unrealistic expectations
They were undercapitalized
Three Reasons Zees Succeed
They do their homework
They budget conservatively
They follow the system
Three Great Sources of Information
International Franchise Association www.franchise.org
Blue Mau Mauwww.bluemaumau.org
Entrepreneur www.entrepreneur.com
Dissecting the FDD
Item 1: The Franchisor and any Parents, Predecessors, and Affiliates
WHAT TO WATCH FOR:
Several years of franchising experience
Dissecting the FDD
Item 2: Business Experience
WHAT TO WATCH FOR:
Stability in management team and franchising experience
Dissecting the FDD
Item 3: Litigation
WHAT TO WATCH FOR:
The volume and type of litigation with which the franchisor is involved
Dissecting the FDD
Item 4: Bankruptcy
WHAT TO WATCH FOR:
Check for any bankruptcy filings of the franchisors affiliates, officers, or directors in the last ten years
Dissecting the FDD
Item 5: Initial Fees
WHAT TO WATCH FOR:
Initial costs will vary greatly depending on:
Term of the franchise
Services offered by the franchisor
Protected territory
Dissecting the FDD
Item 6: Other Fees
WHAT TO WATCH FOR:
Frees the franchisor will collect from the franchisee for itself or third parties on an ongoing basis Operating royalties
Advertising fund royalties
Lease Negotiation
Site Selection
Permitting fees
Training fees
Audit fees
Transfer fees
Renewal fees
Dissecting the FDD
Item 7: Estimated Initial Investment
WHAT TO WATCH FOR:
Budget conservatively, these numbers are notorious for being too optimistic
Dissecting the FDD
Item 8: Restrictions on Sources of Products and Services
WHAT TO WATCH FOR:
Does the franchisor make more money from operating its own units or from selling stuff to its franchisees?
Are the purchase terms competitive?
Dissecting the FDD
Item 9: Franchisee’s Obligations
WHAT TO WATCH FOR:
Compare and contrast what is written in the FDD and Franchise Agreement versus how franchisees rate their relationship with the franchisor (validation process);
sticklers vs. collaborators
Dissecting the FDD
Item 10: Financing
WHAT TO WATCH FOR:
Franchisor leases equipment to franchisees
Dissecting the FDD
Item 11: Franchisor’s Assistance, Advertising, Computer Systems and Training
WHAT TO WATCH FOR:
Services franchisor will provide for the franchisee during term of agreement
Franchisor’s initial training and ongoing assistance programs
Dissecting the FDD
Item 12: Territory
WHAT TO WATCH FOR:
Exclusions, exemptions, and exceptions to the notion of exclusivity
Dissecting the FDD
Item 13: Trademarks
WHAT TO WATCH FOR:
USPTO Registration Status
Dissecting the FDD
Item 14: Patents, Copyrights, and Proprietary Information
WHAT TO WATCH FOR:
Copyright protections for operations manuals and computer software
Trade secrets and proprietary information
Dissecting the FDD
Item 15: Obligation to Participate in the Annual Operation of the Franchised Business
WHAT TO WATCH FOR:
Active vs. Passive Ownership
Dissecting the FDD
Item 16: Restrictions on What the Franchisee May Sell
WHAT TO WATCH FOR:
Necessary to preserve the uniformity, consistency and integrity of the franchise system
Dissecting the FDD
Item 17: Renewal, Termination, Transfer, and Dispute Resolution
WHAT TO WATCH FOR:
Franchisees have very limited rights when terminating franchise agreement before expiration date
All disputes must be submitted for mediation or arbitration in franchisor's home state
Fees and Flexibility
Dissecting the FDD
Item 18: Public Figures
WHAT TO WATCH FOR:
Relationship must be described in the FDD
Dissecting the FDD
Item 19: Financial Performance Representations
WHAT TO WATCH FOR:
Are the numbers validated by the Franchisees?
How will the numbers translate to your market?
Dissecting the FDD
Item 20: Outlets and Franchisee Information
WHAT TO WATCH FOR:
Trends
Is the system growing or contracting?
What is the closure rate in recent years?
Dissecting the FDD
Item 21: Financial Statements
WHAT TO WATCH FOR:
Liquidity/Cash on Hand
Long-Term Debt
Cash Flow
Balance Sheet
Dissecting the FDD
Item 22: Contracts
WHAT TO WATCH FOR:
Standard contracts the franchisor requires of the franchisee
Leases
Guarantees
Promissory Notes
QUESTIONS?
