Tag Archive for: business law in tampa

buying a franchise

Buying a Franchise? Read This First.

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buying a franchiseTo a middle manager in corporate America, owning one’s own business can appear very attractive. Often, buying a franchise business is a more attractive option than simply starting your own business from scratch. A franchise is a form of business that already has an established product or service in which the owner (the “franchisor”) enters into a contract with another, separately-owned business (the “franchisee”), which operates the business within a certain defined territory or from a specific location.

A good franchisor has invested a great deal of time and money developing a proven operating system for its particular type of business. Franchisors often provide detailed policy and procedure manuals that address many of the day-to-day problems associated with owning a business. Moreover, franchisors often (and should) provide training in these policies and procedures, enabling the franchise owner to quickly get up to speed on business operations and the actual processes by which the franchise and franchisee will conduct day-to-day operations.

In addition to a proven business operating system, many franchisors have developed strong trademarks and service marks, such as business names, catch phrases, and logos that are associated with their businesses and that are recognizable in the marketplace. These marks are the embodiment of the franchisor’s goodwill and name recognition in the given field of operations, and the franchisee is intended to acquire the benefits of the franchisor’s branding investment and efforts. In the franchise agreement, the franchisor licenses these trademarks and other intellectual property to its franchisees, allowing franchisees to use these recognizable names or phrases in their own businesses – imparting to them immediate name recognition and legitimacy.

Investigating the Franchise Opportunity

The franchisee is often making a very significant investment in his or her franchise. That investment should not be made without a thorough investigation of the franchisor and an understanding of the strength or weakness of the particular franchise opportunity. A weak franchise – one in which the trademarks are not particularly strong or well-known, or in which the franchisor does not have adequate financial resources to support its franchisees – can be a very poor investment.

Every franchisor must provide a prospective franchisee with a franchise disclosure document (the “FDD”). The contents of the FDD are to a high degree dictated by the federal franchise regulations and it is a rich source of information – and potential questions – about the franchisor and the strength (or weakness) of the franchise. The FDD and its associated tables, charts and appendices can tell the prospective franchisee a great deal about the background and financial strength of the franchisor. The prospective franchisee MUST read the FDD and should seek a lawyer’s assistance with anything in the FDD that he or she does not understand.

The FDD always contains the identity and contact information of other franchisees in the system. The prospective franchisee should contact several current and former franchisees, who are in the best position to provide inside knowledge about the pros and cons of the system. Questions should include the following:

  • Were the franchisor’s estimate of the working capital requirements to get up to speed accurate?
  • In addition to the franchise fee rendered as part of the franchise agreement, are there any other ongoing service fees or other fees payable to the franchisor?
  • Did the franchisor provide adequate training in the business system?
  • Were the operations manuals helpful and easy to follow?
  • Did the franchisor provide meaningful ongoing assistance in getting the franchisee’s business or site up and running?
  • Do the franchisees think that the system added value that would not be available to a similar business operating outside a franchise system?

Finally, because much of the value of a franchise is associated with the strength of the franchisor’s trademarks and other intellectual property, the prospective franchisee or his or her attorney should conduct a search on the US Patent and Trademark Office website to confirm that the franchisor’s trademarks are properly registered. If the franchise is not particularly well-known or well-established, an attorney can (and should) analyze the strength or weakness of a franchisor’s trademarks and discuss those strengths or weaknesses with the potential franchisee.

The Legal Relationship Between Franchisee & Franchisor: The Franchise Agreement.

Franchisors regularly tell prospective franchisees that the franchise agreement is non-negotiable. Even if that is true, it is still important for the prospective franchisee to understand what is contained in the agreement, and it is up to his or her lawyer to interpret and explain to the prospective franchisee in plain English the more complex provisions of the document.

Of course, in many cases, the franchise agreement is negotiable, or at least significant portions of it are negotiable. As with most any contract, the degree to which the franchise agreement is negotiable is related to the relative bargaining power of the parties involved. A general rule of thumb is that the more well-known and well-established the franchise, the less likely the franchisor will be willing to make any changes to the franchise agreement.

With the exception of the very strongest franchises (e.g., McDonald’s, Domino’s Pizza, 7-Eleven), there are certain provisions in the franchise agreement that an experienced attorney should be able to negotiate so that they are more franchisee-friendly.

Notice Provisions. There are many places in a franchise agreement where the franchisor has the right to exercise certain remedies upon a default by the franchisee. The franchisee’s attorney can usually insert provisions requiring advance notice and an opportunity to cure such defaults before the franchisor may exercise its remedies.

Limiting the Franchisor’s Discretion. Franchise agreements often contain provisions requiring a franchisee to obtain the franchisor’s consent to do certain things. The attorney for the franchisee should try to ensure that the franchisor does not have absolute, unfettered discretion to deny its consent when giving such consent would be reasonable based upon verifiable facts.

Trademark Protections. As discussed above, much of the value in the franchise system is attributed to the trademarks that the franchisor licenses to the franchisee. The franchisor should be willing to stand behind its trademarks and defend them in the event they are challenged by third parties. Consequently, the franchisor should be willing to indemnify the franchisee in the event the franchisee is sued on the basis of trademark infringement.

Adjoining Territories. Sometimes the franchisor is willing to grant a strong (generally that means well-financed) franchisee a right of first refusal to purchase the territories that are contiguous with his or her own and which have not yet been assigned to other franchisees. The franchisee’s attorney might even be able to negotiate a reduced price for such additional territories.

Indemnification Provisions. Franchise agreements sometimes contain unreasonable indemnification provisions. It certainly makes sense for the franchisee to indemnify the franchisor for losses or damages that the franchisor suffers as a direct result of the wrongful acts of the franchisee or its employees. But often the indemnification provisions are written much more broadly to favor the franchisor and the franchisee’s attorney should make every effort to cut back such unreasonable indemnification rights.

Advertising Requirements. A franchisee may want to request that the franchisor loosen the requirements that the franchisee spend a certain dollar amount or percent of gross sales on advertising, particularly during the first several months of operation. Some franchisors will lower these requirements during the first six months to a year, in recognition that revenue is usually very tight during the start-up stage of the business.

Forum Selection and Governing Law Clauses. Although it will rarely come to pass, the franchisee should also request that the judicial or arbitration forum for future disputes concerning the operation of the franchise or the meaning and construction of the franchise agreement be in the franchisee’s location and governed by the franchisee’s local law. Owning a franchise in Florida, while having to manage a dispute with the franchisor in Washington state, places a potentially significant burden on the franchisee to inexpensively and expeditiously resolve disputes with the franchisor.

Sale of the Franchise. All franchise agreements set conditions on a franchisee’s ability to sell or transfer the franchise. These provisions are sometimes negotiable with respect to the assignment of the franchise to family members and with respect to the franchisor’s ability to exercise a right of first refusal. Since most franchise agreements have a term of 10 to 20 years (during which the franchisee develops its own goodwill, reputation and business), it is imperative that the franchisee understands the restrictions on his or her ability to sell the franchise.

Conclusion.

Buying a franchise can be a very rewarding decision. It can also be an unmitigated disaster if the prospective franchisee does not understand what he or she is getting into. An experienced attorney can guide his or her client in the investigation of the franchise and can usually negotiate more franchisee-friendly terms in the franchise agreement. Whether the franchisee fails or succeeds will depend upon a variety of factors, but with good legal representation going into the deal, the franchisee will at least be cognizant of the legal and business risks and of her own contractual rights and responsibilities. The attorneys at Wetherington Hamilton have experience representing franchisees in many different industries, from lawn care to sandwiches. We stand ready to help. Please contact the author for more information.

Matthew J. Lapointe, Esq.

Protecting Your Purchase Money Lien Rights

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Recently, our firm had the pleasure of handling a file which involved the potential creation of a purchase money lien on personal property. Our client sold a business and took back a lien on the personal property of the business. The lien was to secure the payment of a note. The new business owner was going to pay our client over time for purchasing the business. In addition to the lien by the seller on the buyer’s property, the buyer also obtained an Small Business Administration (SBA) loan to purchase the business. Our client originally thought that he held a first mortgage as a result of his purchase money lien on the sale. In fact, the statutory procedures for the creation of a purchase money security interest were not followed, and as a result, the client holds a second mortgage on the personal property second to the SBA.

A purchase money security interest is defined as a lien or mortgage that is given by the seller of personal property to the buyer to secure payment of the purchase price. Florida Law, prior to changes in 2001, allowed a seller of personal property to perfect a security interest in the personal property being sold as long as a Uniform Commercial Code Financing Statement (UCC1) was filed with the Secretary of State within fifteen (15) days of creation of the debt. Florida Law now states that the interest is perfected as long as the recordation of the UCC1 occurs within twenty (20) days of the creation of the debt. This of course applies only to personal property. If inventory is involved, proper notices must be sent to any other secured creditors who have a claim on the inventory once the product is shipped.

Sellers and lenders must understand these priority issues. If you are selling property and merely put the words “Purchase Money” on the top of your document, you are not protected. You must also file the UCC-1 with the Secretary of State within fifteen (15) days. Lenders must also be careful to ensure that purchase money lien rights do not put the lender in a second lien position.

On other Uniform Commercial Code cases, our firm has successfully prosecuted a reclamation claim in a Chapter 11 Bankruptcy. A reclamation claim is allowable under the Uniform Commercial Code in certain specified circumstances where product is shipped to an insolvent corporation. In such a case, the seller upon discovering that the buyer has received goods on credit while insolvent may reclaim the goods upon demand made within a certain time. The reclamation rights can often be superior to the rights of unsecured creditors in insolvency situations.

For further information on reclamation or purchase money liens please contact our firm.

Purchasing a Business

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Have you ever pondered leaving your present employer and purchasing a business? Have you ever thought about expanding your existing business through the acquisition of another company? If so, read on.

There are numerous companies that act as business brokers in the Tampa Bay and Florida areas. These companies provide the contact information necessary to determine the types and availability of businesses for sale in your area. These businesses range in size as well as type. The business broker however, does not provide advice in reference to the viability of the business. For such advice, the purchaser of a business might consider contacting either a business valuator or a business consultant of some kind. In addition, in obtaining financing, a business consultant can be a valuable tool in assisting and drafting a plan for your business after review of the financial statements. Of course all of these consultants as well as your business law attorney will charge for their services. Such charges may seem expensive at the outset, however, the assurance of having professionals review the acquisition at the outset will save much heartache in the future.

When purchasing any business, the acquiring entity must make a number of determinations. First, will the purchaser purchase the stock of the existing business or the assets. This is a determination based primarily upon the existing liabilities of the present company. Most of the time, purchasing the assets is recommended. When stock is purchased, liabilities go with the purchase. When assets are purchased, as long as secured creditors are paid at the closing, the unsecured debt of the existing corporation does not go with the assets as long as market value is paid for the assets. It is up to the seller to ensure that unsecured debt is paid at the closing.

Next, the purchaser needs to determine the type and value of the assets. This determination requires a review of financial statements and inventory lists of the existing corporation. This review should be part of the contractual agreement that is reached prior to the purchase of the business. Such a review will include but not be limited to a total review of the inventory, balance sheets, accounts receivable listing, income statements as well as all other financial documents including tax returns. The tax returns for a corporation are often valuable tools to determine the accuracy of the internal financial statements. Tax returns are often prepared by an independent auditor, which are easily compared to the internal books of the company. Of course, this presumes that the tax returns are prepared by an independent accountant separate and distinct from the corporation. If a principal of the corporation prepares the returns, they should be reviewed very closely for their accuracy and compared to the actual financial statements of the company. A review of the corporate checkbooks might also be recommended to compare the checkbooks with the balance sheets and the payable ledger for the corporation. In any event, a thorough review of the financial background of the corporation should occur prior to closing. If any discrepancy exists, it needs to be addressed clearly with the seller prior to purchasing the business.

In addition to this financial review, an interview with employees might also be recommended. If any of the employees are going to continue to work with the corporation after closing, they need to be interviewed and reviewed very closely prior to closing. Their salaries need to be reviewed as well.

In addition, the income and profit loss statements for the corporation should be reviewed for at least the last three years. These statements will clearly show how the company has done. The balance sheet and income statement should be reviewed for payments to the principals. If the principals received no salary from the corporation for the last three years, then a small profit at the end of the year may not accurately reflect how the business is actually doing. There are other ways that a business can show profitability when in actuality a profit does not exist. Each and every line item in the balance sheet and income statement should be reviewed very closely for a determination of whether or not all amounts are reflected on the statements. If a principal of the corporation has substantial outstanding notes due, this could also be a red flag. Such notes could show the existence of ongoing debt of the corporation.

After a thorough review of the financial’s and the profit of the corporation, the closing can take place. At the closing, the seller should sign warranties that warrant the accuracy of the documents signed at the closing and reviewed prior to the closing. Specific documents such as the tax returns could be attached to affidavits which would guarantee the accuracy of the statements. One way that a buyer can protect itself in a purchase is to have the seller finance part of the transaction. If the buyer is paying back the seller from the closing, if the business fails, the seller fails as well. Such an insurance policy does give the buyer some reassurance that the seller is being truthful.

Financing of the acquisition is also a paramount of importance at the closing. The buyer must ensure that the financing arranged at the closing will allow the buyer to operate in the black. If the financing terms are too onerous, the principals of the corporation may not be able to take a salary. This is not the purpose of starting a corporation. The purpose is to make a profit not to operate in the red. Keeping expenses low and income high is the goal.

Finally, the buyer should carefully review the closing documentation. The closing statement will show how the money is coming in and going out at the closing. Fees which are being paid from the closing should be reviewed by counsel prior to closing. In addition, all of the affidavits and closing documents should be reviewed by counsel prior to closing. Once further point, do not assume that the attorney conducting the closing represents your interests. Oftentimes, a business broker uses an independent attorney to prepare the documents who specifically does not represent either the buyer or the seller. In such a case, as the buyer or the seller, you need your own attorney representing your interest at the closing.

Please be aware, this list is by no means exhaustive. Each and every type of business has its own issues to resolve prior to purchase. Should you wish to further discuss any matter raised by this article, please do not hesitate to contact our firm.

Wetherington Hamilton, P.A.

Wetherington Hamilton, P.A.

812 W. Dr. MLK Jr., Blvd., Suite 203, Tampa, FL 33603
Phone: (813) 225-1918 • Fax: (813) 225-2531 • Email

Wetherington Hamilton, P.A.

Wetherington Hamilton, P.A.

812 W. Dr. MLK Jr., Blvd., Suite 203, Tampa, FL 33603
Phone: (813) 225-1918 • Fax: (813) 225-2531 • Email