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Staying alive

Can't any lawyer deal with 'entrepreneurial fever?'


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It's always surprising to find franchisors who try to go it alone in preparing their FDDs, and franchisee prospects who sign on the dotted line without counsel. Are business people being penny-wise and pound-foolish by avoiding legal advice from a franchise lawyer?

Most franchisors select qualified lawyers to assist them in developing there Franchise Disclosure Documents, so I'm always amazed when I meet a franchisor who foolishly attempted to write his own documents or - just slightly better - chose to get his legal documents from a franchise-packaging firm. Franchisors generally understand the need to work with qualified lawyers.

Since having a Franchise Disclosure Document (FDD) is a requirement of being a franchisor, most franchisors understand the necessity of selecting outside legal firms to assist them. The exception, of course, are those franchisors who already have their own in-house franchise legal counsel.

It's a sad fact that too many franchisees sign franchise agreements without seeking qualified legal advice. As illogical as it may be, with an investment that often is measured in multiple six figures, many prospective franchisees still try to save the few thousand dollars it costs to hire a lawyer or independent business advisor to assist in evaluating the franchise and its legal agreements.

Hundreds of law firms claim to practice franchise law. Some are members of the International Franchise Association's Supplier Forum or the American Bar Association's Forum on Franchising and actively participate in their seminars and programs as presenters or attendees. Others, whose practices are more general in nature, may not choose to participate in the IFA or ABA, but still offer franchise "expertise" to clients. There are no requirements by the ABA or tests given to determine who is a qualified "franchise lawyer." Any lawyer can legally provide franchise advice - whether or not they're qualified.

On the surface, providing legal services to franchisors does not seem that complex. After all, the Federal Trade Commission (FTC) and the North American Securities Administrators Association (NASAA) publish guidelines on what is required to be included in the FDD. All the lawyer has to do is complete 23 separate areas of disclosure; attach franchise and related agreements; make certain the necessary financial statements are included; and in a handful of states, send the documents with the required fees to state regulators for approval. That's not difficult, thanks to the thousands of FDDs available to copy. Franchisors who do this, however, put not only themselves in jeopardy, but also their franchise systems and their franchisees.

On the other hand, franchisees also may view working with a lawyer as unnecessary. After all, the FDD is written in plain English, the franchise salesperson has explained the terms of the agreement, franchising appears to be a safe investment, all franchisors are the same and everyone knows franchisors won't negotiate any of the terms in the franchise agreement. Why bother to have something reviewed, when it can't be changed? What benefit will a franchisee receive from investing in a qualified due diligence and investigation?

While that may be the common perception for some, it's hardly the reality. I am frequently quoted disparaging franchisees who do not seek advice to protect their families and their equity from bad franchise investments. In my most gentle and understanding of tones, I tell them that if they invest in a bad franchise opportunity without first obtaining the services of a qualified franchise lawyer, the only person you have to blame is themselves.

Spending money on lawyers only when issues arise is frequently an expensive exercise in futility. However, when things go bad, great franchisee litigators may be your only option. Better to invest on the front end of the arrangement than attempt to solve the problem later on. If you don't believe me, talk to any franchisee who has had to seek redress after the fact.

 

Michael Seid

Michael Seid is the founder and managing director of Michael H. Seid & Associates (www.msaworldwide.com) an international franchise consulting firm with clients that include both established and new franchisors.

Michael can be reached at mseid@msaworldwide.com

I have been a litigation consultant and/or expert in a number of franchise-related lawsuits. Many involve disputes between the franchisors and franchisees, while others included a host of tangential issues, including whether a franchisor has responsibility for the actions of its franchisees. The underlying facts in each case may vary, but I'm always consistent - whether I am on the franchisor or the franchisee side of a dispute. The relationship is based on the contract and the law, and the outcome may largely be determined on which lawyer a franchisor selects to prepare their documents and which lawyer a franchisee selects as its legal advisor.

For franchisors, merely having the 23 items in the FDD completed and a franchise agreement drafted is insufficient. There is an art to ensuring the disclosure document and the underlying agreements are both well written and meet the requirements of the franchise rules. It is important that they also include elements and terms that will provide your system with some "safe harbors" down the road because your disclosure documents were properly prepared. Complete, accurate and well-drafted documents offers a even bad franchisors substantial protection.

It's also essential for franchisees, because not all franchisors are created equal. Some of the best-looking opportunities include terms that should be negotiated out. An expert in franchise law is your best protection against succumbing to what might kindly be described as your "entrepreneurial fever." For every bad franchise opportunity being offered today, there are hundreds of others that hold the promise for your financial security. Let your lawyer turn you away from a bad investment, rather than try to fix one that is not suited to your goals.

Finding your lawyer

So, how do you find the right franchise lawyer for you? Start by asking experts. For prospective franchisees, "experts" may be franchisees you may know, regardless of what franchise they own. Ask for the name of the lawyer they used. If they didn't use a lawyer, they likely have a network of other franchisees who can give you recommendations. Getting recommendations from people who used the services is the best method to pick your legal advisors.

The same advice goes for franchisors. Franchising is a relatively small industry. It is also a community that is extremely open and giving. Call franchisors you respect and ask who they use. Don't be surprised if you get a short list of practitioners. Insiders know which firms are good and which are not. Your franchise consultants will also be a great source of recommendations.

Contact the IFA or get a list from the ABA's Forum on Franchising of lawyers who are members.

Interview the lawyer on his or her experience. Get a list of references and call existing and former clients. Ask the lawyer how frequently they make presentations at franchise conferences, or have articles published in professional journals. If they are asked by their peers to make presentations and submit papers, that is a solid indication they have a good reputation in the profession.

The nature of franchise law does not require that you select a lawyer in your hometown. Given the nature of communications today and the ease in which documents can be sent electronically, it is the quality of your advisor that is important, not their proximity.

How much does legal advice cost? It varies from lawyer to lawyer, and some of the best do not charge as much as some lesser minds. After all, with experience comes speed, and hourly rates have little to do with overall cost. Most attorneys will provide you with a proposed range of fees. Without a doubt though, the cost of a transactional lawyer is far less expensive than hiring a litigator later.

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