For those business owners in growth mode, this is a show for you. If you’ve wondered about the feasibility of expanding your company through franchising, you’ll first want to decide if the franchise business model is right for you. But how do you determine that? Why are some types of businesses right for franchising? What are some of the criteria for a promising franchise business? Are you the kind of owner who can allow someone to come in and run one of your locations without your direct feedback, or do you have to have constant control? Attorney Julie Lusthaus, partner at Einbinder Dunn & Goniea in New York and a specialist in franchise law, joins us to provide her expert view on the subject of franchising.
I think you make an interesting point about people thinking of attorneys as advisors they come to only at a time of need.
- Julie Lusthaus
Jeff: Julie I'm someone who doesn't own a franchise. I happen to own my own business, I have for about seven years now. I know that there are thousands of business lawyers in the United States. They're all over the place in every state. Are the laws and regulations that pertain to owning a franchise business so unique and varied that the owner of a franchise simply can't call up one of these thousands of business attorneys and do business with them and retain them as opposed to a franchise attorney, someone like yourself for example?
Julie: I think that's right, Jeff. There's certain issues that arise when one is selling their business and that is going to be true whether you're selling an independently owned business or a franchise business. But if you add to it the layer of franchise law and regulations that affect the sale of a franchise business then really it's sort of a one stop shop if you work with a franchise lawyer who can help you sell your business and deal with the franchise aspects as well. It's certainly possible to work with a business lawyer and bring a franchise lawyer in for that part of it. But it tends to be a little bit more efficient if you go straight to the franchise lawyer.
Jeff: I think that's a really important point that you've mentioned because people are inclined to believe, and certainly those who don't really have a legal background like yours truly, are inclined to believe that we contact attorneys whenever there's a problem. But what I want to get into and maybe we can talk about this in just a few minutes, Julie, is the idea that attorneys and particularly those who are business attorneys and those like yourself who specialize in franchise law are not there just to be there to answer questions in times of crisis or when there are problems but you're there really to kind of help prevent problems and prevent maybe some risk that someone does not necessarily have to expose them to and we're going to get into that in just a little bit. But first I want to bring things back to really the center of premise of this program is to help preserve value and improve the value of their businesses. People are ultimately really, really concerned about that. With that in mind I'd like to get your thoughts on how much might the name of a company or a corporation, and the global reputation that that corporation has alone impact the valuation of my franchise location?
Julie: I think that's a great point, Jeff. Certainly a strong franchise brand is going to be a business that's going to be more easy to sell, and is going to sell for a higher price. I think that people understand the concept of a franchise and part of what they're buying into is not only the brand but the training they'll receive, whether they're buying an existing unit or they're buying and building it themselves. But even if they're buying a business that a franchisee is selling they're still going to receive certain training from the franchisor. So they're going to have the benefit of both the brand name and the value that brings as well as the training and support that the franchisor will provide.
But even if they're buying a business that a franchisee is selling they're still going to receive certain training from the franchisor
Jeff: Really, really important to know that, just because you have a strong brand behind you doesn't mean that there isn't hard work involved because you have to uphold your end of the bargain, not only to continue to help that brand maintain its standing but also too you have your own customers, you have your own clients, your own business there, and your own neighborhood that you need to serve. And so you obviously want to put your best foot forward, get the best value that you possibly can later on, and that comes through your efforts. Now we're going to go ahead and get to what we wanted to talk about and I touched on just a second ago. Can you talk to us a little bit, Julie, from your own perspective how working with an attorney prior to the sale of my franchise actually can help me to either preserve or potentially approve the value of my business, from your perspective?
Julie: I think you make an interesting point about people thinking of attorneys as advisors they come to only at a time of need. And in fact if business owners think of their attorney and the cost of their attorney as an investment as opposed to an expenseI think they will come to understand that there's true value in talking to your attorney first before you engage in extendednegotiations of the sale of your business, and get thelawyer involved early on so that they cannot only advise you on some of the business issues but even more importantly some of the legal issues and negotiations that a seller may not be thinking of at the time that they're just looking to negotiate based on a price of the business. Particularly in franchising the seller is not always able to sell what they have. The franchisor typically is going to want a buyer to sign a new form of franchise agreement. And as a result of that the seller needs to understand a little bit more about what they're selling outside the context of their everyday operation of their business. And the soonerthat they get their attorney involved they'll understand that perspectiveof it and have their attorney there to assist them in negotiating the best price for their business.
Jeff: Julie Lusthaus is an attorney specializing in franchise business law. She's a partner at the law firm of Einbinder and Dunn LLP in New York and you're listening to Deal Talk. My name is Jeff Allen. Julie, when it comes time to sell my franchise, should I consult my own attorney or am I better off contacting an attorney recommended by the franchisor, or maybe a fellow franchisee in the same system?
Julie: I think that's a very interesting question. On the one hand there's certainly going to be a benefit to possibly working with an attorney who's familiar with the franchise system and therefore an attorney recommended by a franchisor, or another franchisee who's used that attorney. That attorney may come to the process with a little bit more background about how the franchisor is going to participate in the sale process. Butthat being said as with selling any business, independent or franchise, there's going to be local issues involved. And it's very important to use an attorney who is local to the market and who knows the specifics of the geographic area in which you're looking to sell your business. So I think that you certainly want to have an attorney who has some franchise experience and knowledge. If you can find one who's worked in the system and who's local, that's fantastic. But ultimately I think that you want a business lawyer who understands your particular market.
Particularly in franchising the seller is not always able to sell what they have
Jeff: Okay. Let's say I know that I want to sell my business and I'd like to work with you. Whenshould I contact you and how involved are you throughout the process? I'd consider attorneys as kind of glue really. They don't just solve problems but they help to prevent them and they help to make sure that you have everything that you need and everything islined up. Do you communicate with the franchisor at all at any point, any of the other parties that are really necessary to allow that sale to go through and go through the way that ultimately the seller would like it to?
Julie: That's exactly right. The franchisor is going to need to be contacted and is likely going to need to approve the sale. The question of when to approach the franchisor is dependent on the particular circumstances of the situation of the system of the sale. And that's something that an attorney can help the seller work through so that they're contacting the franchisor at the right time. The sooner that you get the attorney involved the sooner that you'll be able to address the issues relating to the franchisor, possibly disclosure issues, whether the franchisee has to give certain information to the buyer. So you really want to get your attorney involved pretty quickly once you decided to go ahead and put your business up for sale.
Jeff: We're on Deal Talk with Julie Lusthaus. She's an attorney. She specializes in franchise business law. She's in New York working for a firm that she is also a partner with and Einbinder and Dunn LLP. And we've got more on Deal Talk coming up in just a matter of moments. Stay tuned.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen, with my guest Julie Lusthaus, attorney and partner at Einbinder and Dunn LLP in New York. We're talking about how a franchise attorney can help franchise business owners prepare their business for sale but also to deal with certain issues that come up along the way. Julie, thanks so much once again for staying through the break and for being with us today. It's a real pleasure having you here. Let me start by asking if you would recommend that a prospectivebuyer of a franchise business seek the services of someone in your field,a franchise attorney, before they buy a franchise business because of the things that you may know that are kind of subtle curiosities orunique to franchise businesses as opposed to seek the council or advice of a business consultant, or a business attorneywho doesn't have any franchise knowledge.
Julie: That's a great question Jeff, thank you. I think that it's very important for a prospective buyer to speak with a franchise attorney before they sign the franchise agreement or buy an existing business. It's very important for them to understand the details of the deal and what they're getting themselves into. It's also important that they have help with negotiating any of the terms of the agreement that they may want to negotiate. And a lot of times it can be very helpful for franchise attorneys to explain to the buyer particular issues that might be unique to that franchise system, whereas some of the provisions in their franchise agreement may be pretty standard. And it can be helpful for a prospectivebuyer to understand that a term in their franchise agreement is typical. This is common for franchising and so therefore it may not be as much of a concern whereas if there's a particular term in their agreement, perhaps a veryhigh royalty rate or some other issue that stands out to the franchise attorney, it’s helpful for the buyer to understand particularly when there are competitive businesses in the same industry. And I think that only a franchise attorney can really have the sense of what's standard in franchising and what is going to look a little bit red flag. What's going to cause the red flag to go up. I think it's very important both to help the buyer get the best deal they can but also to educate them and make sure they really understand the details of what they're getting into since the franchise relationship is a long-term relationship.
It's very important for them to understand the details of the deal and what they're getting themselves into. It's also important that they have help with negotiating any of the terms of the agreement that they may want to negotiate
Jeff: Julie, let me ask you a little bit about the process itself. In terms of due diligence and that's really what we're talking about here, a buyer's going to want to do that obviously because they're making an investment, an investment of a lifetime when you get right down to it. In terms of the process itself, how long might the process take? What's involved for you from an attorney's perspective as far as getting everything you need and getting it in a timely fashion over to the buyer. Is this something that can take weeks, or months, or typically what's involved?
Julie: It typically can move quickly if all parties involved wantitto. Once a buyer has decided on a franchise system that they're thinking about buying into they're likely to have had some discussions with the franchisor. Perhaps participated in what's called adiscovery day where they learn more about the system. And at that point the franchisor is going to provide to the buyer a franchise disclosuredocument which is going to contain a lot of information about the franchise, the franchisor, and the system. Once the buyer has that information it's time to reach out to an attorney. I always encourage my clients to read the disclosure document, but I will tell you that it's hundreds of pages long. And while some try really hard to get through it, it can be a little detailed and that's really another reason why you want to have your franchise lawyer involved, because we actually do read the document and we can discuss it with the buyer. The franchisor actually has to wait a certain amount of time from when they give the disclosure document to the prospective buye rbefore the buyer's permitted to sign the franchise agreement. But it's a 14day period generally and the work that the attorney needs to do can be done within that time frame as long as they have the disclosure document and can start work on reviewing it.
Jeff: You mentioned that things can move as quickly as everybody wants them to provided everybody's prepared, you get all the documentation that you need and so forth. As far as the sale process itself is concerned with respect to franchise businesses, do they tend to move any faster or slower than the sale process, the whole escrow process, than an independently owned business would require?
Julie: That depends a little bit on the franchisor. They certainly can move quickly and more efficiently if the franchisor has a lot of resales in their system. That can speed the process along. But that being said, a lot of it is going to come down to the parties agreeing on the terms and I don't mean just the business terms. And it sort of brings us back to why it's so important to get an attorney involved as soon as possible. Because generally what happens is the seller and buyer will agree on some big terms. What's the price and how's it going to be paid, what is the buyer buying, and that's it. There can be a little bit more involved, and the sooner you get the attorneys involved they can discuss that part and get it hashed out, terms that are not the business terms that the clients have worked out or the brokers have assisted with, but the terms that need to be hashed out in order for the contract to be written. The seller has got a buyer and they're pretty close to terms, they should be getting their attorneys involved sooner rather than later to get the contract strong enough the way they need them to be, and they can decide and the deal can close. It's a problem when they go back and forth and don't get the attorney involved until the last minute and then say, "Okay, this is our deal so now do whatever you got to do and let's close" because the attorneys really do need to work some other issues out that the parties just don't think about.
It's a problem when they go back and forth and don't get the attorney involved until the last minute
Jeff: Just a question out of personal interest, I know that sometimes a seller will be asked to stay on board in an advisory capacity or they'll be asked to have maybe some limited involvement in a business that he sells to a new buyer because there's a transition period. But when you've got a franchise business and a franchisor to provide support to all of the franchisees from a marketing and operations perspective, have you been involved in a situation where you have heard a new buyer come in and actually ask the seller of the business to stay on for any period of time to help in that transition process? Or in the world of franchise business is that something that just doesn't happen very often?
Julie: Typically it doesn't happen very often. However, that being said there may be reasons why the seller's involvement is required. If it's particular industry that has licensing requirements and the seller needs to stay involved for some reason then they might. But generally when the seller is not required to be involved for some regulatory reason the buyer can come in and take over from the start, and as you say will get training and support from the franchisor.
Jeff: Very good. And I kind of felt like that's the direction you were going to go with your answer, but I wanted to have an understanding to be sure. Having said all of that as we kind of continue with the discussion regarding due diligence on the part of a buyer, if I'm interested in a franchise business maybe for the first time what are some of the distinguishing characteristics that I might notice, or some of the data perhaps that might indicate to me that one franchise system is stronger than another? Is there anything you can share there from your years of experience that can help us to understand what you see from an attorney's perspective that lends you to believe that this company is very, very strong and this is a great choice for a business relationship?
Julie: I think certainly one of the things to look at is how long the franchise has been in operation and how many units there are, and where they are located. And also to look at how fast the franchise is growing. If a franchisor is growing very rapidly that might cause some concern because operating the business of the sort that is being offered as a franchise is one kind of business, operating as a franchisor is a different business. And as the franchisor grows they need to have the resources to provide the support and the training for their franchisees. Unfortunately, some systems grow so rapidly that they simply can't keep up, and it almost seems as though they're in the business of selling franchises rather than supporting their brand. So you really want to make sure that there's a stable, solid franchisor with experience who can provide the support that's needed. One of the ways to find the information like that out is to look at the franchise disclosure documents that we spoke about before. And one of the required items in the FDD includes contact information about existing franchisees, and that's really going to be the best source of information about the franchise and the franchisor, and prospective franchisees are encouraged to reach out to as many of those franchisees as possible. And ask them the questions they may have about the system.
prospective franchisees are encouraged to reach out to as many of those franchisees as possible. And ask them the questions they may have about the system.
Jeff: I think that's really important, and you don't want to get into a situation where you're in a franchise operation, you've just bought this business, and people in the corporate office aren't returning your phone calls, or they're slow in returning your phone calls and the emails. You haven't seen your area rep in God knows how long. You don't want to get to that point.
We're talking with Ms. Julie Lusthaus. She's an attorney specializing in franchise business law and a partner in the law firm of Einbinder and Dunn LLP in New York, you're listening to Deal Talk. My name is Jeff Allen. I appreciate the fact that you're listening today and you're getting a lot out of it. And just a real brief programming note here, we've kind of touched on franchisor... What we want to do is we're going to have Julie back on with us again in the very near future on another segment where we're going to delve a little bit more deeply into the subject of how you can franchise your own business and the role of the attorney in how they can help you move toward taking the business that you own, and actually taking and branching out, and opening new locations. We're going to do that on a show coming up in the future so we hope you'll stay tuned to Deal Talk for more information on that. Julie, what I'd like to ask you though, we can wrap up the show a little bit, the content portion of our program with this. I'd like to put us in the position now, we bought our franchise business, we're really excited about it, whether or not we've owned a business before it doesn't really make any difference. But I think there might be kind of an interesting conversation here Julie about the types of unique situations or concerns that new franchise business owners may face that maybe they didn't realize or didn't expect to face when they came in and took over a business. Can you touch on some of those that you faced or that you helped a franchise business owner work through?
Julie: Franchising can be wonderful for the business owner who wants a little bit more support. On the other hand you have the sort who’s quite entrepreneurial, who has wonderful ideas and who wants to run their own business, may not be a good fit for franchising. And that's sort of where some of the difficulties arise. When you're operating your own business and you're independent you can make decisions about what investment clause you might want to make in your business. But if you're a franchisee you're going to also have to follow the requirements of the franchisor. For instance if you think about a franchise system that may have operated using a particular trademark, if you're familiar with some of the shipping companies they were operating under a particular name and the franchisor decided to change the trademark. Which meant that the franchisees all had to change all their signs, change the way their location looked, change their uniforms, and then there's costs involved with that that any particular franchisee may not be prepared to incur at that moment. But if the franchisor requires system-wide changes then the franchisee has to comply. And that can be a realproblem for new business owners who have now invested a certain amount of money in their business, and who don’t want to invest in that moment in time, that's a real issue. I think also when a franchisee wants to sell their business they can run into some difficulties with selling the business to the value that it is worth to them as we discussed earlier. A franchisee is not necessarily able to sell exactly what they have because they were operating with a franchise agreement and there's a certain term on that franchise agreement, and the buyer may not be getting the same amount of time, or may have different terms in its franchise agreement. So I think it can be difficult for a business owner who's thinking that they're going to get into a business, buy a franchise, and sell it within a certain amount of time at a certain increasedvalue. It can be difficult as a franchise owner because you're restricted by some of the requirements of the franchisor. Those are some of the issues that we have faced with franchisee clients who are operating systems and have to accept the fact that they're in a franchise system and not completely independent business owners.
Franchising can be wonderful for the business owner who wants a little bit more support. On the other hand you have the sort who’s quite entrepreneurial, who has wonderful ideas and who wants to run their own business
Jeff: Julie Lusthaus we are running out of time so what we need to do now is end it here but not before we give people your contact information. For those who are listening today, maybe these are people who are either interested in purchasing a franchise or they're currently franchisee or franchisor who have questions and might need your services, how can they reach you?
Julie: Well, as you indicated Julie Lusthaus from Einbinder and Dunn, email... Sorry.
Jeff: That's okay. You can pick it up anywhere you want.
Julie: Excellent. Our website is ed-lawfirm.com. I can be reached by email at email@example.com and our phone number's 212-391-9500
Jeff: That's Julie Lusthaus. Julie, we're going to have you back on in the future to talk about franchise businesses and basically how to take an independent business that anyone might own. They're interested in expanding, and how they can turn that into a franchise based organization. And we're looking forward to that. I want to thank you so much for being with us on Deal Talk today.
Julie: Thank you Jeff.
Jeff: That's Julie Lusthaus, attorney specializing in franchise law and partner at Einbinder and Dunn LLP in New York.
Deal Talk has been presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts like Julie Lusthaus, make sure to join us again here on Deal Talk. My name is Jeff Allen. Thanks again for listening. We're going to talk to you again soon.