Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're a business owner, entrepreneur, or investor this is the place to be. It's our mission to always to educate and inform you with the help of some of the most credible, highly-regarded experts in the industry of transacting businesses so you'll be equipped with the knowledge to help you make some important decisions when the time comes to sell your business or buy one.
If you're a franchisor or a franchisee, or if you are considering purchasing a franchise I think you might find this segment particularly informative, because the needs of franchise business owners are different from independent business owners. How are those needs different? We're going to find out. My guest on this edition is Tom Spadea. He's a business and franchisee attorney and principal at Spadea, Lanard, & Lignana in Philadelphia. Tom Spadea welcome to Deal Talk.
Tom: Thanks Jeff, great to be here. I appreciate the time.
Jeff: You work with clients from all over and particularly those who own franchised businesses. And I was wondering if maybe you can just take a minute to give us an idea of a little bit about what you guys do.
Tom: Our firm, we're a little bit unique from some of the people out there. Me personally, I slant in the other direction of what a lot of lawyers do. I was a business broker many years ago, and then I went to night school to get my law degree. And at the time I also took a job with a couple of mature, larger franchisors. I was the head of franchise development and real estate while I finished up my law degree. I spent 15 years as an entrepreneur. I owned a business, I was partners in a business, I sold businesses, and I also was on the corporate side of franchising. I practiced for a little bit and I founded the firm five years ago with my partners Nancy Lanard and Josh Lignana. Now, we've been fortunate enough to get 14 attorneys, I would say 80%-90% of what we do is in the franchising space and we focus on franchisors and franchisees. Nancy was a general council at a big firm, Will Jameson, one of our other partners was general council for 15 years at Cottman transmission. We really have a focus of the business side of franchising. We've seen all the deals that you could possibly imagine throughout our careers prior to the firm so that we know when we're looking at these deals and we're advising our clients the nuances in franchising as it pertains to the business side of things, both with franchisees and franchisors. It's been a great run and our clients appreciate it. Most of our business comes from referrals and the like.
Jeff: Tom, you handle both ends, franchisor and franchisee. Franchised business ownership, are we seeing kind of a growth phase in franchise ownership in the country, do you think?
Tom: Yeah, I think we really are. And when we deal with franchisees most of our clients in that side of the business are new to franchising. They thought about starting the business... I'm a big believer in that because I've seen people build real wealth and get the kind of lifestyle that they're looking for by getting into franchising, whether they're buying a franchise from the ground up as a new store, or a location, or they're buying an existing franchise and transfer. But it gives people the infrastructure and the scaffolding so to speak around their business, but they just have to go in with the end in mind and know what it means to be a franchisee. We focus on franchisees, but by representing a few select franchisors mostly in our area, with franchisees we go nationwide, it allows us to know why franchisors ask for certain stuff, why certain things are in franchise agreements, because we place them there for other clients, so it's really about the perspective of what franchising means as an ecosystem, not just from one side or the other but really from everybody's side. Yes, I think that things are growing again. We've been really busy and I hear from the industry that a lot of people are busy. It seems to me that it's working - that synergistic relationship.
Jeff: Having said that, have there been a lot of regulatory changes in franchise law in recent years which might actually make owning a franchise more challenging than it used to be?
Tom: Franchising is regulated at the federal level by the FTC, and the FDD, and the documents franchisors have to prepare. And then you drill down to the state level, a dozen or so states have very specific requirements of what happens in their state. There is this sort of this double regulatory and times have changed. You have seen some movements with respect to labor laws, nothing that's really been concrete but there's been some rulings at the National Labor Relations Board, considering the employees of franchisees, joint employees of the franchisor, which has kind of chilled some franchisors in the way they advise their franchisees. They want to make sure they keep that separation. It's a moving target and I think that's why people who live and breathe this stuff every day... We do an annual conference every year where three days of all franchisors getting together saying, what's happening in Georgia, what's happening in California, Washington State has put in some regulations about minimum wage applying only to franchisees, but not to independent businesses. So there's always a movement to further regulate the industry and franchising is really no exception to that.
So there's always a movement to further regulate the industry and franchising is really no exception to that.
Jeff: By the way, and that brings up kind of an interesting subtopic we can talk about that just a little bit, talking about the minimum wage laws, have you found that your phone is ringing a little bit more lately from franchisees who are coming to you with questions about those minimum wage laws. A lot changing. There are many states that are considering ratcheting up those minimum wage laws as much as $5 an hour in some cases. Or certainly there are local municipalities who are making that law. Is this something that you're really getting busy on?
Tom: Oh it is. And not only are we busy on it from obviously the cost push that it hurts to a lot of us, say the restaurant business or the labor intensive businesses. But it's not just the straight, what the minimum wage is going to be, you just see between the health care laws, and the push, and the regulation of employees at every level has been increasing. And it's a real challenge for a small business owner who's starting a business and maybe working a corporate job themselves and they have never really been involved or had employees before. And now they're expected to comply with a myriad of laws at sometimes at the city level, at the state level, at the federal level. And then the push on the other side with franchisors in fear of being considered co-employers are telling franchisees, "Hey, you've licensed the brand. The employment stuff is really on you, we're not going to advice you directly on that." We certainly have seen some movement in terms of that. At the end of the day it shouldn't chill anybody to want to go into business. If your minimum wage goes up and you have regulatory burdens or your competitor down the street who's doing the same thing that you're doing, to some degree it's a level playing field. As much as we would want to change these laws... I'm involved with the IFA and politically I think it's better to roll back some of these regulations and sticking points. But they're just things that we have to comply with. Our roles is to help our clients comply with it in the most cost-effective manner possible and get on with the business of doing business.
Jeff: Tom Spadea is a franchise attorney with Spadea, Lanard, & Lignana in Philadelphia, he's my guest today on Deal Talk. Tom, let's just go off into a different direction now. If I'm a business owner and let's say I've sold my business. I was previously an owner of an independent business, it could be in any industry. Now I'm going to consider purchasing a franchise. Can I work with my previous business attorney, who would help me with my independent business, on establishing that relationship with a franchisor? Or should I have to consider using a franchise attorney now that I'm looking at a franchise business and why should I do that? What's the difference?
Tom: First, of course, we'd always respect an existing relationship and if somebody came to me and asked that specific question I'd say, "Hey, there's some things that your attorney locally is going to know about you, your family, and your business that is important." But the flip side of that, franchising is a very specific set of rules, set of laws, set of culture and things that happen. And as franchise attorneys we're looking at dozens of these franchise agreements on a monthly basis and we can help…. If a different traditional business attorney looks at a franchise agreement. They're going to think about maybe more like a real estate lease. And they're going to think it's a document that they can go through and negotiate and push back on. And that's going to frustrate the franchisor, probably not going to get the prospective franchisee into the system. It's not that they're right or wrong about it, and I've seen this happen many times when I was corporate and now in my practice. It's a lack of experience with franchising systems and recognizing that when you're a franchisee you are one part of a much larger system and you can't just think of that contract as a bilateral contract between you and the franchisor. You have to think of it holistically. If there's real strict language about default and brand standards, your attorney is worried about, "What if my client is not complying?" But you have to take a little bit of a step back and say, "I'm making a couple of hundred thousand dollar investment in this brand image. And if something happens with the brand, I want to make sure that my franchisor has the teeth." If I had a guy down the street not complying and hurting my brand that's going to affect me. The piece that I have to comply with, I don't mind it. I'm always suspect of if I ask for too many changes and I get it from the franchisor, maybe that's a system I don't want to bet on in the future. And that's the real difference, the real mindset change is when you're a franchisee, your interests are aligned with the franchisor. If at some point you don't trust the management team anymore, you're not going to be served by trying to fight within the four corners of your contract, you're going to be better serves to call a business broker, put the brand on the market, and go sell the business. And just get out and get into a system where you do trust your fellow franchisees and the franchisor. The franchise contract is really not the place for that. And sometimes that's hard for non-franchise attorneys to get their head around, although we do ask for changes, we do get changes. But they are really at the fringes and are not a core of what the franchisor is trying to ask.
Jeff: Tom, when considering which franchise attorney I should use, what question should I ask to find out who would be right for me?
Tom: I think one is that what we sort of just talked about is do they have experience in franchising. In FDD, those documents I mentioned, the franchisors are required to put together, those could be 200-300 page long documents. You don't want to pay an attorney to read that thing for the first time. A, the pretty thick documents and there's a lot regulatory issues that are kind of irrelevant from the franchisee standpoint. But need to be written but aren't really up for negotiation, it's just more informative. So I think the experience of it, have you done franchise resales, or do you understand…the franchisor has to approve it. Do you understand that the multi-party nature of this negotiation, and I would be very blunt to say how many FDD's have you reviewed, have you ever written an FDD, do you understand the culture of franchising and what's expected, and are you considering yourself a franchise attorney or are you general business attorney", and have you looked at one or two of these a year. That would be my question.
In FDD, those documents I mentioned, the franchisors are required to put together, those could be 200-300 page long documents.
Jeff: Franchise owners need a franchise lawyer, and I'm talking with one right now. And we're also going to talk when we come back with Tom Spadea about the importance of a franchise attorney with respect to selling your franchise location. My name is Jeff Allen and we'll continue or chat when Deal Talk returns after this.
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Welcome back to Deal Talk I'm Jeff Allen with business and franchise lawyer Tom Spadea, a principal at Spadea, Lanard, & Lignana in Philadelphia. Giving this kind of an idea of the types of considerations you need to make as a business owner, particularly as a franchise business owner, when it comes to contracting the services of an attorney, and a franchise attorney to be specific. And Tom I want to thank you so much once again for joining us today and for staying with us during the break.
I've been told that it's really important to have an exit strategy in place on the day that I take over a business. Today, we'll talk about franchise businesses obviously. But what I'd like to know is why it's so important to have that exit strategy in place. Is it necessary also Tom to get people like you involved from day one on that exit strategy planning process?
Tom: That's a great question and it's actually one of the first things I' say to people at any new client or any new perspective client I always start with the end in mind, when even someone buying the business. It's going to affect a lot of things. It's going to affect the structure of how you set-up your entities. It's going to affect how you're thinking about the business going forward. With any small business, is your time horizon three years, is it five years, is it seven years, is your mindset to generate cash flow, build equity? You’re fortunate to be part of a franchise system because typically you're going to able to get some pretty good comparables and that's always a challenge in any traditional small business is to be able to say, "This guy's going to be the exact same business…he or she sold for X." But with a franchise, especially a system that has dozens or hundreds of units, you can get a much better sense of what that business is going to sell for. What's your goal, what's the goal of your family? Is this a lifestyle play, is it a cash flow play, is it a wealth building play? Once you start fleshing out what you want, it's really the role of the professional to then back in to what we should we be doing about that today to prepare for that eventual exit strategy. The clients who come to me and say, "I want to sell my business but I never thought about it for the five years I’ve been in business", typically we'll struggle with documentation, structure, how effective it's being run. And you can't fix those things overnight. Profit and loss statements are a really good area to think about. What kind of expenses are you running through that business? How clean are your books? Are you really doing tax returns that reflective of the actual operation of the business, or are you just running way too many personal expenses through that business which is really going to save you on some taxes in the short term, but then it denigrates that business value when you go to a business broker to sell that business. And these are the kind of conversations that you should be having with your professional advisors.
Jeff: What if I have, Tom, been approached by a potential buyer? So obviously we've kind of gotten the exit strategy thing out of the way. I'm a franchise owner. I've been successful and things have been going well. And now all of a sudden I'm approached by a potential buyer. I haven't necessarily considered selling my business, but you know what, he's making me a pretty enticing offer. Do I need to get in contact with a business broker, or is this something that I can handle myself?
Tom: There's two sides of that answer, and they both to me lead towards getting a professional and a business broker. My experience has been, first is pricing. If someone's coming out of the blue and offering you a certain amount of money for your business, you have no idea if that value is realistic, if it's undervalued, and people start thinking about, "Am I saving commission? Will I have to deal with a business broker?" But the reality is, supply and demand holds true everywhere in capitalism, and it certainly holds true in the sale of your business. If you only have one potential buyer, typically, that number's going to be a lot lower than if you can go out and cast a wider net, see some existing franchisees who might want to buy or some other people in the market, people who maybe are thinking about a similar type of business. The more activity you get, the more potential buyers you get, the more realistic you can get on a fair price and just knowledge. And a business broker is going to give you that better than really any, in my opinion, any even formal evaluation or something like that. That's one take on it as I see it. The second take, which is equally important is, just like someone would come to me to review a franchise agreement as a lawyer, because I've done these so many times, or to draft asset purchase agreements, or other relevant documents. There's a lot of pieces in the sale process that people might not be aware of, especially franchise resales. Go into your franchisor and getting the sign-off, or the right a first refusal, all those moving parts. A business broker has experience, this is not the first or last business they've sold, this is going to be your first or last business you may have ever sold.
Jeff: Good point.
Tom: You might get taken advantage of. That whole process, you don't know what you don’t now is more than what the commission you ultimately will pay.
That whole process, you don't know what you don’t now is more than what the commission you ultimately will pay.
Jeff: I guess too. The rule of thumb here, you're not quite as savvy as you believe that you are, or as your friends believe that you are. It's worth the investment, I guess you could say, or worth the cost of having a business broker on-board to help you, something that they've made a profession of, and they do all day, every day.
Tom: It's specialized work.
Jeff: There you, exactly right. Tom Spadea is a franchise attorney joining us today on Deal Talk. Tom, what role does the attorney play, if any, in this sale of a franchise business?
Tom: We do, and we play, depending on the size or sophistication of the franchisee selling or buying, and the broker involved. Our role really is not to negotiate what I call the deal points, the dollar points. We're not making a risk assessment for the franchisee. We're not telling you whether this is a good or a bad business. What our role is to wring out ambiguity so that the deal that you show hangs on in the diner when you say, "I'm going to sell the business for this and I'm going to buy the business for this." Our job is to shine a light on all the other areas that you may have think you agreed on but you didn't quite put a number on it or put a mechanics on, maybe the accounts receivable or the employee issues, or any issues with the transfer, or if the logo needs to be upgraded by the franchisor. Who's going to do that? Who's going to pay for that? So we really go through a pretty extensive checklist and make sure that... We haven't done our job right if two weeks after closing, or two months, or two years someone says, "That wasn't what I expected to get." That's a big part of what our job is, and then to mechanically make it happen. The asset purchase agreement, the bill of sale, the lease assignment with the landlord, are they getting released or are they not getting released? And just drill in to all those mechanical issues. We love to do the boring stuff so that you don't have to think about it. So once the deal is done you can sleep at night knowing that we covered your back and we flushed those issues out. That I think is the experience of being a franchise attorney understanding main street businesses. These are not $15, $25, or $100 million deals where a team of attorneys are going to be negotiating business terms and turning this thing on its head, and spending hundreds of thousands of dollars in legal fees. Absolutely that’s not our approach, ours is simple, straightforward, make sure everybody understands what happens in the deal, not adversarial.
Jeff: There you go. I think some of our listeners just kind of exhaled Tom when you talked about that because they want to make sure there's someone in their corner looking out for their interest but that aren't going to complicate the process. Unfortunately, I think we've seen in the past in certain areas of law where businesses are concerned, those types of things can happen. But where you're talking about small businesses, that's not the role that you guys play. You're in there to try to simplify and to make things work as smoothly as you possibly can without getting in the way. I'm assuming that the franchisor has to approve any sale of my franchised business. How long can that take and what does that process entail Tom?
Tom: Typically it's written into the franchise agreement and most franchise agreements have a right of first refusal. We have an asset purchase agreement signed that we're buying the business for $500,000. The franchisor has the right to actually step in and write that check. It's very rarely exercised, but it's a mechanical thing where it allows the franchisor to get into the middle of the deal so that they can see the deal, they can see all the deal points, and they could decide to buy the business or not. And then obviously they're going to...It can take four to six weeks really. I think you need time on this. It's sort of like getting with bank. Franchisors are pretty open to it. The more mature ones have pretty streamlined processes. They really need to approve the new franchisee. So that's something for the seller to keep in mind, that at the end of the day you're selling this business but you're really selling the license and the rights to run this business. And that's personal to you. So the franchisor's is going to have to approve that buyer in the same way they approve you when you bought the franchisee. So we do a selling job of how good this new person is going to be for the business, put them through training, and make sure that they're going to run the business. Sellers sometimes they're upset by that. They say, "It's my business." But you're really partners with the franchisor. You really have to work together to get this deal done.
You really have to work together to get this deal done.
Jeff: You've worked with thousands of people. Your firm certainly has Tom Spadea with thousands of franchise business owners no doubt far and wide, your region of the country and probably throughout the country as well. No doubt that you have seen certain common issues come up among business owners, that for whatever reason there was something that they lack. Maybe it was knowledge of how to run a business somehow, or there was something that created some issues for potential buyers that made the buyers just turn away and think, "I'm not going to do this deal. I don't feel good about it." What is the one thing that you've seen that most or many business owners often lack, a common issue that you feel needs to be addressed, that can potentially create a problem in the sale of their franchise and essentially prevent a timely sale of their franchised business?
Tom: I would say the number issue is clean books. That is the real killer for small business owners, and a lot of accountants and referral sources…But you push for the accountants to minimize taxes but that has an effect on equity. And so I've kind of mentioned it before, but I think that's the number reason that will turn off potential buyers is books that are confusing. If you’re running personal expenses through, which really shouldn't be because it hurts the value of the business and…that are not how it's set-up, but I know it happens often. If you're doing that, make it clean, make explainable, and have your books done properly. Lots of companies, lots of franchisors will offer third party vendors to run the books. The last thing a franchisor maybe wants to do is their monthly QuickBooks. I'll tell you, if you're not transparent with the cash flow that's coming in and out of your business, then that's going to create an enormous amount of risk in the mind of the buyer and potentially kill that deal. You tell them one thing, "This is how much money we're making." But when they drill down, they're looking at those numbers. If they're not comfortable with the way you've been handling those books and they're consistent month over month, year over year, and they're really getting back and they're backed up, you're going to have a problem. I've seen that's the number one thing, is the bookkeeping. It's got to be done properly and clean.
Jeff: And it seems to me, and this has been repeated many times throughout the conversions that we've had with so many business consultants, advisors, CPA's, attorneys, they say the same thing Tom, and it's because it's important. It seems to me also that that would be probably the one key piece of take away advice from this conversion today. We saved the best for last and it bears repeating. If our listeners need to get in touch with you for any reason Tom, they need some advice, they need to talk with you about helping to represent their interest and helping them make the choice. Whether that be representing them in the sale of their franchise or just kind of retaining your services throughout the process, how can they reach you?
Tom: They can call our main office, 215-525-1165. They can visit our website at spadealaw.com. I've mentioned we have a nationwide practice. We have clients in just about every state throughout the country. We do everything through email, documentation, and franchisors, banks, and everybody is kind of split up. So we have a pretty streamlined process. We'll talk to any perspective client. We're about referrals as I mentioned. I'll always talk to somebody, if they have a quick question and they're just nervous about something, and then maybe you're three years away, and they just want to ask something, or something on this program today, jog their memory and they say, "Jeez, I just want to ask some question but I don't want the lawyer to turn the clock on." I'll talk to anybody whom they charge. In fact, they need a new person and a new system, and help, I'll be happy to do that. So 215-525-1165, ask for Tom Spadea, and I'll be happy to have that initial conversation.
Jeff: Tom, thank you so much. We're going to have to leave it right there. I appreciate you joining us today here on Deal Talk. Good to have you again.
Tom: Thank you Jeff, I enjoyed it.
Jeff: Tom Spadea, business and franchise attorney at Spadea, Lanard, & Lignana in Philadelphia, Pennsylvania.
Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you'd like more information about buying or selling a business call Morgan & Westfield at 888.693.7834 or visit morganandwestfield.com. And make it a point to check in with us again soon for valuable information and insight from our growing list of small business experts here on Deal Talk. My name is Jeff Allen. Thanks again for joining us and I'll see you next time.