Franchise Programs for Veterans

As franchisors look to recruit new franchisees, one viable segment of the population is veterans transitioning out of active duty. The International Franchise Association (“IFA”) has established the VetFran program that links veterans with franchisors willing to offer discounts and incentives to veteran franchisees.

If you, as a franchisor, are interested in participating in the IFA’s VetFran program, you must be a member of IFA. All members of IFA are eligible to participate and there is no fee to be listed as part of the VetFran program. If you are already a member of IFA, you can sign up for the VetFran program by going to: http://dev.vetfran.com/franchisors/signup/.

While there are no fees directly associated with joining the VetFran program, there are requirements that a franchisor discount fees. Each franchisor must offer an incentive to veterans of no less than a 10% reduction on the initial franchise fee. Beyond that, there is no restriction as to what types of discounts and/or benefits are offered to incentivize veterans. Several franchisors eliminate the franchise fee entirely or offer a lowered royalty rate.

Once the franchisor is part of the program, the franchise system is listed in a directory of franchise opportunities. If you desire to have a more prominent listing, for an additional fee, a franchisor can have their franchise system featured prominently in the directory and in certain advertising. It should be noted that the VetFran website receives over 40,000 hits per year and the IFA is constantly working to establish relationship with national veterans programs and groups to bring this program to their attention.

The advantages to joining VetFran are several. The franchisor is able to use the VetFran logo on all promotional material and can use it on their letterhead and website which can be a helpful marketing tool to let the public understand the franchise system supports veterans. It is a minimal investment (through membership in IFA) to have access to a group of prospective franchisees that may otherwise not be as accessible. In addition, the franchisor can create a “calibration” assessment to help the VetFran program locate ideal franchisees. The assessment helps match a prospective franchisee’s skills and experience with a particular franchise opportunity. Lastly, VetFran is part of the Veteran Job Bank that allows veterans to search for veteran-friendly job opportunities upon transitioning out of service.

Once a part of VetFran, there is no prohibition against the franchisor making direct contact with veterans programs to promote the franchisor’s discount and veteran-specific offering. A franchisor is not restricted to using only the advertising made available through the VetFran program.

Should you desire more information about the VetFran program, you can find information on their website at: www.vetfran.com.

(This blog post is provided for informational purposes only and is not legal advice or an endorsement of any product, service, group, organization or program.)

Additional Franchisor Liability From Franchisee Employees

Over the past several years franchisees have been claiming that they have employee based claims against the franchisor. This has been especially prevalent in the janitorial and other service based franchises. Now we are getting cases where employees of franchisees are making claims that they are employees of the franchisor in certain cases.

 

Generally franchisors have been able to say that they are a separate entity from the franchisee and therefore cannot be liable to employees of the franchisee. But recently in New York, employees of Domino's Pizza franchisees were able to amend their complaint against the franchisee employers to also include Domino's, the franchisor, for violations of the Fair Labor Standards Act and the New York Labor Law. This case is Cano v. DPNY, Inc.

 

While this case is still pending and the franchisor may not be held liable in the end, it is concerning that the court did not dismiss the amended complaint, as expected. Some of the reasons the court gave for not dismissing the amended complaint are based on the following actions by Domino's:

 

1) Domino's promulgated compensation policies and implemented them through the Domino's PULSE system which included tracked hours, wages and payroll records. These were submitted to the franchisor for review.

 

2) Domino's created management and operation policies and practices that were implemented at the restaurants by providing materials for use in training store managers and employees, provided posters and directions for employee's tasks and monitored that performance through required computer hardware and software.

 

3) Domino's developed and implemented hiring policies.

 

This is just one more reason for a franchisor to have their franchise attorney review their policies, including their operations manuals, to ensure that they are limiting their exposure to liability.

Financing your Franchise

If you are considering purchasing a franchise, one major hurdle to overcome is how to fund the new business. If you have tried to obtain a loan or refinance a business, you know the lending environment today is very different from what it was even 5-6 years ago. In essence, it is harder to obtain financing, even for those with great credit ratings. There is money out there, but it harder to access that it was previously.

When looking at funding the new business, you first need to evaluate all the financing options available and determine which will be the best route for you to take. Because lack of sufficient capital in the initial stages of starting a business (whether your own concept or a franchise) is one of the leading reasons businesses fail, you want to make sure to have adequate financing in place before you purchase. The International Franchise Association (IFA) has a dedicated website to help you look at all available funding options to help you choose which option(s) is right for you: http://franchise.org/IFACreditAccess.aspx.

Below is a brief overview of some of the financing options available to franchisees:

1. Cash. Obviously, if you have enough cash, you have greater options both with conventional financing options, and in quickly getting your business started. As they say, cash is king. But you don’t want to make the mistake of using all your cash up front and not having the ability to access additional capital or to obtain financing down the road.

If you don’t have the cash available, you may want to consider taking on a partner who does have sufficient capital. This is a risk that you will have to carefully weigh when determining if a person is the right partner for you and the business.

2. Veteran Programs. If you in the military and close to retirement, or are the spouse of an active member of the military, you may qualify for the Patriot Express Pilot Loan Initiative. This program is an SBA-guaranteed loan program in which the SBA guarantees up to 85% of the loan, up to $500,000 at the SBA’s then-current lowest rates. The SBA website contains eligibility criteria and requirements.

In addition, the IFA has started the VetFran program to help honorably discharged military personnel finance their purchased franchise. Franchisors who participate in the VetFran program will typically offer reduced initial fees and/or reduced ongoing and other initial expenses.

3. SBA Loans. This option is especially viable if you are looking at a franchise system that has registered on the SBA Registry. The process to obtain financing is faster and easier with a registered franchise system.

4. 401(k) and IRA. This is a risky option, but has its advantages if properly done. Before moving forward with this option you should speak with a qualified tax attorney or accountant who can discuss the tax implications in using retirement funds.

5. Equipment Leasing. Remember, you don’t always need to purchase everything up front. If the franchisor allows you to lease, this can be a great alternative.

6. Conventional Loans/Commercial Lending. This type of funding is often difficult to obtain because your credit score is the most important factor in determining to grant or deny a loan. Even then, a great credit rating will not often overcome a high debt to income ratio. You will often need to put 20-30% down in order to qualify.

7. Franchisor Financing. This option is rarely made available. However, if it is, the financing and terms will be set out in Item 10 of the FDD.

8. Other Options. In addition to the above there are home equity loans, signature credit lines and online loan portals. 

Forgotten Essentials: Estate Planning for Business Owners

Business owners understand better than anyone that there are not enough hours in the day. With all the time, effort, and duties surrounding owning a business, a business owner can get overwhelmed with the number of items on their to-do list. Often a business owner will overlook one legal area that may ultimately be most important: estate planning.

 

Business owners work hard to build their businesses. This is usually done with the goal of providing for their family. However, without some estate planning, if the business owner passes away, all the hard work will not have been worth it because the family will not be protected.

 

The first estate planning tool for a business owner to consider is a buy sell agreement. This is an agreement that governs what happens if an owner dies or chooses to leave the business. This protects the interests of all owners. By agreeing beforehand how to handle these situations, the owners reduce the risk of lawsuits or other issues which could harm or ultimately ruin the business.

 

Next the business owner must consider estate planning documents that apply if the owner is incapacitated. This includes powers of attorney and advanced directives. A power of attorney is an authorization for someone to act on behalf of another regarding that person’s financial or legal needs. If an owner is incapacitated, then someone needs to have the power to make decisions and keep the business operating until the owner is able to do so himself or herself. Advanced directives are a set of written instructions for taking care of the health care decision of someone who is incapacitated. This helps ensure that the wishes of the owner regarding the medical they would receive if incapacitated are followed.

 

Finally, the business owner should make a will and consider using a trust, family limited partnership or LLC for certain property. This ensures that the business owner’s assets are divided between his or her heirs in the way that the business owner believes is best. The estate planning tools used by the business owner may have significant tax consequences.

 

In making any of these estate planning decisions, a business owner should consult an attorney to decide what would be best for his or her circumstances.

 

 

Success in Franchising

When I tell someone that my business law practice focuses on franchising, I will at times get a blank stare. This is where I explain that franchising is a concept where a person licenses out their brand and business system to another person in order for that person to operate a similar business under the same name. If I am still getting a deer-in-the-headlights look, I will say, you know, like McDonald’s. Once the golden arches are mentioned everyone understands.

 

However, I was recently reading an online article from Entrepreneur Magazine about the top franchises[1]. The surprise I took away from this article was the fact that Subway outranked McDonalds on the list of America’s top 10 franchises and the top 10 international franchises.

 

I don’t know the exact ingredients that Subway has combined in order to make their franchise even more successful than the most well known franchise in the world. If I were to guess, I would not bank it on the popularity of Jared as a spokesperson, $5 footlongs, or the innovative and newest sandwich. Instead, I would guess that, in some way, Subway’s franchisees are making more money than McDonald’s franchisees.

 

Whenever I meet with a new startup franchisor, the number one thing I like to emphasize is that a successful franchise brand is one in which the franchisees are successful. There are other issues to consider for success, but a franchise system in which the franchisees have the ability to make money will grow. Successful franchisees will tell others about the franchise and franchise sellers and brokers will feel comfortable pushing the franchise brand over other brands.

 

Some other factors that go into the success of a franchise business include: having a teachable system in place; providing the proper amount of support to the franchisees; excellent training; creative branding; and good marketing. All of these things will help the franchise system grow. But when you really focus on these additional items, they all boil down to the same goal: helping the franchisee turn a profit.

 

So the next time you want to brainstorm about expanding your franchise business, first look to your system and see how you can help your franchisees increase their profits. This will help you increase the number of franchises in your system. Maybe one day your system will be even more recognizable than the golden arches.

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[1] http://www.entrepreneur.com/slideshow/222422

Top Franchisee Missteps and Mistakes

With renewed SBA funding by the current administration, now is the time to start thinking of buying a franchise. If you are looking at buying a franchise, there are common missteps and mistakes that you want to avoid. Most of these are simple and will not cost any additional money, but they are incredibly important to keep in mind as you negotiate yourself through the thick packet of documents know as the Franchise Disclosure Document and the Franchise Agreement. This is our top 10 list of common franchisee missteps and mistakes (in no particular order):

1. Not Reading Everything. To make an informed decision as to whether or not this is a good investment for you, you absolutely need to read every document provided to you. It seems like a daunting task, but it is worth it. This is a legal obligation you are considering and if you don’t know what your obligations are, you cannot make an informed decision and I promise, you will discover down the road that you agreed to something you had no idea about. Don’t be surprised or caught off guard.

2. Not Taking Enough Time. You may feel pressured to read through everything and sign on the dotted line quickly, but the truth is, you have time so take it. Remember, you have at least 14 days before you can sign anything or pay any money.

3. Having the Right Documents.  Make sure you have the most current Franchise Disclosure Document (FDD) and Franchise Agreement. If you are talking to a franchisor in June 2012 but you have a 2011 FDD, then there is something wrong. Remember, the franchisor is under federal and state requirements to have an annually updated FDD to provide to prospective franchisees. 

4. Failure to Understand the Product/Service. The franchise may appear to be a great idea, but do you really understand what you are selling or offering to the public? You need to be comfortable with your business and to know how to sell it. This due diligence step is often overlooked to the detriment of the franchisee.

5. Failure to Contact Current and Prior Franchisees. This takes time, but remember #2 above –take time. This includes calling up all the current and former franchisees in a small system and a lot in a mid-size to large-size system. You need to ask questions such as: a) how is their relationship with the franchisor; b) are there problems with the franchise system that are or are not being addressed; c) do they still feel like it was a good investment; d) what is their revenue; e) any advise in making the decision to purchase this franchise. This is just a short list and there are a lot of questions you can ask franchisees. They are an incredibly valuable resource that is often overlooked.

6. Failure to Have Adequate Initial Financing. While the FDD discloses the amounts estimated to start your franchise business, you need to plan for the unexpected. Not having sufficient working capital while in the initial phase of your franchise business could leave you without a business at all.

7. Failure to Have Sufficient Long-Term Capital. The franchise system you purchase is going to change. You will be expected to remodel, to upgrade software, hardware and equipment, and to possibly rebrand the business –all your own expense. Planning for the future by having planned for long-term capital needs will help sustain your franchise business.

8. Underestimating the Time Commitment. Buying a franchise is starting a business. You have a head-start in that you have a recognizable name, but you are still the owner of your own business and that takes a lot of your time. Make sure you are prepared to dedicate the time necessary to make your franchise business succeed.

9. Not Getting It In Writing. Whether you have an experienced franchise attorney helping negotiate for you or not, you need to make sure you get everything in writing. No matter how great the franchisor is today, if there is ever a dispute, you will wish you had that promise to lower royalties in 6 months in writing.

10. Not Marketing. There is a reason that most franchise agreements require a franchisee to spend money on marketing and advertising. Advertising and marketing works. Products and services don’t sell themselves. And remember, your competitor is spending time and money on marketing and advertising so don’t lose a sale to them.