By Michael Seid, Managing Director, MSA Worldwide
MSA routinely works with lawyers in developing the franchise documents used by both new and existing franchisors. Helping our franchisor clients make the choice of which law firm to work with is an integral part of our practice. Having a Franchise Disclosure Document is a requirement of being a franchisor. Because of that, with the exception of franchisors that have their own in-house franchise counsel, those that foolishly attempt to write their own documents, or those that unfortunately choose to get their legal documents from a franchise-packaging firm, most franchisors understand the necessity of selecting outside legal firms to assist them. Franchisors are generally well represented by lawyers.
At the same time, while we do not routinely provide advice to prospective franchisees, when asked, we email to prospective franchisees a list we have put together of those franchisee lawyers that we respect and recommend. It is still a sad fact that too many franchisees sign franchise agreements today 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 have a lawyer or independent business advisor work with them in evaluating the franchisor and its legal agreements.
There are hundreds of law firms that advertise that they 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 those organizations’ seminars and programs as presenters or as attendees. Others, whose practices are more general in nature, don’t participate in the IFA or ABA but still offer their 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, but some that do really are not qualified to do so.
On the surface, providing legal services to franchisors does not seem to be 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 Franchise Disclosure Documents. All lawyers have to do is complete twenty-three separate areas of disclosure, attach a franchise and related agreements, make certain that the client has included the necessary financial statements, and in a handful of states, send the documents with the required fees to state regulators for approval. That’s really not hard to do with the thousands of Franchise Disclosure Documents available for them to copy from. Franchisors that believe this put not only themselves but also their franchisees and their franchise systems in jeopardy.
For franchisees, having a lawyer work with them may seem unnecessary. After all, the Franchise Disclosure Document (FDD) is written in plain English, the franchise salesperson has explained to them the terms of the agreement, franchising appears to be a safe investment with little chances for failure, all franchisors are the same and after all, everyone knows that 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 get from investing in a qualified due diligence and investigation? This is hardly the truth. I am frequently quoted disparaging franchisees who do not seek the needed advice to protect their families and their equity from bad franchise investments and, in my most gentle and understanding of tones, if you invest in a bad franchise opportunity without first obtaining the services of a qualified franchise lawyer, the only person you have to blame is yourself. Spending money on lawyers only when issues arise, given the nature of franchise disclosure, is frequently an expensive exercise in futility. However, when things go bad, great franchisee litigators may be your only option. Better to invest in the front end of the arrangement than attempt to solve the problem later on. Talk to any franchisee who has had to seek redress after the fact.
I have participated as a litigation consultant and/or expert in a number of franchise-related lawsuits. Many of the suits involved disputes between franchisors and franchisees, and others included a host of tangential issues including whether or not a franchisor has responsibility for the actions of its franchisees. The underlying facts in each case vary, but one thing remains constant whether I am on the franchisor or the franchisee side of a dispute – which lawyer a franchisee or franchisor selects as their legal advisor frequently determines whether or not they will prevail when things go bad.
For franchisors, merely having the 23 items in the FDD completed and having a franchise agreement drafted is insufficient. There is an art and an expertise to ensuring that the disclosure document and the underlying agreements are not only well written and meet the requirements of the franchise rules, but also include those elements and terms that will provide you and your system some “safe harbor” down the road. Even for franchisors that most experts would not allow their relatives to invest in, having complete, accurate and well-drafted documents offers substantial protection. In offering a franchise, proper disclosure is a franchisor’s best defense against claims later on. Selecting great franchise lawyers is essential and not difficult to do.
For franchisees, it is important to remember that not all franchisors are created equal. Some of the best-looking opportunities include terms that should be negotiated away or are offered by franchisors that do not truly hold the promise of meeting your expectations. An expert in franchise law can help you understand what you are getting yourself into, and is your best protection against succumbing to what might kindly be described as your “entrepreneurial fever.” I can assure you that 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 arrangements that are not suited to your goals.
So, how do you find the right franchise lawyer to work with? A starting point is to ask experts in franchising. If you are a prospective franchisee, some of the experts are franchisees you may know, regardless of what franchise they own. Talk to your local franchisees and ask them for the name of the lawyer they used. Even if they did not use a lawyer, they likely have a network of other franchisees who can give you recommendations. Getting advice from people who actually used their services is the best method of picking 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 whom you respect and ask them who they use. Calling several franchisors will give you a list of respected lawyers, and don’t be surprised if many of the franchisors you call seem to be working off 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 International Franchise Association or get a list from the ABA’s Forum on Franchising of lawyers who are members. Call a reputable franchise consulting firm or other provider to the franchise industry. They know who has the best reputation in franchising and who does not.
But regardless of where you get your recommendations from, interview the lawyer. Find out about their experience, get a list of references, and call their existing and former clients. Ask them how frequently they make presentations at the IFA or the ABA franchise conferences or have articles published in professional journals. If they frequently are asked by their peers to make presentations and submit papers, that is a solid indication that they have a good reputation in the profession. Professionals invite other professionals to speak at these meetings.
The nature of franchise law does not require that you select a lawyer that is close to you. The lawyer you select can be anywhere in the country, and whether or not you ever have a sit-down with them is irrelevant. Given the nature of communications today and the ease with which documents can be sent electronically, it is the quality of your advisor that is important, not their proximity to you.
How much does legal advice cost? It varies from lawyer to lawyer, and some of the best of breed 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.
Franchising is one of the best methods for companies to expand and for individuals to obtain their “Great American Dream” of business ownership. But enter it with some common sense. Getting the best legal and business advice on the front end is far superior to the alternative.
Do you have further questions about legal advice in franchising?
MSA can provide expert guidance on engaging quality advisors for a successful and sustainable franchise system.