First published on AllBusiness.com, December 2011
There was one thread that was common to many of the emails I received after my November column appeared. People wanted recommendations for local lawyers or consultants to work with them, either in starting a franchise system or for evaluating a franchise opportunity.
Having a qualified franchise consultant and franchise lawyer is important before you begin to design and develop your franchise system.
Franchise law primarily deals with how a franchisor is required to offer their opportunity and there is little, if anything, in the law that impacts what that opportunity is or how the franchise relationship is structured – including the fees, rights, and obligations of the franchisor and franchisee. A mistake made by many people new to franchising is believing that most franchise agreements are uniform and that one agreement is going to be similar to another, even in the same industry. That mistake in understanding is one reason that many franchisors and franchisees run into significant problems later on. Franchising is significantly more about business issues than it is about the law, and you will need to evaluate different possibilities and make a host of decisions on the feasibility of franchising and the structure of the franchise system required to meet your goals long before you need to speak with a lawyer.
If you don’t believe me, spend a Sunday afternoon reading the franchise offering documents for a few concepts that all sell burgers, like McDonald’s, Burger King, Wendy’s, Five Guys, Smashburger, Hardee’s, Sonic, Checkers, and A&W. What you will find is that each have significantly different offerings including level of investment, profile of franchisees, classes of franchisees, initial fees, continuing fees, territorial rights, supply chains, sources of revenue, marketing requirements, training, headquarters and field support, in-term obligations, post-term obligations, length of agreement, renewal possibilities, and a hundred other things that make each of them unique and marketable against the others.
Equally important, when evaluating whether or not a particular franchise opportunity meets your needs, having a lawyer is essential before you sign the franchise agreement. Buying a franchise without the assistance of a qualified franchise lawyer is the single biggest mistake you can make, and is the one that frequently leads to problems between the franchisor and the franchisee later on. If you go it alone and the rights you expected to be in the franchise agreement are not there, the only person to blame is yourself.
There is a natural inclination, when you start to explore something as complex as franchising, to engage a lawyer or consultant to assist you. But, before you engage any professional to work with you, there are a few things you should do first.
I have learned over the years that even the most experienced expert becomes a much better advisor when their client has some knowledge of the subject under discussion. The client also is able to better participate in the engagement, and is able to provide the needed direction to their outside advisor on the culture and other aspects of the business that will impact the planning process, and ultimately whether or not the execution of the strategy will be successful.
For this reason, my firm begins every engagement with our emerging franchisor clients with several hours of classes and discussion on the basics of franchising, and of course we also recommend that they read Franchising for Dummies. Besides providing them with some knowledge about franchising, understanding the dynamics of franchising enables them to begin to think about their company in the context of being a franchisor. It also allows for the removal of many of the myths many people have about franchising that often impact their thinking and decision-making during the franchise development process. Before you engage outside experts to assist you, invest a little time and begin to learn all you can about franchising on your own.
There is an abundance of books and magazines available, and the Internet is full of professional papers, useful articles, well thought-through presentations, and a ton of extremely good and factual information. Much of the material on the Internet is also free.
But you need to be careful, as there is a lot of junk out there written by folks that none of the professionals in franchising may have even heard of. Be wary of the websites and blogs where everything is black-and-white and the site is biased toward one view on any issue. Be careful when relying on any website where those who think differently or express alternative views are vilified by the “regulars.” Every industry has the type of site where people post anonymously, and the “experts” on such sites seem to have all the time in the world to post. Biased information generally is near-useless information.
When looking for information on the Internet, many of the law firms and consulting firms, MSA Worldwide included, post articles, presentations, and industry news on their firm’s websites. A few even have newsletters that you can subscribe to. You can learn a lot about franchising and the professionals that write the articles in this way.
I will admit, since I was just reelected to its board of directors, that I am biased toward the information provided by the International Franchise Association on its website (www.franchise.org) and in its newsletters and magazines. The IFA is arguably the most pro-franchising site on the Internet, and its bias toward franchising is clearly projected. But much of the information in its newsletters and magazines is relatively unfiltered and is generally always reliable and verifiable. On the site is an abundance of research produced by the IFA Education Foundation as well as courses on franchising. You will also find information written by franchisors, franchisees, and suppliers that are remarkably balanced for an industry trade association. Most of the information is free and available to non-members. The IFA also has conferences, programs, and meetings you can attend and, on their calendar, they list others in franchising. When you begin to explore franchising, in addition to reading my book Franchising for Dummies, the IFA is where you should start your exploration.
Once you are comfortable that you have a basic understand of franchising, working with knowledgeable business advisors truly should be your next step. This is most important if you are looking to become a franchisor, because it will be the business determinations that you need to make that will drive the terms of the franchise offering. For the emerging franchisor, the lawyer becomes essential once the decision to franchise has been made and the terms of the franchise offering have been designed and developed by management and their business advisors. At that point, your consultant will be able to provide you with recommendations of several lawyers to work with, based on their reputation among their peers.
If you are considering becoming a franchisee, most of the business advisors serving the franchisee community are franchise brokers. While many franchise brokers are extremely knowledgeable, it is important to remember that they make their principal living working for the franchisor, and selling you one of the franchises they represent is their goal. It is not recommended that you rely on the franchise broker or their legal advisors as a replacement for your own legal counsel, any more than you would take advice from the seller’s attorney when you are buying a house. While brokers can be a source of good information, it is important that you have your own independent legal advisor to assist you in evaluating any franchise opportunity and to help you understand the terms of the franchise agreement you will be signing. As a prospective franchisee, working with a franchisee lawyer is absolutely essential. This is not a place you should look to save money, and there is no way to overemphasize the need for you to work with a qualified franchisee lawyer who represents you.
When looking for a lawyer to work with on a franchise-related matter, remember that all lawyers are not equally knowledgeable about franchising. In fact, most members of the bar really don’t have enough working knowledge about franchise law and practices to be of much use to either an emerging franchisor or prospective franchisee, and in reality can be quite dangerous to use. Given its importance in the U.S. and the world economy, I am still surprised that franchise law is not a major subject widely taught in law school (only around ten law schools in the U.S. teach about franchising). It’s something that most lawyers learn from experience. You need to locate a lawyer who is experienced in franchising, and you should never rely on a general practitioner.
While the trend is to work with both franchisors and franchisees, the vast majority of franchise lawyers still work only one side of the street; that is, they represent either franchisors or franchisees, but not both. The vast majority of franchise lawyers are predominately franchisor-oriented. As with most members of the bar, franchise lawyers are also split between those that are principally litigators, or those that are principally transactional-oriented. If you are planning on becoming a franchisor, the lawyer you want to work with is a transactional lawyer. If you are looking to become a franchisee, since the pool of legal counsel available to you is smaller and because of the type of services you are requiring, both transactional and litigation lawyers generally will be able to provide you with the advice you need. But experience is still the key here.
So, where do you find the best franchise lawyers? When selecting any professional, it is their reputation for performance that is important to you. Getting a recommendation from another professional you work with and trust is the strongest indication of the competence you can have when conducting your interviews. As I mentioned above, ask your franchise consultant to recommend to you several law firms that they have worked with and whose work product they stand behind. At MSA we routinely work with more than 40 law firms and generally provide our clients with two or three recommendations that we believe meet our client’s overall franchise legal needs. Most franchisors will continue to retain their outside general lawyer for general corporate and tax matters, and will use the franchise law firm only for franchise-related issues. Another great source of advice may be your outside legal counsel and possibly even your accountant.
The lawyers you interview should be members of the American Bar Association Forum on Franchising. This is a practice segment of the ABA, and almost all serious franchise lawyers and most franchise business advisors, even if they are not lawyers, are members and regularly attend their programs. Since the forum is peer-driven, the lawyers and consultants you interview should routinely be selected by their peers to speak at the forum’s annual meeting and to regularly contribute to its publications. Why would you ever want to work with a professional who is not routinely and regularly recognized as an expert by their peers? Many, but not all, franchise lawyers and consultants will also be members of the International Franchise Association’s Supplier Forum and, as with the ABA, the better practitioners will routinely be asked to speak at the IFA’s legal symposium and other programs.
Because some franchisee-oriented lawyers believe that the IFA is more supportive of their franchisor members than their franchisee members, quite a number of the better franchisee lawyers are unfortunately not members of the IFA. It is a sentiment that I understand based on my many years of experience in the IFA, but I don’t believe it is reflective of the organization today. A good source for locating franchisee-oriented law firms is the ‘Mainly Franchisee’ section of Chambers USA. Firms only make it onto this list through peer review, and based on a review of the firms they list, I think they do a good job. The information can be found at chambersandpartners.com/uk/Editorial/42656.
Don’t be overly influenced by the prominence of an advertisement in a directory or in a magazine. You really need to look for proven experience. Ask for references from their existing and past clients, and check them out. Examine their specific practice experience, which is usually described on the lawyer’s own website. You should also ask your current lawyer to check the information found on the lawyer in a respected published directory such as Martindale-Hubbell.
It is foolish to pick any professional based on their hourly rate. Lawyers and other professionals’ professional fees are usually based on their experience and their reputation. All professionals are not equal, and saving money by picking someone who is not best-of-breed can be much more expensive later on. Besides, with experience comes speed. Get an estimate of the total cost of the engagement or the services you are requesting, not just what they will bill you by the hour. The hourly billing rate is really not important. Have your general counsel work with you in reviewing the engagement letter of your franchise lawyer and consultant before you sign it.
In most cases, the geographic location of the lawyer and consultant is immaterial. Today, most franchise lawyers, especially those who work with franchisees, perform much of their work with clients electronically or over the phone. All qualified franchise lawyers and consultants are fully capable of working with you, and your goal is not to select the closest professional but the best professional. “The best” does not mean the most expensive, nor does it mean the most convenient geographically.
Finally, if you perform the investigation I recommend above and when contacting a franchise lawyer find out they don’t provide the services you require, ask them for a recommendation. The ranks of great franchise lawyers and business advisors are relatively small. While we may hold different philosophical views on the issues, we know the professionals on the other side who we respect, and many of them are also friends. It makes dinner conversations so much more interesting because of that.
Take your time and invest in the best. Selecting your franchise lawyer and consultant is one place where you cannot afford to make a mistake.
In the next few articles, we will begin look at how to determine if your business is ready to become a franchisor, and what you need to do before you begin to offer franchises. Let me know at email@example.com if you have any feedback, questions, or suggestions for future articles.
I look forward to our continuing dialogue.