Two Top COVID-19 Legal Issues: Force Majeure, Sales Figures

So far, there haven’t been many franchise-specific COVID-19 legal issues making their way to the courts. In the recent Legal Eagles coverage, however, franchise attorneys say the chaos of the past 16 months will certainly have some legal effects.

Two key issues highlighted by many Legal Eagles were the force majeure clause and how to make financial performance representations in light of the pandemic.

Sam Khajeei, a partner at Canadian firm Nerland Lindsey, said the force majeure clause was one of the first places the industry looked for contractual relief. The clause essentially says contracted parties can renegotiate or nullify a contract based on “acts of God” or unforeseeable issues, but the language is pretty broad.

“The FDD language was an early place where I looked when the pandemic hit, and it seems that force majeure clause largely didn’t apply,” said Khajeei, who sees that vague language as a point of contention. “How do you see people clarifying that very standard language? I imagine franchisees want looser language and franchisors want more strict language. And for businesses that couldn’t survive COVID, does force majeure apply or is that something that will be tested in the courts?”

He thinks there will be some litigation there, but also some changes to franchise disclosure documents. If anything, COVID-19 was a reminder that seemingly boilerplate language can have a bigger impact.

“A force majeure clause is really boilerplate, and the problem with calling something boilerplate it appears to be something that cannot be changed, you chuck it in and don’t think about it. The problem is, when you do that and something like COVID happens, I think you realize what a clause like that can be. As far as what the litigation looks like, it really comes down to what the langue looks like in the actual clause,” said Khajeei.

Financial performance representation issues are also likely to arise. The last fiscal year was a mess—some companies had dismal sales, others had a great year. How that is portrayed in the FDD is a big question mark at this stage as the guiding documents are just rolling out.

“People are just starting to deal with the realities of how do you convey the financial performance of this time. I think that will be something to work on for a long time. The decisions people make on that will reverberate on their newly opened franchises,” said R. Henry Pfutzenreuter, a lawyer at Minnesota-based Larkin Hoffman (and one of the younger Legal Eagles).

It’s not just what to include for the 2021 FDD, but how do finances continue to change as things reopen, adding a little more chaos to the numbers.

“When will COVID be over? I don’t know that it will be the flick of a switch. I can’t wait for my vaccine, but the pandemic won’t end with a shot in the arm,” said Pfutzenreuter. “I think there’s going to be a long tail of issues.”

Those issues could also be brewing now. Financial performance representations made prior to the pandemic may not hold up. That could lead to litigation or legal issues from franchisees looking to get out of their contract.

Stay tuned to Franchise Times throughout April as we’ll be exploring some of the potential and actual COVID-era legal ramifications through the month.

All of the Best Franchise Investments Start With These 10 Essential Steps

Think of a franchise as a business-in-a-box. Franchisors provide their franchisees with all of the items and equipment necessary to start a business — branding, marketing ideas, sales and marketing training and field consulting. That said, franchisees must do research and ask the right questions before making the long-term and legally binding commitment of becoming a franchise owner.

The Federal Trade Commission requires that all potential franchise owners to wait 14 days before any money passes hands. This gives you time to do due diligence and review the franchise documents with the consultation of a legal professional. After working in the franchise industry for 15 years as a franchisor, I’ve found that taking the time to assess your ability to handle a franchise leads to success for both the first-time franchise owner and the franchisor.

1. Assessing your own skill set

First and foremost, you need to assess your own skill set and be honest about it. Sit down and list all of your previous jobs, positions, and responsibilities. List your strengths and weaknesses, likes and dislikes, relevant points from past evaluations, and transferable skills

You are going to be the boss — initially, at least. You will be managing, mentoring, and evaluating people and will be required to make managerial decisions. Have you had the experience of firing people? Is that something you are able to do with professionalism and compassion? If your soft-skill set is lacking, can you break out of your comfort zone to get it up to speed with training and development?

2. Articulating your passion

The first question many people have about any business opportunity is, “How much money am I going to make?” It’s a reasonable question, but it’s not the right question. Instead, you should ask yourself, “Am I going to enjoy the business and get along with employees?” You should be able to identify what makes you personally and professionally happy, and the business should align with your personal beliefs and values. I’ve owned franchises that made good money, but I didn’t enjoy them because I didn’t see eye-to-eye with the management team. Your philosophy should resonate with the parent company’s philosophy.

3. Calculating your investment level

How much are you looking to invest?  You need to be comfortable making an investment that requires a significant amount of liquid capital. If you are stretched thin to the point of being uncomfortable, then you’re going to make decisions that aren’t best for the business. If you’re thinking with your wallet and how much money you have, you won’t be thinking with the creative and passionate part of your mind that should be the heart of your business. Understand all of the fees involved with establishing your first franchise and have enough capital to cover them.

When buying a franchise, be aware that you’ll need to pay a franchise fee, which provides you with your license and the key to open the door to all of the business’s operating systems, earned wisdom and branding. The brand is a known entity with a built-in following, and paying the franchise fee gives your business automatic credibility. Also, factor in franchise-specific fees, like royalties, when creating your business plan and pro forma. 

4.  Evaluating your long-term personal plan

If you don’t have a long-term personal plan, laying out one before you think about entering a franchise commitment is imperative. Entering into a franchise contract is a marriage, complete with all the joys, rewards, headaches and heartaches. Franchise agreements last anywhere from 5-25 years, with an average of 10 years.

You should have an idea of when you want to retire, if you do. If you have a family, will you downsize? When? Do you see yourself living where you are now? Do you want to travel? What is your 5-10 year plan, and does owning a franchise give you the flexibility to meet your personal goals? 

5.  Determining your role: owner-operator, semi-absentee owner or absentee owner

There are some businesses that say you’re going to have to be an owner-operator. Other businesses may claim you can just buy a franchise, and it will run on its own. Neither is completely true: Your role in the business is more of a process, and you have the power to choose how that process flows. Personally, I don’t believe there is any such thing as a passive business unless you have an operating partner.

Running a business isn’t like buying stock — you don’t purchase it and wait for it to earn money.  When I bought my first franchise, I was an owner-operator, but I wanted to spend more time with my family, so I became a semi-absentee owner. Finally, I hired the right people, handed the day-to-day operations off to them, and became an absentee owner. I was very hands-off at that point, but I never could’ve begun that way. You have to spend some time getting to know the business, understanding it and gaining the acumen to make the right hiring decisions for people you trust. 

6.  Identifying the brand that best suits your passion and wallet

According to a 2019 Statista report, there were 773,000 franchises in the United States, and franchise consultant Mark Siebert predicts that 2021 is going to be a banner year for franchise growth. There’s a lot to choose from, and the start-up fees vary wildly. Budget Blinds LLC can cost anywhere from $125K to $245K, while a Wyndham Gardens franchise begins at $447K and can go as high as $14.4M. 

If you can’t see yourself working in window blinds or hotels, there are thousands of other businesses in dozens of other areas to choose from — from restaurants to real estate companies to fitness centers to salons to hardware stores. It all comes down to what you love and what you can afford.

7.  Consulting your inner circle

Be it a family member, significant other, confidante, business consultant, or lawyer, someone in your inner circle is going to raise a point that you hadn’t considered before, and it’s worth the conversation. You’re going to be laying out a significant amount of time and capital, and your personal life is going to change just as much as your professional life. 

For those with partners or families, this could be an issue. For the mental health of all, talk about how those changes can impact your relationships. Even those without partners or families will have additional responsibilities once they become a franchisee, and the work-life balance will need adjustment.

8.  Talking to current and former franchise owners

This point might seem like common sense, but not everyone seeks out current and former franchise owners who have worked with the business through good and bad times. You should talk to franchisees who own businesses that interest you, and the easiest way to do that is to just visit the business and ask to speak to the owner. They can tell you about the management team, training, franchise fees and other things you probably haven’t even thought about.

On the flip side, talking to people who have been unhappy in their experience can provide you with pitfalls to avoid. But be judicious in your listening and take the overly optimistic and overly pessimistic owners with a grain of salt. There is no business that is problem-free, just as there is no business that is completely rotten.

9.  Meeting the management team

After you’ve found a business that you’re passionate about, is within your budget and one you’ve researched well, it’s time to talk to people in the company, see what their processes are, how they’re organized and how they’re going to support you and get your business off the ground — because that’s why you’re paying for a franchise in the first place. 

Make sure you have ongoing support. If you click with someone in the management side and with a team that’s there, you’re primed to have a successful business. You’re going to run into bumps, no matter what anyone says. I haven’t met a single person who has said they’ve had a smooth ride with the business they’ve owned. So when you ride those bumps, make sure that people on both sides have the same goals. You want the right team who shares the right business concepts.

10.  Developing your exit strategy

While it may seem counterintuitive to plan your leaving before you even begin, developing your exit strategy is both a part of your long-term personal plan and an important component of your overall business strategy. Even at the beginning, you should know your end goal for the franchise. You may want to grow your business and clientele to a certain point, then sell, or pass on your business to your children, grandchildren or other family members. 

How easy is it going to be to exit? This is a question you should ask the management team when you meet with them. You want to make sure that your exit, regardless of whether you’re choosing to sell your franchise or pass it on, is just as thought out as your entrance into the franchise world.

I’ve found franchising to be the ideal work environment for me. Though I’ve hit rough spots myself, using this roadmap has helped me stay on course, and ultimately thrive.

Franchise Resales 101: Why an established franchise could suit you better than a start-up

‘Resale’ is a term used in the franchising sector which refers to an established franchise which is being sold on. 

Many individuals looking for a franchise business opportunity are often looking for a start-up, but some may instead consider a resale opportunity. Resales might be a favorable option if they cannot find a new territory in their chosen area, or realize their strengths lie in growing a business and a team. 

At the beginning of their journey with Home Instead, franchisees are encouraged to consider the future of their businesses, including their exit strategy. Owners who are looking to sell on their business are provided with a wealth of support, helping them to realize their investment whilst being sure they are handing their business over to someone who shares the Home Instead ethos and mission. 

So, what is a resale?

A resale is a franchise territory which is an established business and may have been built up over many years, which is now being sold on. 

A franchise resale has an established reputation, customer base, team of employees and a guaranteed revenue. 

Why do resales come about?

Resales are part of the business cycle of any mature franchise network. Franchisees come to a point in their journey where they may wish to retire, realize their investment or move onto something different. 

Most franchise networks in the UK will have a number of resale territories available at any one time.

Resales bring enthusiastic new faces into a franchise network, who are invested in the brand and will help achieve further growth for the company.

How is a resale valued?

A franchise resale is valued on a multiple of the operating profit of the company, representative of the success and turnover of the business. 

You’re investing in the business which the previous owners have given their time to establishing and building, helping it to become profitable and successful. Franchise resales require a larger initial investment than start-up franchises, but financial help is available. 

Many banks look favorably on the franchise sector, due to the very high percentage of successful businesses. Resales also have a track record in the form of a proven profitable turnover, an existing team and an established client base, meaning banks will look even more favorably on any lending.

Resales also come with a franchise fee and ongoing royalty fees as they access the same level of franchise support as start-up franchisees. 

How does the franchisor fit in?

As a franchise, the business isn’t a standalone company- it is part of a franchise network. The franchisor wants someone to invest in the resale office who will continue to grow the brand, mutually benefitting their franchise network as a whole and the individual. 

When owners decide they want to sell their business, the franchisors may become involved to ensure the franchise is sold to someone who aligns with the franchise’s mission and ethos- a good fit who will continue to achieve success. Many franchisors help to advertise and market resales, as well as recruit new owners. 

Home Instead, alike many franchisors, are there to guide franchisees from the very first day of their journey until their last and are invested in ensuring their exit from the company is supported. 

What are the benefits of a resale as opposed to a start-up franchise?

For people who are looking to step into an established, profitable business, a franchise resale might be a perfect opportunity. You don’t have to deal with any of the initial development of the business, instead accessing an established team, customer base, and revenue from day one. 

Resales are perfect for someone who has run a business before and is looking for more of an investment than a hands-on opportunity. You may want to buy a resale in a growing market or sector, and manage a steady, profitable business. 

However, if you want to experience the highs and lows of starting your own business, you may be more suited to a start-up franchise. 

A resale franchisee ideally needs to be able to engage with and manage people straight away, as the existing team will already be established and have their way of working. They must have a very clear vision, ethos and culture that aligns with the franchise network.  With a franchise resale, you get all the positives of buying an established business, with the added benefits of a franchise support package and a well-known name.