Jeff Wheelock Discusses the Franchise Law

Adam: Welcome to another edition of the franchise consultant podcast. I’m here with my friend Jeff Wheelock from Dickinson and Wheelock law firm. Thank you. Welcome to the show, Jeff.

Jeff: Thanks for having me today.

Adam: So if you could please tell me and our listeners a little bit more about what your firm does?

Jeff: On my part of the firm handles these days mostly franchise-type matters. We represent franchisees we represent franchise owners, some of it is litigation, some of it is creating the FTD. If you’re the franchise already sell franchises, some of it is to review and understand and negotiate the FTD and the franchise agreement if you’re the franchise, unfortunately, sometimes things go badly. And so there’s a need for litigation or arbitration or some sort of dispute resolution, we handle that. And then on a happier note, sometimes people that are franchisees have to develop an asset, they’ve developed a business, they want to sell their business. And so we help with the sale of the business after they’ve been in it for a while.

Adam: So you recently wrote an article about the five things to look for in a franchise agreement. Could you please comment on that?

Jeff: Sure. And for the plug, you can go to Texas franchise attorney dot blog, and the whole article is there. But what we did is we created a little bit of an article of things for franchisees to be aware of. The first one is that, of course, it’s negotiable. And some of the franchise orgs will either say directly or allude to an idea that the franchise agreement is fixed in stone, and it is just simply not negotiable. And they’re not even willing to consider anything for as far as changes and I will tell you, I find that to rarely be the case. My personal experiences a lot of times the franchise ORS We’ll consider changes. That being said, they’re not going to make some of the most obvious changes. And maybe some of your clients think that they’re going to get, most commonly, the franchise owner is not going to change the amount of the initial fee. Most commonly, they are not going to change the amount of the royalty, the royalty rate, or that the royalty is based on gross revenues. People will say well, then Gosh, what does that leave? And my response is, well, the other 50 pages of the contract. So there is a lot. Some of them are issues that are geared toward events of success, let’s maximize your success if we’re going to, you know, be involved in this thing. Things like you know, when I transfer it, I’d like to have the transfer fee reduced. The transfer fee is reduced in theory, you know, if you’re able to do that, then that is more money into the pocket of the seller. Some of them are going to be geared a little bit more towards things that don’t work out very well. And that’s gonna, I’ll get into that in a little bit of another one of the points.

Another issue for people to consider is territory. You know, if you’re involved in real estate, everybody always says location. If you’re involved in the world of being a franchisee, its territory, territory, territory. And to some degree, it’s the location of the territory. But in my mind, it’s a little bit more about the size of the territory. And so you want to make sure or you’d like to work on getting you to know, like as big a territory as possible. And the reason behind this, of course, is that you don’t want to be competing with your brand. You know, in an area that is too close to you, you don’t want another franchisee, who’s offering the same services, the same goods under the same brand, being too close to you. This is America. We can’t keep somebody from having In a similar business moving in across the street, but you want to keep another one of the franchisees having the same brand moving into the close. Another concept and I’m just talking, talking, talking if you want to break up the window

Adam: No this is good. This is great.

Jeff: Another one is aware franchisees, that when you are reading through the FDD, and you’re reading through the franchise agreement, some of the terms may not mean what you think they mean. Some of the terms are, it’s not so much that you’re trying to be sneaky. The lawyer is not trying to be sneaky. It’s just that the terms may not have some of the common-sense meaning that you think that they’re going to meet and I wrote this in the article one of the examples of that has to do with post-termination obligations if this doesn’t work out for you franchisee then you are likely to be terminated whether it is your fault. weather, it’s not your fault. If you don’t want that being a bad location, it’s not your fault. If you are not open enough, that is your fault. Some of these are going to be your fault. Some of them are not going to be your fault. Nevertheless, you’re still going to be terminated. Well, the franchise agreement includes some provisions about what happens to you, if you are terminated, what are your obligations, and some of those obligations make a lot of sense, and they’re fair things like, you have to stop using the trademark. Of course, you have to stop using the trademark if you’re not a franchisee anymore. You have to stop using their confidential information. You’re not allowed to compete with them. A lot of these make a lot of sense and are fair, frankly. But then there are all sums due and so the franchise agreement very commonly will say, and you have to pay all sums do I think that regular human beings that don’t franchise waters, probably think that all sums do means I have to pay All of the amounts of money that were due before the time of termination. Some franchise orgs think that, but most of them don’t. Most franchise orgs interpret that clause to mean, all of the money that you would have had to pay during the remainder of the first term or the full term of your franchise agreement. So let me say that a little bit differently. I’m in the fourth year of my franchise agreement. My franchise agreement is for 10 years. Whether it’s my fault or whether it’s not my fault, the franchise agreement gets terminated. I still have six years left on the franchise agreement in the franchise orgs franchise agreement probably is written in such a way that you still owe them for six more years of royalties and advertising fees and technology fees, and computer fees and convention fees, etc, etc. And so a lot of people don’t realize that so you know, be careful. You know, that word may not mean what you think it means, from Princess Bride. And then the last one that I was going to put, I put in the article and now I may say nobody has to see the article is moving at your own pace. You know and I will tell you I’m pleased and impressed. This is a little pitch for you. A lot of franchise coaches or franchise consultants or franchise brokers discouraged actively discourage their clients from being involved with a friend from an with an attorney, whether it be a franchise attorney or a non-franchise attorney. And I think the idea is that they don’t want anything to stand in the way of the clients signing off on the deal. And I think good and reputable franchise consultants are going to want their clients to talk to somebody like me, not just a random lawyer, not somebody who does criminal law, not somebody who even just does contracts, you know, a real-life franchise attorney. And I think that that serves everybody I think it serves certainly serves the client because they understand the deal that they’re getting into it. Nothing else. I think it serves you well too because you want your clients to be involved in a deal that they understand and they are, you know, appreciative of, you know what the deal is so, so again, that was, you know, a little kudos to you for having me on. Not only are you encouraging people, but you’re gonna, you know, sort of give somebody like me a chance to talk a little bit, so that’s good. And so my last point was to move at your own pace.

The Franchise Disclosure Document, says the Federal Trade Commission, the franchisee has to have that for at least 14 days before they’re allowed to sign. That doesn’t mean that you have to sign on the 15th day. It just means you can’t sign before the 15th day. franchisees you need to work with people like Adam who are going to, you know, help you with the process, but you don’t want to work with people that are going to try to speed you through the process. You know, let’s hurry and get you to the 15th day by God you have to sign I was talking to Al yesterday. And he says why I want to come in and talk to you, Jeff, but I have to sign on Friday. So why do you have to sign on Friday? Oh, because then that’s the 15th day and I said, No, that’s just the first day that you can sign that doesn’t mean that’s the day you have to sign. I don’t, I’m not telling people to slow down as you know, a negotiation tactic. But this is a big investment. And you know, don’t you want to understand the deal and don’t you want to feel comfortable and if you’re not quite ready, and you still need to talk to a few more people, or you still need to visit with an attorney or you still want to talk to them a little bit more. That’s what you need to do. If you the franchisee, or the hot commodity. The reality is, is it’s hard to sell franchises if you’re the franchisor they’re glad to have found you. So, you know, don’t let them convince you that by doubt if you don’t sign today, you know the little old lady from Pasadena is going to come in and sign and take over the territory. That could be true, I find that to be rarely true. Don’t go slow, just for the sake of going slow. But this is your deal. Sign up when you feel like you’re ready to sign it. This is a long term commitment, you’re probably gonna be involved with this franchise cash, I don’t know, 10 15,20 years, taking a few extra days to make sure that you have all your ducks lined up and you feel good about it. That’s what I would want to do.

Adam: That sounds like great advice, Jeff. And just to follow up on what you’re talking about, with things being negotiable. Have you seen any COVID related concessions from franchise orgs to prospective franchisees?

Jeff: I’m a little bit I’m seeing you know, sign up now and you don’t actually have to open quite as soon. You know, one of them was one of them that I recently saw said I want to give out too much client confidential information but it was kind of a tutoring type of business. And we don’t really it says the franchisor, we kind of acknowledge that we don’t really know how this is going to our industry or our business is going to be affected. So we’ll give you some extra time to open. You know, and that may or maybe good, you know, so that’s one of them. That’s kind of the biggest one that I’m seeing right now, I’m not seeing a lot of COVID specific terms that are being put in right now. That could be the case that may develop and evolve a little bit, you know, over the next few months, but for right now, I’m not seeing too much more than just delays on opening.

Adam: So how many years have you been a franchise attorney for?

Jeff: I have been licensed since 1991. So a million years, and I’ve been practicing franchise stuff since probably 1997 or 1998. So let’s see how we’re good at math. I would have done something useful with my life instead of being a lawyer. So I guess that’s about 20. 22 years doing franchise things.

Adam: What is the worst one-sided Franchise Disclosure Document that you’ve ever seen?

Jeff: Oh, man, that’s a good one. Um, I don’t want to say it by name because I don’t want to get in any sort of trouble. But the ones that I always find to be a little curious or every once in a while, I will see a Franchise Disclosure Document for a franchise system that doesn’t actually even have any stores open yet. And as crazy as that sounds, I’ve seen that not even they don’t even have a company on store that’s been running for a while. They’ve got no stores. And so the very first franchisee is going to be the very first person who’s ever had one of these businesses up and running under this name at all. And, gosh, that’s not really a franchise system as far as I’m concerned. So I think I don’t know if that one was more of lopsided but harder to believe that somebody was, you know, going to do, I guess, I guess it could work out. That one didn’t work out. I’ve actually I’ve seen a couple of them and they don’t work out but not saying it couldn’t, but it seems like you’re sort of buying a pig in a poke.

Adam: What about the flip side, the best agreement you’ve seen for a potential franchisee?

Jeff: Um, what are the ones that Okay, so since I’m going to speak positively of one and this is not my client, the Sylvan Learning Center just as a good example, I think, okay, they are well established. They’ve been around for a pretty long time. They’ve got a lot of franchisees. I, you know, I’m not going to tell you that the franchise agreement is the pro franchisee, but I think that it’s pretty fair and reasonable. You know, it’s, it’s not even things like you know, the amount that’s being charged I mean, that the amount that’s being charged by a lot of franchise ORS is pretty steep. I’m not telling you that the Sylvan deal is way, way cheaper than in the other deals. But I think that you know, just sort of the reasonableness and what it is that Sylvan is promising is putting, you know, been put in writing. You know, I think that’s a good example there. They’re not the only ones. That’s just one that pops to the top of my head is being a good FDA with a franchise agreement.

Adam: Could you comment a little bit about your impression of item seven and item 19? Because with my candidates, we talk about those items a lot.

Jeff: Well, with regard especially with regard to item 19, the financial performance representations. It’s, it’s still, I think, an area of the law that hasn’t really been solidified yet. I think the Federal Trade Commission is still trying to figure out exactly what is the right balance with regard to a franchise or making some sort of, not even representations, providing some information With regard to earnings, and not going over, you know, on the other side and making false promises, the the the way that the Federal Trade Commission rule is written right now is that the franchise or effectively can give out any sort of information about earnings, that is objectively verifiable. That’s not the official standard, but that’s kind of the gist of it. And so, therefore, you can give past information because that is objectively verifiable. You could never ever, ever give out any sort of estimation about how somebody is going to do in the future because you can’t verify the future. This is the tension or this item 19 is a great example of the tension that exists between the salespeople and the lawyers. The sales people’s position is how in the world are we going to be able to sell something if the franchisee doesn’t have any sort of expectation about how much money they’re going to make you legitimate concern? salespeople. I get it. Lawyers across the country are all terrified of the Federal Trade Commission. And they don’t want ever to make a representation or a statement that could possibly come back and bite their client at the bottom in the future. So some franchise ORS a lot of franchise ORS will basically include a very short statement that simply says we’re not obligated to give any information. And so, therefore, we’re not going to, which really seems like a poke in the eye. But it’s because the lawyers figure if we don’t give out any information, we can’t get in trouble. So if you see that franchisees don’t take that as some sort of we’re trying to hide the ball. That’s just kind of the lawyers trying to look out for the client. Some franchise ORS, will in there FDA will include some information. And when you go through the information in FTD, that provides a lot of financial, you know, information, look at what it includes, but then sort of scrutinizing it as to whether It doesn’t include. Yes, here are the revenues. revenues are kind of irrelevant. But if you don’t have expenses, then who cares? I had a billion dollars in revenues. Yeah, a billion dollars. But I had $2 billion in expenses, that’s not really a good business to be involved in. So revenues by itself are not really the end of the analysis. Sometimes they’ll say, you know, the, they’ll give you core tiles, you know, this is what the top floor tile does. This is what the, you know, the median 30% does, this is what the bottom does. You know, a lot of times the franchisees, you know, everybody wants to be at the top, everybody figures, oh, I’m going to be in the top 10%. And that’s certainly an X, you know, great. That’s your goal, you want to be in the top 10%. But on average, you will be average. And so when you’re running some of your numbers, maybe you need to look at the median numbers and the average numbers, but I think most importantly, is the information that you might be getting in a federal A Franchise Disclosure Document, you know, and an item 19 shouldn’t be the end of your analysis. Yes, that’s a really good starting point. Yes, that’s going to give you some information. But what you really need to do is you go out, you must go out and talk to some of the other franchisees, and you need to ask them, How are you doing? You know, what are your revenues as compared to your expenses? How long did it take you to get to this place, if they’re now in the eighth year, and they’re doing great, that’s great? But if it took them eight full years to get to great, then you need to know that if for no other reason, you need to have reasonable expectations of how your business is going to do.

Adam: What about item seven?

Jeff: With regard to which part of it are you concerned about

Adam: The expenses.

Jeff: I think that I think that again, this is the type of deal that you just need to go and visit with the franchise. It’s the essence. Again, this is the tension between the sales guys and the lawyers. The lawyer’s position is, you know, we need to give estimated initial investment that will never be exceeded. And so we’re going to create this huge range. You know in said your estimated initial investment for the first three months is going to be somewhere between $100,000 and 14 million, says the lawyers because if we do that, we’ll never get in trouble because no one will ever exceed $14 million. And the sales guys say, if we put that in, everybody’s gonna think that they might have to spend $14 million. That’s an exaggeration, but But again, this is the tension. So the lawyers when they’re writing this always want the client to guess really, really high on the high end. So ultimately, it’s been my experience that franchise ORS try to give good numbers they may, they may create a little bit bigger range because their lawyers don’t want them to get in trouble. But It’s been my experience that franchise ORS really does give numbers that they believe are fair and reasonable. I always tell my clients that you need to go out and you need to visit with the other franchisees, not so much that you’re trying to play gotcha with the franchise or I’m usually very, very surprised if I ever hear Oh, these numbers are way off. But I would want to know if the range and so now won’t use the crazy $14 million number. But if the range of an estimated initial investment is somewhere between 250,000 and $750,000, well, that’s a pretty big range. If you took that to the bank to go borrow money, the bank would tell you you know, go try again being off by a multiple of three isn’t really a very reasonable forecast of how much your estimated initial investment is going to be certainly for the purposes of borrowing money from us the bank. So if for no other reason I would want to go out as the franchisee and the potential franchisee and talk to a bunch Have Not one or two, or even three or five, a bunch of the other franchisees and say, How much did it really cost? Again, not so much to play gotcha as much as this, I want to have a more reasonable expectation of what my costs are going to be. And when you’re going out and visiting, go out and try to visit with people that are in similar markets. I’m in Houston, you know, it would be great to talk to the Houston people, but I’ll take the Dallas people I’ll even take the Atlanta people I want to, you know, maybe I want to talk to people that are in southern ish type large cities, the guy who is in Bangor, Maine, you know, he’s a good guy, and he really is part of the system, but his experience may not be as directly relevant to what my experience is gonna be. And so there’s, there are more similar franchisees to call

Adam: Have you ever seen a franchise org that claims that expenses are why right like really, really low but they act in being really, really high in practice?

Jeff: Yes, I do. And that is sometimes a basis for getting the franchisee out of the system. That is a violation of the Federal Trade Commission rules, it winds up being a violation of a series of jumps of some Texas rules. That that is, that’s what I was talking about that the franchise ORS attorneys desperately don’t want, because now you have misrepresented franchise or the expectation of how much money and so if I wind up if the high end of the, you know, the estimate is $500,000. And my costs wind up being 500,000 in $1. You know, is that a misrepresentation? Now, maybe it’s a misrepresentation, but who cares? If it winds up being, you know, a million dollars, that’s a real problem.

And that is exactly the kind of thing that Federal the Federal Trade Commission established the FTC rule for in the first place. They want people to have a reasonable expectation of what it is that they’re really getting into it the franchise or has misrepresented that, you know, it’s only going to cost you 500,000. But you wind up spending a million, not because you overspend or you are crazy. You know you did a bunch of foolish things. But mostly you were just following along and none of these original numbers were close. Now you’re in violation, certainly of the spirit of an FTD. In the first place. It’s supposed to give you some reasonable information to base your decision upon then the franchisor is not allowed to lie. What’s the point of a disclosure document if it contains a bunch of lies? So yes, I see that sometimes. I especially see that more often see that with a relatively new franchise or because Because I don’t think that they’re necessarily trying to be sinister. And there’s not evil in their hearts, but they just didn’t know. And so yeah, I do see that some.

Adam: So Jeff, if someone wants to get ahold of you, what’s the best way to reach you?

Jeff: They can. The easiest thing to remember is texasfranchiseattorney.com, or you can look that up or you can just call up the name of the law firm is Dickinson and Wheelock and you can just call me at 713-722-8118 Jeff Wheelock The last thing that I do want to throw in a little bit and we’re getting toward the end let me know but my last bit of unsolicited advice that I often give to people that call me as a franchisee especially makes sure that you go and you talk to a franchise attorney. I’m not the only franchise attorney, but there aren’t very many of us and what you’re really looking for a potential franchisee is you want somebody to review This document who has experience having seen, hopefully, hundreds of these, if you go to, you know, go to the criminal lawyer, he probably doesn’t even look at contracts. If you go to a contract lawyer, he doesn’t really have as much experience with the ins and the outs and he doesn’t really know how some of these terms are going to play out. And he certainly doesn’t have a very good feel for what’s negotiable and standard and you know, not standard and not negotiable. And so my recommendation is to go to somebody like me, hopefully, me but if not meet somebody like me, who really has that experience. So whoever you wind up using potential franchisee make sure that this lawyer convinces you that this really is what they do for a living because that’s what your potential franchisees are looking for in an attorney.

Adam: And just one final question, do you work only in Texas, or do you have other states that you work in as well with candidates?

Jeff: I am licensed in the state of Texas, but I help clients that are franchisees in franchise ORS From a contractual standpoint all over the country. So if you are a potential franchisee, and you’re in Florida, you can certainly call me and I can certainly help somebody, you know, help you along. I deal with people, not all, not only throughout the country. I was talking to franchisees within the last year, you know, in Saudi Arabia, Afghanistan, and Germany. So I can certainly help you all over the country.

Adam: You do 2 visas as well?

Jeff: I know, I know what I don’t know. And so if you need some information with regard to that I could probably direct you to the right person that does immigration law that no, I don’t directly involve myself in any sort of immigration numbers.

Adam: Well, Jeff, so great to see you again today. And thank you so much for your time.

Jeff: Adam. Thanks a lot.

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