Thank you to our sponsors: Franchising 101 Presented by the Dallas Bar Association, Franchise Law and Distribution Section Speakers: Farheen Ibrahim Treasurer Tate Hemingson Chair Thank you to our sponsors:

Franchising History We’ve all heard of these: Isaac M. Singer (1811- 1875) started modern use of franchising to distribute his sewing machines Franchise model is now mature and almost anything can be franchised:

What Does it Take? As a franchisor, a business concept that can be scaled and replicated Franchising is highly customizable As a franchisee, an entrepreneurial spirit but willing to work within a defined system All – an understanding of the different components of franchising All - compliance with all legal laws – including federal and state This presentation will focus on components of franchising and compliance with laws

Why Franchise? ADVANTAGES DISADVANTAGES Quick growth Less capital expenditure needed to fuel growth Motivated operators Leveraged purchasing and advertising power Reduce risks of day-to-day business operations DISADVANTAGES Less control Less revenue Harder to change business Subject to specific rules and regulations (discussed later)

Essential Components To A Franchise System What is a franchise? An agreement that contains: Substantial association with a trademark; Payment of a fee; and (Most states) Prescription of a marketing plan or significant control Comply with all federal and state laws regarding franchising specifically, business laws, and employment laws Trademark registration and enforcement Franchise disclosure document Franchise agreement and other agreements

Trademarks Any word, name, symbol, or device Very valuable asset to businesses Also extends to trade dress, which is how the product or service looks Two ways to gain rights: Common Law Register (state and federal) USPTO registration needed for franchising Steps: Conduct a thorough trademark search File a federal trademark application ASAP Document everything

Franchise Disclosure Document An FDD is a disclosure document that the franchisor prepares to give to potential franchisees Content is heavily regulated by state and federal laws as to what needs to be disclosed to potential franchisees FDD has 23 Items that must be disclosed, examples include: Franchisor officers and parents and affiliate info Litigation and bankruptcy history Trademark, patent, and copyright info Initial fees, other fees, estimated initial investment Financial statements and financial performance representations Franchisee information

Franchise Legal Compliance On a federal level, the Federal Trade Commission has passed the FTC Franchise Rule, which outlines the disclosure requirements and prohibitions concerning franchising Evolved over the years, last update was in 2007 On a state level, North American Securities Administrators Association, In. (“NASAA”) issued the 2008 Franchise Registration and Disclosure Guidelines Includes commentary Highly technical and easy to be non-compliant Some states require registration, some states require a filing of an exemption, some states only require a federally registered trademark

Other Important Laws Federal, state, local laws, rules, and regulations that apply to all businesses generally Must also be aware of industry-specific laws – such as menu labeling provisions of the Patient Protection and Affordable Health Care Act, if a restaurant Franchisors and franchisees must independently ensure compliance of all employment laws – federal, state, and local Increased activity of both the Department of Labor and National Labor Relations Board Must be educated on new employment laws, for example, the new overtime exemption – May 2016

Franchise Disclosure Document What to do: Hire a competent attorney to help draft an FDD Although not required, seek out consultants to help plan your franchise system for growth Know your business very well and hire a competent sales team Plan for a crisis Plan for growth What NOT to do: Do not draft your own FDD based on a competitor’s FDD Do not rely solely on business consultants or CPAs, especially when it comes to legal compliance Do not take shortcuts Do not be afraid of change Do not market or sell a franchise illegally

Franchise Agreement As a franchisor: Read your franchise agreement, do not depend solely on your attorney Make sure you understand your obligations and duties under the franchise agreement Understand your enforcement remedies Enforce the franchise agreement, especially when it comes to royalties and system noncompliance Protect your trademark license and enforce your rights to protect your system As a franchisee: Read the franchise agreement thoroughly, do not depend solely on the FDD to explain the franchise agreement Many agreements include a personal guarantee, confidentially and noncompete agreements Consult a franchise attorney before you sign anything Do your own research Negotiate your franchise agreement Term is usually 10 years, most systems allow you to renew- that’s a long time to be stuck in a bad deal

Sounds hard…but there is hope As a franchisor: Properly plan your franchise system for growth Obtain proper insurance Update your system every year because laws change frequently Consult your attorney to make sure your FDD is compliant Obtain a second opinion, if necessary Properly support franchisees Plan for a crisis, such as litigation Educate yourself on your system and on the basics of franchise laws Do not sell a franchise without properly registering As a franchisee: Obtain your own franchise counsel to review the FDD before you sign anything Seek out a CPA to help decipher the financial representations Negotiate your franchise agreement Maintain your own franchise counsel to help compliance with local laws, federal employment laws, and problems within your business Obtain proper insurance, maybe above franchisor’s requirements Educate yourself Do your own research on the franchise system - talk to current and former franchisees before purchasing a franchise

QUESTIONS? Farheen Ibrahim Farheen.ibrahim@mullinlawpc.com Tate Hemingson Tate.Hemingson@strasburger.com