Copyright Gary R. Duvall Dorsey & Whitney LLP January 2012 Legal Aspects of Buying a Franchise

2 Benefits of Franchising to Franchisee 1.Training and Assistance 2.Trademark and Advertising 3.Reduction of Risk 4.Bulk Buying Discounts

3 Risks to Franchisee 1.Business Management Aptitude Needed 2.Working Capital Needed 3.Working with the Franchisor and Franchisor's System 4.Competition and Normal Business Risk Factors

4 Benefits to Franchisor 1.Franchisee Provided Capital Shares Financial Risk and Fuels Growth 2.Profit Motive of Franchisee 3.Enhancement of Franchisor's Trademark Good Will 4.Franchise Fee and Royalty and Indirect Income

5 Risks to Franchisor 1.Shares Store Level Profit with Franchisee 2.Franchisees Have Long Term Agreement 3.Franchise Law Compliance Creates Risk and Expense

6 LEGAL ISSUES TO LOOK FOR IN A FRANCHISE: FDD Items Prospect must receive the FDD 14 calendar days (and in some states 10 business days) before investing or signing an agreement. We provide a half-day tailored franchise legal compliance program for franchisors for $2000, with no cost for travel.

7 LEGAL ISSUES TO LOOK FOR (p 2) Franchisees' Earnings Record, Item 19 of FDD (used by about 30% of franchisors) For a prospect to build a proforma, he or she can also use FDD Items 6, 7, and 21, other franchisor Item 19s, and industry financial ratios, and contact current and former franchisees

8 Franchisees' Turnover, Closures and Transfers, Item 20 of FDD And contact current franchisees for validation, and former franchisees for reasons for turnover and how to avoid failure LEGAL ISSUES TO LOOK FOR (p 3)

9 Franchisor's Experience, Background of Franchisor Managers, Litigation, and Bankruptcy, Items 1 through 4 of FDD LEGAL ISSUES TO LOOK FOR (p 4)

10 Required Purchases, Amounts of Franchisor Supplier Rebates, Item 8 of FDD Franchisor's Training and Initial and Ongoing Support, Item 11 of FDD LEGAL ISSUES TO LOOK FOR (p 5)

11 Other Key Legal Issues, FDD sections: Item 12: Exclusive Territory Items 13 and 14: Franchisor's Trademark, Copyrights, or Patents Item 16: Restrictions on Goods or Services Offered Item 17: Term, Renewal, and Sale

12 a.Ownership of Franchisor b.Creditworthiness of Franchisor c.Competition in the Industry, Average Profits, Financial Ratio Studies d.Economic Health of Industry, Short and Long Term Other Information Not in FDD:

13 Review FDD and Agreement Explain legal rights, obligations Benchmark key aspects to others A franchise law specialist will cost less! Seek a Franchise Lawyer’s Advice for:

14 Cost of Agreement Evaluation (p 2) For prospect, an oral report is $1,300. Subtract: $300 for franchisees working with an experienced franchise consultant. Add: $500 for written report; $500 for area developer; $1,000 for area rep or subfranchise.

15 Franchise Agreement Evaluation (p 3) For the flat fee we: spot key legal issues in the franchise agreement; compare it to customary franchise agreements, both negatives and positives; While we do not guarantee that we will identify all matters, our clients frequently comment on our thoroughness. We understand that most franchisors will not agree to amendments. We don’t waste the parties’ time with lengthy requests for changes on routine provisions!

16 Post-Agreement: CHOICE OF BUSINESS ENTITY A.Sole Proprietorship B.General Partnership C.Limited Partnership D.Corporations E.Limited Liability Companies We advise on costs and benefits of these and other entities.

17 Post-Agreement: CHOICE OF BUSINESS ENTITY (p 2) Our services include formation of entity for one owner (or H and W), which includes charter, minutes, bylaws, shares, initial report - $1,500 (plus filing fee). Separate fees apply for other governmental registrations and requirements.

18 Post-Agreement: Lease Evaluation and Negotiations. Negotiations are charged hourly. Our services for lease evaluation for prospective tenant and written report are $2,000. (Add $500 for each personal guaranty or other agreement). Negotiations are charged hourly.

19 Post-Agreement: Franchisee Financing Legal Issues Possible Assets Financed 1.Franchise Fee 2.Inventory 3.Equipment and Improvements 4.Real Estate

20 Post-Agreement: Financing Legal Issues (p 2) 1.Franchisor as Direct Lender 2.Franchisor-assisted financing 3.Pure Third-party financing Item 10 FDD discloses franchisors’ provided or arranged financing

Thank You Gary R. Duvall Co-Chair, Franchise & Distribution Group Dorsey & Whitney LLP