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Proposed 2017 Florida franchise legislation

A committee substitute for SB 750, creating the “Protect Florida Small Business Act”, which is intended to regulate the conduct of franchisors and their representatives to prevent fraud, unfair business practices, unfair methods of competition, impositions, and other abuses upon franchisees in Florida, has been favorably reported out of the first of three Florida state senate committees to which the legislation had been referred. More information about the bill can be found at http://tinyurl.com/lkbcxye.

Watch this space for more news!

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Be Sure to Get Any FDD Updates

The purpose of the franchise disclosure document (FDD) is to provide prospective franchisees with basic areas of information which are generally important to making an investment decision. The FTC Franchise Rule requires that the FDD be periodically updated to include any material changes to its disclosures. The franchisor is not required to make any additional disclosures to the prospect after he has been provided the  FDD unless he asks for it. But, what if a material change has taken place after the FDD has been delivered to a prospect? Once an updated FDD has been asked for, the prospect must be disclosed all material changes to the FDD. Unfortunately, many prospects do not make any request for updates. So, be sure to ask for any FDD updates before making any final investment decision.

Stephen M. Feidelman maintains a general civil law practice in Hollywood, Florida serving Miami-Dade, Broward and Palm Beach counties with a core concentration on franchise and dealership representation and allied business law issues. He has attained a Martindale-Hubbell Peer Review rating of AV®, Preeminent™ – 5.0 out of 5, which depicts that a lawyer is recognized for the highest levels of skill and integrity; has served on the Executive Council of The Florida Bar Business Law Section; chaired The Florida Bar’s Antitrust, Franchise and Trade Regulation Law Committee; been a faculty participant in numerous seminars related to franchise and business opportunity legal issues; contributed to Florida Bar committee consumer education pamphlets and seminar course materials; and been a guest college lecturer on franchise law issues. He is also a Florida Supreme Court Certified Circuit Civil Mediator and a Qualified Arbitrator.

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Is Your Business Too Small to be a Victim of Identity Theft?

It’s not just the big boys who make tempting targets for cybercriminals. News reports show a rising trend of cybertheft which is not confined to large corporations. Rather, it appears, smaller businesses are attractive targets of business identity theft because they tend to not devote the resources to protect themselves against identity and information technology theft as do larger companies. It has been reported that more than half of those companies who have had their identity stolen will be out of business within one year of the theft.

One scheme which has been reported upon is the use of fraudulently altered public records which allow a perpetrator to appear to be authorized to act on behalf of a business. What can you do to help protect against your business’ identity being stolen? The Florida Department of State’s Division of Corporations suggests that you periodically check your business entity filings on www.sunbiz.org for any errors or problems. You should do this even if the entity is dormant or has been dissolved. If any unauthorized changes are found, you should immediately contact the Division of Corporations.

You can learn more about preventing business identity theft on the National Association of Secretaries of State’s website, www.nass.org.

 

Stephen M. Feidelman maintains a general civil law practice in Hollywood, Florida, with a core concentration on franchise and dealership representation and allied business law issues. He has attained a Martindale-Hubbell Peer Review rating of AV®, which depicts that a lawyer is recognized for the highest levels of skill and integrity; has served on the Executive Council of The Florida Bar Business Law Section; chaired The Florida Bar’s Antitrust, Franchise and Trade Regulation Law Committee; been a faculty participant in numerous seminars related to franchise and business opportunity legal issues; contributed to Florida Bar committee consumer education pamphlets and seminar course materials; and been a guest college lecturer on franchise law issues.

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Things to Consider Before Purchasing a Franchise

You should consider the following issues before committing to any purchase:

  • Are you willing to work within the limits and operating structure of the franchise system?
  • Is the product or service to be offered something which you enjoy dealing with?
  • Have you evaluated the market for that product or service?
  • Have you read the franchise disclosure document and resolved any questions which have been raised?
  • Can you arrange for sufficient working capital to offset periods of negative cash flow while the business becomes established?
  • Do you have a business exit strategy and do the franchise agreement terms conflict with it?
  • Have you learned as much as you can from existing and past franchisees about the system under consideration?
  • Have you negotiated the most favorable terms for acquiring or leasing a commercial business premises?
  • Have you sought independent legal and financial advice about the business relationship you are about to enter into?
  • Have you explored the formation of a business entity to help avoid owners’ liability for third party claims against the business?
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The “Standard” Agreement

Business transactions are best documented through the use of written agreements. However, the impression is often given that the offered agreement is a standard document, and no variations can occur. Many times this is the case. However, one cannot know if that is the case in your particular instance until attempts are made to negotiate those portions of the agreement which are most objectionable or have the greatest impact upon your ability to go forward with the transaction. A party’s willingness to negotiate is generally directly related to its perceived need to enter a particular marketplace or business alliance, competitive pressures existing in the market, and its perception of its then existing business relationships. While no assurance can be given as to the success or economic rewards of any negotiation attempts, a prudent business person should keep these facts in mind as he or she reviews all offered documents.

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Electronic Data Discovery Impacts Small Businesses Threatened With Litigation

Business data used to be recorded upon paper and filed in manila folders within a cabinet. Not anymore! Most businesses have taken advantage of the computer age to go “paperless”. Without realizing it, many businesses have electronic data stored throughout their offices. The obvious places, desktop and notebook computers, aren’t the only places data is electronically stored. In addition, data is also commonly stored on hand held PDAs and Blackberry® mobile units – even iPods®. Often, electronic messages (data) have been uploaded to a central server. Of course, they also came from someone else’s server. Electronic records everywhere!

Why is knowing this important to you? Because on December 1, 2006, amendments to the Federal Rules of Civil Procedure addressing the safekeeping and production of electronic data became effective. Those rules now make clear that significantly greater obligations exist to maintain electronic data if one reasonably believes litigation may occur, and to produce all relevant electronic data if requested to do so during litigation. Many states’ civil procedure rules, including Florida’s, have been modeled on or originated from the federal rules and likely will be amended to incorporate the same or similar obligations.

What should you do? Businesses should immediately seek legal advise concerning their electronic data storage and deletion policies, and should get their lawyer involved to review electronic data issues as soon any litigation is either threatened or instituted against the business.

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Be Careful When Relying Upon a Franchisor’s Financial Performance Claims

Prospective franchisees have often been incorrectly told that federal law prohibits a franchisor from disclosing financial performance information to the prospect prior to his or her becoming a member of the franchise system. The revised Federal Trade Commission Franchise Rule now requires that franchisors clearly disclose they are legally permitted to provide financial performance information if they chose to do so. Only about 20% of franchisors made financial performance claims in 2006. Virtually all current disclosure documents and franchise agreements contain warnings that no one is authorized to make financial performance claims on behalf of the franchisor unless those claims have been included in the disclosure document, and also warn you not to rely upon any undisclosed claims if they have been made to you.

The revised Rule also permits a franchisor to give financial results of chosen subsets of its franchise system. Of course, certain additional information must also be disclosed so as to permit the prospect to evaluate the claims which are being made. All financial performance information must now be disclosed within the disclosure document’s Item 19, and not through a separate document as was previously required by the original Rule. Notably, financial performance information no longer needs to be prepared in compliance with generally accepted accounting principals so long as the representations made are “reasonable.” Needless to say, this change represents a much looser standard. The revised Rule also makes clear that providing prospective costs or expenses alone does not constitute the provision of financial performance information.

What does this all mean to you, the prospective franchisee? You should read your franchise disclosure document carefully! While the franchisor may continue to refuse to disclose any financial performance information, the franchisor is now protected from complaint that it has made improper financial performance claims if it chooses to disclose only prospective costs or expenses. In such circumstances the temptation will be great for a prospective franchise to “fill in the blanks” of missing revenue information in an attempt to obtain a more complete picture of the financial performance of units within the system. However, the prospect will be doing so at its own risk.

Compliance with the revised Rule has been mandatory since July 1, 2008. In addition, various state laws may be amended to harmonize them with the revised Rule.

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Franchise Risks

One should fully read the franchise disclosure document to identify relative risks in the total transaction. Put in other words, what are the promises which are being made in return for your agreement to pay the initial and ongoing franchise fees, and what are the risks of those promises falling short of your expectations or their being broken? What obligations are you being asked to undertake, and how dependent are you upon achieving a perceived business goal in order to meet those obligations? To be sure, no business is risk-free. However, the franchise purchaser should remember that he or she is agreeing to pay significant sums of money for something. You should endeavor to determine what that “something” is, both as to perceived value and reasonable expectations.

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An Ounce of Prevention……

Franchised businesses and other business opportunities have become a major portion of the retail business environment in America. Contact us to ask for one of our free checklists of things to consider before purchasing a franchise or business opportunity, and things to do before offering a franchise or business opportunity for sale.

Franchising offers the seller a method of rapidly expanding its distribution network with reduced capital outlay, while offering the buyer a “big brother” with the expertise to train the buyer to setup and operate a particular business without having prior experience.

Franchisors are also proud to point to Department of Commerce reports which show as much as 95% of franchised business succeed as compared to U.S. Small Business Administration reports which indicate that 65% of start-up businesses fail within the first five years of operation.

The International Franchise Association (“IFA”), the franchise industry’s flagship trade organization of franchisors, franchisees and suppliers which is based in Washington, D.C., reports that, in 2000, most analysts estimated franchising companies and their franchisees accounted for $1 trillion in annual U.S. retail sales from 320,000 franchised small businesses in 75 industries. Moreover, franchising is said to account for more than 40 percent of all U.S. retail sales. An additional IFA funded study estimates that franchised businesses provided almost 10 million jobs, over $229 billion in payroll and produced over $624 billion in output during 2001. Such outlets range from gas stations and fast-food to real estate brokers and cleaning services.

For more than a decade, the Federal Trade Commission has required “plain English” disclosures of required information aimed at increasing the ability of prospective franchisees to make more informed buying decisions. In addition, some states’ laws require registration of offering circulars before a franchise many be lawfully sold.

Despite the fact that more information is disseminated to prospective franchisees than ever before, the franchising industry still suffers from a perception of continuing improper sales practices. The U.S. Congress has considered proposed federal franchisee rights and relationship legislation, but not yet enacted any provisions into law. However, the Federal Trade Commission has long standing disclosure requirements aimed at increasing the ability of prospective franchisees to make more informed buying decisions. In response to state and federal legislative pressures, the International Franchise Association has adopted a Code of Ethics which its franchisor members are urged to follow.

What does all of this mean to an entrepreneur interested in purchasing a franchised business? Any grandmother will tell you that an ounce of prevention is worth a pound of cure. The franchise buyer should be aware that no law can replace the need to obtain a careful review of the franchise documents by an attorney knowledgeable in the state and federal laws which pertain to the sale of franchised businesses and the franchise relationship. The buyer should also properly investigate the franchised business before the purchase takes place. Talking with current and past franchisees is a great way to get a feel for what operating the particular business is really like.

Finally, consult a qualified business advisor who can properly evaluate the opportunity apart from its “sizzle”, and look only at its financial merits. Particular attention should be given to the related issues of sales seasonality, cash flow and adequate capitalization. Business advisors generally agree that most small businesses fail due to their being undercapitalized. This occurs when business owners fail to invest sufficient cash in the business when it is formed, and later do not have sufficient cash reserves or are unwilling to invest further in the business. During periods of seasonally lowered sales, which are common in most businesses, the undercapitalized business does not have sufficient capital with which to ride-out the reduced cash flow. The result is an inability to timely pay the business’ expenses. If the business has questionable viability in these or other areas, a more studied approach should be undertaken.

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Do You Want a Lawsuit With That Tune-Up?

Businesses, such as retailers or service providers, often wish to use another company’s protected name, trade dress or logo in association with the marketing of their own business. The marketer believes this is proper since it sells, repairs or offers services specific to the other company=s goods or services. However, when done without first having obtained the other company=s permission, marketing in this manner can bring about significant legal problems under both state and federal law. Merely including a J, 7 or K along with the other company’s name or mark is generally not enough to protect you from liability.

First, a written demand that you immediately cease all unauthorized use of the other company’s trade name or logo will be sent. If that demand is ignored, the trade name or mark owner can be expected to sue to stop your unapproved use of its protected name or marks. This frequently includes seeking a preliminary injunction ordering you to stop all unauthorized uses. The owner may also seek to recover all profits you derived from the unauthorized use of its intellectual property, damages for any dilution of the value of the name or mark, and the award of its reasonable attorneys fees and costs of having to bring that litigation.

Factory-authorized distributors, dealers or service facilities may have already been granted limited contractual rights to use a manufacturer=s name or marks. Those contractual provisions and limitations must be strictly adhered to. When in doubt, one should seek written permission before using another=s trade name, trade dress or marks in association with their business.

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