April 12, 2025 • 36 mins
Don't sign your franchise agreement without watching this! ⚖️ In this full Franchise Freedom episode, Giuseppe Grammatico interviews expert franchise lawyer Kit Higgs. Kit breaks down the FDD, explains crucial clauses, discusses negotiation, reveals his review process, and shares vital advice to protect prospective franchisees. Essential legal insights for anyone buying a franchise!
DISCLAIMER: The information on this podcast is for general information purposes only. Franchising involves risk and careful consideration should be given before making any decisions.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Because if you don't ask it, theanswer is gonna be no.
(00:02):
So I tell my clients, look, ifthere's that 1% chance that you
can get it, ask for it.
It's really about understandingall of your rights and
responsibilities and realizingthat you are not powerless in
this relationship, that you dohave rights, and if the
franchisor does mess up, you cando this or that.
it's great that you can ask itto'em in person then and see how
(00:23):
they respond, right?
And whether or not they'remaking eye contact, whether or
not you think they're beingtruthful because you need to
make sure that you arepartnering up with the right
person that's a good fit foryou.
Welcome to the Franchise FreedomPodcast, where you can escape
the corporate trap throughfranchise ownership.
Here's your host, Giuseppe gr,the franchise guide.
(00:47):
Welcome to the Franchise FreedomPodcast.
I'm your host, GiuseppeGrammatical, your franchise
guide, the show where we helpcorporate executives experience
time and financial freedom viafranchising.
Thanks for joining us today.
We have a very special guest.
I think you guys got sick ofjust seeing me.
So we brought on today a goodfriend of mine, kit Higgs from
kit Franchise Law Kit.
Welcome to the show.
(01:08):
Thank you.
Thank you, Giuseppe.
Great.
Happy to be here.
We spoke a while back.
I've been meaning to, to bringyou on as the, franchise
attorney expert.
And we've been getting a lot ofquestions on this topic.
Thanks again for joining us.
If you could give the audience alittle bit of background of who
kid is, how you got into thisfield we'd love to hear that.
Sure, sure.
So somewhat of a long, littlewindy story here, but I was
(01:29):
working as a prosecutor in childabuse and juvenile delinquency,
and my phone started blowing up.
I was actually in trial and Igot, three phone calls in a row.
Thinking it was an emergency.
And so I stepped outta court,called this guy back.
It was Todd Kirby.
I'm not sure if, do you knowTodd Kirby at all Sounds
familiar.
Yeah.
So one of my buddies and hestarted a franchise sales
(01:50):
organization called St.
Gregory Development.
Ah, yep.
Okay.
And needed a lawyer.
And so he said, Hey, kit, wannahire you?
And I was thinking, my gosh, Ithought somebody was in a car
wreck or something was,seriously wrong.
So I said, Hey man I'll talk toyou later on this afternoon,
what have you.
Talk to him later on.
He said, Hey, you look I wannahire you to be our lawyer.
And I knew nothing aboutfranchise law.
(02:11):
I was a prosecutor in childabuse.
Switching over would be a, ahuge change.
And so I said no, I turned himdown.
I would've loved to work withfriends, but I said, I don't
know this area of law and Ican't provide you advice on it.
Well, later on I talked to afriend's father who was a mentor
and over beers and he said kidfranchise law is one of those
areas where you really gotta getyour hands dirty to learn it.
(02:32):
There aren't too many lawschools that actually teach
franchise law, so go try it outand see if it works.
And that's what I did bestdecision I ever made.
So I first started working outjust making sure that.
When he took this role that thesales guys at STG weren't
overselling, that they werefollowing the FTC rules and
regulations on franchise sales?
Well, really learned franchiselaw was when one of the partners
(02:55):
decided, you know what?
There's a void in themarketplace right now in
franchising.
There's nobody doing indoorcycling.
So we created this conceptcalled Cycle Bar, and my first
role as general counsel was towrite the franchise disclosure
document and the franchiseagreement.
Same documents that I reviewnow.
Right.
I actually had to write and ofcourse I didn't write this
(03:16):
myself.
At the time we used this lawfirm outta Chicago, one of the
best law firms out there.
and they helped me write it, andI needed to know everything
about this.
I had a hundred questions backto them.
Why do, why, how do you come upwith a royalty rate?
What are the positive negativesif you do this or that with a
territory size?
I needed to make sure I kneweverything, because at the end
(03:36):
of the day.
I knew that my name was gonna beon this document.
it would look pretty bad if afranchisee were to call me up
and say, Hey, kit, I'mconsidering buying your
franchise.
Maybe this is a candidate.
I wanna know what section 13point 0.4 means.
And if I were to say, geez, Idon't know, let's talk to our
lawyers that look, that wouldlook really bad.
So I needed to make sure Iunderstood everything about it.
(03:58):
And so then once we got our, thedocuments issued, I was taking
what I learned.
Implementing those terms andseeing what works and what
doesn't and then refining it andeach year revising the documents
and really understanding this isa living, breathing document
that should be changed year toyear needs to be, obviously the
FTC requires it, but you know,you've got some changes to the
(04:19):
system.
You need to make surefranchisees are aware of.
Because the whole point of thedisclosure document is to
disclose important informationto give buyers a good
understanding of what they'rebuying into before they're
locked into a contract.
Right?
So that's how I got startedreally understanding the
franchise agreement andfranchise disclosure document.
Then we had franchise openoperating.
It was figuring out what works.
(04:41):
And then once the company gotbought out.
They were about to go public iswhen I decided to start my own
firm.
And since then I've just beenrepresenting franchisees doing
FDD reviews.
So I've done several hundred inthe last year I'll do more than
a few hundred this year.
And so I've got experience thereso I can tell you what's normal
and what's not, and I thinkthat's there.
I bring a lot of value when Iprovide my reviews.
(05:04):
Right.
Yeah.
I mean, the industry offranchising, it's a business in
and of itself When you're doingthe review, you really need
someone that has a background infranchising that really
understands franchise law,especially when you're not sure.
Is this normal wording in anFDV?
Correct.
Absolutely.
I get people all the timeasking, Hey, is this normal?
Is this not?
I just did a review yesterday.
(05:24):
The royalty rate was 40%.
Wow.
Never heard of that.
And yeah.
but it makes sense for thissystem.
And so I was telling thefranchisee look, this is the
highest royalty rate I've seen,but it makes sense for this
business model.
Right.
And so I'm comparing and lookingat all these other business
models and seeing what isindustry standard.
And if there's an outlier, itdoesn't necessarily mean it's
(05:46):
bad.
The franchisor could be reallyinnovative.
They could be doing something alittle bit different.
And I think that's a great thingif you investigate and dig a
little deeper and find out, doesthis actually work?
I agree.
I always, when someone hadlooked and it was, I think it
was over 20, 20% and I said,well, that's definitely higher
than what we normally see.
But the better question is not,is this too high?
(06:07):
It's, what am I getting for thatroyalty?
You have to make sure it.
Sense, especially if they'retaking a lot of the stuff off
your plate, or now you don'tneed an office or an assistant
or bookkeeper because maybebookkeeping is bundle in there.
You want to really see what'sincluded and validate talking
with the franchisees, makingsure that they've been happy,
with the services and thesupport from the franchisor.
(06:30):
Yeah, I get questions a lot andI am not an attorney.
I'll be first to admit that andis this nor normal wording, is
this normal?
And I always refer it back tothe attorneys because, it,
there, there is some wording.
I, again, I'm not an attorneyand I don't understand
specifically what it means or itsounds like the franchise or may
not be able to, are theycompeting with me?
Are they not?
(06:50):
I don't understand, what thislooks like.
I always tell people, speak witha professional in that space And
if you disagree that I, this isa good conversation because I
wanna make sure I understandthis correctly, but when the
point of.
Reviewing this franchisedisclosure document, which by
the way, for everyone listeningin, if you haven't listened to
past episodes, the franchiseagreement is contained within
(07:11):
the FDD.
So you hear all these terms, butthe franchise disclosure
document is the completedocument.
The franchise agreement is inthat document.
But you know, people will say,well, that document really is
written in stone, so why do Ineed a franchise attorney?
It is what it is.
But my understanding is, numberone, you're doing it for the
review, for the peace of mind inthere, making sure that there
(07:34):
aren't any red flags, and maybeeven potentially, I know there's
a couple questions built inhere, but potentially maybe
there is some type ofnegotiation or wiggle room.
Can you talk a little bit aboutthat?
Sure.
Absolutely.
Now most franchisors are gonnatake the stance that there's
nothing negotiable in thedocuments.
And I understand that becausethat's how I dealt with things
(07:54):
when I was general counsel cyclebar, I wouldn't change anything.
But it provided an opportunityfor me to explain why we've got
it in there.
And so if there's an area that Ithink you could potentially ask
the franchisor to make a change,I say ask it.
And so the ask is twofold or theimportance, it's important for
two reasons.
(08:15):
Number one, if they say yes,great.
They will write up the addendumor the amendment and they'll
send it to you, and then youjust send it to me and I'll
review it and say, yep, it saysexactly what it's supposed to.
And there you go.
But the other reason why youshould ask it is, so it does
provide that opportunity for afranchisor to explain why
they've got it in there.
(08:35):
A liquidated damages clause.
When you take a look at thatcandidates say, oh my gosh,
there's a liquidated damagesclause in here.
Yeah there's a reason whythere's one in there.
Have the franchisor explain it.
If they can't explain it, Idunno, maybe it shouldn't be in
there.
Agreed.
Yeah, that makes a lot of sense.
And I mean, the document'swritten in simple, I.
Simple enough terms, but it forsomeone to get through the
(08:57):
document, not saying theyunderstand all the law, but it's
written, I forget what at whatgrade level.
But it's simple enough thateveryone should be able at least
to read through it.
Maybe not understand itcompletely, but there, it's not
overly, it's not an overlycomplicated read if I understood
correctly, correct.
It's just dense.
And it's a lot of pages.
Yeah.
I tell a lot of my clients, lookI'm like the CliffNotes version
(09:18):
that the yellow and blackdocuments he used to use was in
middle school and high school.
I will go through the documentsand raise issues that you
weren't aware of.
Because you may be focused in onan area that you think is it's
worrisome to you, but inreality, it really shouldn't be
where you're focusing your time.
You should be worried aboutanother area.
And so I explain, Hey, look,maybe you should be looking at
(09:40):
this when you've spent most ofyour time looking at that.
That makes sense.
I always tell people, we'll say,well, the franchise agreement
seems to be written in the favorof the franchisor.
And I take a step back and say,you are right.
It's written in the favor of thefranchisor.
but really it's written in thefavor of the brand itself
because.
At the end of the day, they wantall franchisees presenting
(10:01):
themself the same way, the samebrand, the same service, the
colors, the fonts to, all thedetails.
So that they're not makingspecial arrangements.
Well, we're gonna treat you thisway and then all of a sudden,
and treat someone else adifferent way and or give them
all these exceptions.
And ultimately they wanna keepit universal.
They wanna keep every theeverything fair everything the
(10:22):
same.
But on occasion, maybe there is.
Some wiggle room.
I don't know if you can eventalk about that, but, I'd say
what would be an example ofmaybe a negotiation or a change
in an agreement if any?
First you, you brought up a goodpoint, and most, most, most of
my clients, when they're lookingat the Franchise disclosure
document, the franchiseagreement, they see, oh my gosh
(10:43):
the franchisor can do a lot.
There's a lot of may franchisor,may do this, may do that.
Well first they've gottaunderstand that this document is
good for the next 10 years, mostlikely, most franchise
franchisors have 10 year terms.
They're occasionally five yearterms, and sometimes even seven,
but 10 is the most common.
So this document has to be ableto survive all the changes and
(11:04):
economic conditions withcompetitors and with building a
system.
Maybe they've got 10 franchisesnow, but they'll have 200 in two
years.
And so this document's gotta beable to deal with all that
change.
And so You wanna have goodlawyers drafting these documents
that are going to protect thefranchisor and then it's also
gonna protect you, thefranchisee.
(11:25):
And so there are a lot of waysthat you can see actual fairness
in the documents.
One of the areas is a prevailingparty provision.
Anytime I see a prevailing partyprovision, that means basically.
That the franchisors agreedwhoever wins in a lawsuit, if
we've got a dispute and it comesto blows and we either have to
go to arbitration or litigation,if there's a prevailing party
provision, it says whoever winsgets their legal fees paid for
(11:48):
by the losing party.
and when I see that, I think,wow that's really good.
Because if the worst casescenario does occur, if you're
actually right and you proceedthat you will have your legal
fees paid for.
So you.
Not out anything.
and it causes both partiesreally to come to the
negotiations table before theyspend a lot of money and time
(12:09):
going down the path oflitigation.
So that's one area where I seeactually more fairness brought
into this.
Now you mentioned originally dofranchisors.
Are they willing to make changesto documents?
Yeah, occasionally they are.
And I can't predict when theywill do that because it's
dependent upon a variety offactors.
They may say, well, we reallylove this franchisee, so we'll
(12:29):
be willing to bend the rules alittle bit for'em and provide
them maybe a right of firstrefusal on an adjacent
territory, right?
Or maybe give them theopportunity to expand for a
cheaper price.
Maybe give them a discount.
And again if they are willing todo that they will write it up
and then send it to you thecandidate, and then you can send
it to me and I'll review it.
(12:50):
But most of the time,franchisors really don't change
a whole lot.
My review isn't about goingthrough and redlining the
documents and sending you 50pages of changes that we'd wanna
make.
The franchisor would just take alook at that and say, well, no,
we don't make any of thechanges.
Your lawyer just spent,$15,000or you just spent 15,000 the
legal fees for no reason.
(13:12):
It's really about understandingall of your rights and
responsibilities and realizingthat you are not powerless in
this relationship, that you dohave rights, and if the
franchisor does mess up, you cando this or that.
It's really about understandingwhat you're buying into because
it's a 10 year contract Giventhe length of time.
it's very important to reviewit.
(13:32):
Even if you're working withsomeone review the document, go
through it a couple times.
Cover to cover, make sure youunderstand it, mark your own
notes there.
I think that's something Irecommend to everyone.
And the biggest piece of advicehere is get everything in
writing.
So if you are discussingsomething and someone says,
yeah, we could do that, or wecan arrange that, maybe it's we
had someone that needed anextension for personal reasons.
(13:54):
They couldn't meet the sixmonths and it was a pretty good
reason and we will extend it.
I go.
Just get everything in writing.
Let's just play it safe.
It's not that people forget,maybe employees leave within the
organization.
So it's always a safe bet.
one question that came up andmaybe this is case by case, but
you sign a franchise agreement,do the review, you move forward.
You're five years into a 10 yearagreement.
(14:17):
Then you go to sell, obviouslyyou have the ability to sell the
agreement.
You don't have to stay the whole10 years and you could sell it
to someone else.
When that buyer purchases thefranchise, are they really
continuing your franchiseagreement or are they usually
signing a brand new franchiseagreement?
10 years.
Can you I guess what is normalin that case?
(14:37):
Well, that's a great question toask and it's a great question to
ask the franchisor because it isdependent upon the situation.
When I was at CycleBar If youwere selling a franchise and
you've got maybe six years lefton the term, so you're in year
four the incoming buyer we wouldlove to have on a 10 year term.
So what we would do is transferover the remaining term.
(14:59):
So that the document itself,that franchise transfers over,
and then you sign that franchiseagreement, the transfer
assignment agreement, and thenwe reissue a new agreement.
With a 10 year term.
Now there are situations thoughwhere you have a franchise,
let's say, that signed in 2020and with a 7% royalty.
(15:22):
And in 2021, the royalty went upto 10%.
And so in those situations, youcan work the franchisee.
the franchisor will say maybewe'll grant you the right to
have that old royalty for thenext three years.
And then after that you'llswitch over to this other
royalty.
there are certainly tweaks andchanges you can make to it.
But franchisors generally wantyou to be on a longer franchise
(15:43):
term.
They don't want you to have, buya franchise and then you're out
in two years.
ultimately, when you're lookingat a resale you're looking at
both franchise agreements,right?
You're investigating thefranchisor.
Maybe you wanna go out andstart, in a new territory.
You're comparing that to theresale.
So you're kind of doing two,double the due diligence, making
sure you have the whole picture.
Ultimately you're gonna be withthe franchisor, so you wanna
(16:04):
make sure that fits there forthat 10 year 10 year agreement.
Question I get to on.
This is actually one that's beencoming up for some reason a
little bit more often, is whatis included.
And I'm gonna explain dive alittle bit deeper what's
included in the franchisedisclosure document, to give you
a little bit more context, everyyear we're in refiling season,
(16:25):
so every year in the us they'llrenew the agreement.
It'll have last year'sinformation.
So the new F DDS coming out willhave the 2024.
Data in that agreement.
But specifically, I getquestions like, well, okay,
they're giving us a financialrepresentation.
They're giving, which is an item19 or an item seven.
They're giving us a range ofinvestment.
(16:47):
What is normally included isthat every single franchisee in
the system does the franchiseehave to be a franchisee for a
certain length of time.
I guess those are the questionsI get just because it is only
being updated once a year.
Item 19 generally is gonna havefinancial performance
representations spanning a fullyear.
Okay.
And with emerging brands, youmay not have a full year of
(17:11):
financials to to disclose.
And that's really then done on acase by case basis that the
franchise lawyers or thefranchisor's lawyers will decide
what is appropriate in thatcontext.
Okay.
I've seen some where theyinclude just six months of data
and that's all they've got.
And with proper disclosurethough, you can say, look, this
(17:32):
is all we have.
These are the two corporateowned locations.
These are the data, this is thedata, and that's it.
Right?
And some in that situation willsay, well, we only have six
months.
We don't have a full year.
Let's just not disclose thisyear.
Let's disclose when we actuallydo have a full year.
Okay?
So it really is dependent uponthe franchisor's advice.
(17:53):
Perfect.
Ultimately, what I advise is ifyou want some additional
information, that is where thevalidation and the franchisee
call franchise validation calls,which is speaking with existing
franchisees.
You may have someone that, maybewas a few months in, but we're
now in April, so they havethree, three complete months of
this year.
And maybe it's not included inthe FDD, but you can ask'em
(18:14):
like, Hey, how are things going?
Q1 of 2025 was, the investmentin line, what are your numbers
looking like?
So you can absolutely speak withfranchises.
So it's a combination.
It's the agreement.
You can obviously, learn alittle bit more on the on the
validation calls.
And what I will also say in acomment I get is, although the
items are the same, I.
The agreements the way theinformation is kind of,
(18:37):
presented is different.
I've seen DDS that have profitloss of every franchisee I've
had.
Dds item 19, that's completelyblank because maybe they are
newer or the model has changedand they wanna give it time to,
to reflect.
And I have others where it's aparagraph, so there's it,
there's no real, it to, it's myunderstanding.
There's no.
(18:57):
it has to state the numbers in acertain way.
Is that correct?
Correct.
Just can't be misleading.
I've seen some that basicallylook like they're ripped off of
the internet.
That somebody, a bot from ai Didit?
They bought the franchisedisclosure document from, legal
Zoom and then others, they'vehired these artisanal craftsmen
(19:17):
who, they put.
Pictures and, it looks like apainter created it.
You wanna just see the presentor the information be presented
in a way that's not misleading.
It's very easy to understandaverage median highs, lows
disclosing when the locationsopened up.
I think is critical to havethat.
(19:38):
And then depending upon whattype of business it is you're
seeing how they break down therevenue.
and where that's coming from andhow often so you get a better
sense of what you couldpotentially earn.
And of course they're gonna havea disclaimer in there.
Some outlets have earned thismuch, your individual results
may differ, but at least you'llget a sense of what is
potentially achievable here.
(19:59):
And the best item nineteens thatI see are ones where I see the
franchisee doing better than thecorporate locations.
That's when I'm like, wow.
It shows that the model workshere, right?
They're doing better than theones that you've owned and
operated for the last 10 years.
absolutely.
I mean, they factor everythingin the royalties, but you wanna
see that, you wanna see thefranchisees doing better as they
grow.
They're just focusing on that.
(20:21):
One business, the franchisor hastheir location or their
territory.
They're running the franchise.
They have a lot of stuff goingon.
And all that information isreally gathered.
That's direct input.
Even going to the investment,the item seven, which is the
investment range it's all inputsright at, end of the year
they're gathering informationfrom the franchisees.
Maybe they.
Are able to import directly fromQuickBooks or whatever their
(20:43):
accounting system is, butthey're gathering that
information because sometimesyou'll see some ranges, a
hundred to 300,000.
Well, that's a big swing andthere's a lot of variables.
Obviously, if you're buyingleasing equipment or a.
Have a manager in place orrunning it full time.
But that is all in thisinformation's not made up.
These aren't just, estimates.
This is what we think.
It's give us your data.
(21:04):
They put it all, they put it alltogether, and they have these
ranges.
Correct.
Am I correct by that?
Okay.
Yep.
And that's what they'lltypically risk in the first
couple pages of the FDD.
They'll talk about general riskswhen buying a franchise, and
then the next page after thatare special risks.
And if a franchisor is emerging,they'll put in there that, this
is riskier, a potentiallyriskier investment.
It has a short operatinghistory.
(21:25):
And I'll explain to my clients,yeah, it's because item seven
and item 19, I.
If they don't have a whole lotof franchisees open and
operating they don't have allthese other data sets right.
Now, if they had a thousandlocations open, well, those a
thousand locations, they'regonna be using that data to, to
figure out what their item sevenranges are.
The data's gonna be reallysolid.
(21:46):
Item 19, they're gonna show datafrom a thousand locations.
So it's, in emerging brandsyou've gotta look at, all right,
well here's all the informationwe've got.
And do I have enough to actuallymake that informed decision?
Some will say yeah, maybe Ishould wait until the next
year's FDD, especially rightnow.
But you know, the franchisorwill tell you, Hey, maybe the
(22:06):
royalty rate's going up.
You may wanna sign under thisversion now because the next one
will change.
It's very dependent upon thatsituation.
And depending how long it takesfor the refile and getting new
FDD, that territory may not beavailable or the Territories.
For some of these that areselling like hotcakes, The
territory could be gone by thattime.
Any other, I mean, there's allthe parts are equally as
important, but and then I wantto go into kind of your process
(22:29):
and things like that.
But when reviewing, the FDVstandouts, there's so many
different sections such asthere's a legal section, right?
If there's have been anylawsuits, Can you talk to us a
little bit about maybe a generaloverview and then I want to go
into your full process of areasto.
Think about or focus on,considering the whole document
as equally as important.
(22:49):
Sure.
Well, you mentioned litigationand item three and whenever
somebody, when I have candidatesthat see in an FDD litigation,
They tend to get a littlescared.
Oh my gosh.
The franchisor was sued.
And I don't necessarily, I takea look at every case that's
listed.
If they file arbitration, it'sall private.
So I don't know what happened,but if they file in state or
(23:11):
federal court, I can typicallysee what occurred.
most of the time it's just runof the mill stuff, a dispute
that you have with a franchisee.
And there's really not a wholelot there, but if you see a lot
of them.
That then is an issue, right?
And then you look at item 20.
So you see a lot of litigationin item three, maybe three to
five cases.
And then you go to item 20 whereit shows us the outlets.
(23:34):
And you go to the transfersection and you see that they
had 20 transfers last year andthey had 30 terminations.
That may indicate that thefranchisor is having a little
bit of a crisis and maybethey've got a new executive
leadership team that is taking areally hard stance on maybe
minimum performance guarantees,right?
And seeing, all right, well weneed to clean house.
(23:54):
So there's a lot to look at.
And it's not necessarily lookingat one individual portion or
item of the FDD, it's looking atit.
In combination with the others.
So if there is, lawsuits listeditem three, then I go to item
20.
I'll look at trademarks.
Item 13.
That's not something that peopletypically look at, but I wanna
(24:15):
see what.
Potential revenue streamsthey're gonna add on, right?
So maybe they filed othertrademarks that they wanna have.
Also make sure that they own thetrademark.
When you buy a franchise, you'regetting the rights to use the
mark.
The system in the territory.
So you wanna make sure thatyou're trademarked, you actually
have the right to use it.
And occasionally I've seen someissues with that.
(24:35):
It's more of an administrativeside where a different entity
actually owns it.
May have it listed in the FDDbut it's just making sure you've
got the whole thing here.
And I want to check and makesure everything lines up with
what they're telling you.
It's a very important document.
What I advise people on.
And then I want to go into kindof your the process is number
(24:56):
one, a franchise, a franchisorwill give you the FDD at
different points in time.
It may be on the intro call.
It may be on the second call.
The document is extremelyimportant, but you wanna make
sure the franchise, at the endof the day is a good fit.
it's a legal document.
It's not the most excitingdocument, but it is extremely
important to review.
So what I tell everyone is makesure the fits there.
(25:18):
May take you a couple calls, youdive in, dive into the
agreement, and then.
Look into, as you move furtheralong, maybe you narrow it down
to one or two brands, or maybeit is that one brand.
And doing that review now, thereview you can do on your own.
I always recommend looking intospeaking with a franchise
attorney specifically as wementioned, a franchise attorney.
(25:40):
Not, your friend who practiceslaw that knows nothing about
franchising, so it's always agood idea.
It is an investment, but it'sgonna be a thorough review.
It's gonna give you kind of thatpeace of mind.
It's gonna answer all thoselingering questions in the back
of your mind.
Is this normal wording, what doI do in this case?
Can we do an addendum and thatkind of deal?
Highly recommend it, and this isdone later on in the process.
(26:03):
You wanna make sure there's afit, you had a chance to review
it.
And then as you kind of, maybeyou start off with three or four
brands and narrow it down that'swhen you hire someone like kit
to, to do that review for you.
So with that being said, givethe audience maybe what is your
process length of time andanything else, I guess what to
expect when working with you.
(26:23):
Sure.
So I'm typically the last partof due diligence.
It's when a candidate is readyto move forward and they've
typically they're either aboutto go to Discovery Day or
confirmation day, or they'vejust returned.
Right.
And I generally recommend thatyou do the review before you go
to Discovery Day, so you'rearmed with questions that you
can ask them in person.
(26:45):
Because my review is gonnareveal a lot of hard hitting
questions that you want to askthe franchisor.
And it's great that you can askit to'em in person then and see
how they respond, right?
And whether or not they'remaking eye contact, whether or
not you think they're beingtruthful because you need to
make sure that you arepartnering up with the right
person that's a good fit foryou.
(27:05):
So I generally recommend you dothe review.
Alright, well, I'm not sure thatI, I'm 90% there.
I wanna get to 95% and then I'lldo the review.
That's fine too.
Either way before or after.
It's generally right around thattime, right?
So my review is fairly simple.
It's three steps really.
I've got an intro call.
15 minutes over Zoom where Iwanna learn more about the
(27:28):
candidate and what they'relooking at what franchise
they're looking at buying.
Why you're buying, why are youbuying it?
Who else is involved here?
Because I wanna make sure thatthey're also part of the
conversation.
Is it your wife, your brother,your sister your mom, or your
dad?
Have them also in the call.
So first call is just getting toknow them and explaining my
process.
What I do, second step is I send'em the engagement letter
(27:51):
that'll list my flat fee inthere.
My flat fee to review onefranchise is$2,395, and to
review the purchase of multiplesis$2,895.
So I send my engagement letter,list the flat fees in there, all
the candidate does, which is bythis time it really is now my
client.
They electronically sign it andsend me back the FDD.
(28:14):
Then I do my homework.
And then we have the reviewcall.
The review call is an hour and ahalf over Zoom, where I share my
screen, and I have the Zoom AIbots enabled too.
So we have the, I send a notesummary afterwards showing
everything that we talked about.
And so then we go through thedocument, literally cover to
cover pointing areas.
I like areas, I don't like areasthat are unusual in a good way
(28:36):
or bad way.
Questions to ask the franchisor,areas of liability and all of
that.
And at the end of the day, thenthe franchisee candidate should
have an amazing understanding ofwhat's actually in the document.
It shouldn't be as intimidatingas it was beforehand, right?
Which it is, it could be anintimidating document if you've
never read one before.
(28:57):
And then you start readingothers and they all have the
same, setup for the MO for themost part.
No, that's awesome.
It's very inclusive as Imentioned it.
It kind of, it answers a lot ofthe questions and kind of clears
up certain sections because I'veread quite a few agreements and
sometimes I don't know what someof the sections mean or I have
to kind of go back and forth ifthere are additional questions
(29:17):
come up or based off theresponses, there is gonna be
some back and forth.
Correct?
Absolutely.
So you may have five questions,they come back with responses.
Is it more of you communicatingthrough the franchisee yes.
Do you speak with the attorneyson the other side?
Is that, does that happen often?
Okay.
But most of the time it's thefranchisee talking to the
franchisor.
Okay.
I think life would be a lot lesscomplicated if lawyers weren't
(29:38):
the ones that were talking.
The lawyers should be there toformalize things.
and make sure that whateveragreement was made actually is.
So I tell my clients, go.
Ask the franchisor directly.
They'll provide responses, andsure, you can run those
responses by me, right?
Because they wanna know, oh,wait they said, yeah, they
agreed with you, kit.
But they said this.
(29:59):
Is that correct?
Right.
Oh yeah.
It is.
Absolutely.
Feel free to go ahead.
Just getting assurances becausethis is most of the time this,
these are my client's first timebuying into a franchise or
buying a business.
So they have no idea what toexpect.
And so they just wantassurances.
They wanna know is, again, isthis something I should be
doing?
I love that.
That's great.
(30:20):
And I like the idea that you'refocusing on this area because in
the past.
People that are in kind of sameposition, fra franchise
attorneys, they also hadclients.
So there was a conflict if theywere working with a certain
franchisor.
And it's like you had to check,are what's your current client
list?
Can you do an FDD review forthis specific brand?
So it just, it's reallysimplifies things.
(30:41):
Flat fee, it eliminates, well,should I ask this question?
Am I gonna get charged?
So this way it's kind of allinclusive.
It's peace of mind and again.
It's done towards that end ofthe process.
Anything we didn't talk about?
These are most of the listenerswe pulled the listeners a
majority are first time.
We do have some people that owna franchise maybe looking at
(31:01):
additional, but there's a lot ofcorporate executives that are,
I.
Looking to invest in their firstfranchise.
So any other advice you'd liketo to give the audience?
Well, it's just, it's never toolate to engage an attorney.
I'll typically have clientsthat'll, call me up and maybe
it's the day before they go toconfirmation day.
Or even, a night before theysign the franchise agreement.
(31:23):
Call me in a panic.
Hey, I didn't get a review done.
Is there any way you can helpme?
And if I can.
I will I'll move heaven andearth to try to squeeze them in
because I know it's a scarytime.
But it should also be anexciting time.
And you always have to remind'emof that.
Look you're making this changefor a reason.
You've done everything you needto do.
And now you just need to dot theI and cross the T's.
(31:45):
And that's where, I come in andsay, yeah, everything looks
great.
Or, Hey, maybe just ask theselast few questions.
And then, all of your fears ormost of the fears really will
kind of be washed away so thatyou can feel confident moving
forward.
'cause the last thing you wantis a hesitant or reluctant
buyer.
Because if they feel likethey're pushed in, well then
(32:07):
three months down the road, theymay think, oh my gosh maybe I
shouldn't have done that.
No, they should feel confident.
I made the right decision.
I did everything that I neededto do before I bought into this,
and I'm just gonna move forwardand kick ass and take names.
Right.
That's why I encourage people,if you have questions, bring it
up with the franchisor, bring itup with you, on the legal side.
Bring up those questions, jotthem down because you'll forget.
(32:28):
And I have them kind of keep arunning tabs each brand
questions, concerns pending, allthat kind of stuff, because you
want to get it outta your headbecause.
It could be an overwhelmingprocess, especially when you're
searching in the very beginningstages.
We're working together, but youmay be talking with three
different brands.
It does get a little bitoverwhelming if you've never
done this before.
Love that.
I think that's some awesome andsome really good advice fun
(32:51):
fact.
I heard you're a movie star withDe Niro.
Is this true?
Oh man.
yeah.
So yeah, I was in a movie like ayear and a half ago.
I think it was like, I mean,they cut my hair super short,
had to shave my face.
And my role, I was the mare D inwhat was at the time called the
Wise Guys.
Okay.
and Bob De Niro walks up to me'cause he is going to have
(33:13):
dinner or lunch with hi.
The other character and you seeme for like, I don't know, my
wife says it's like a second.
It might be less than that.
The camera kinda sweeps by and Imean, if you didn't know me, you
wouldn't know that was me.
But it was fun.
It, as it was all get out andit's amazing.
That took two days to shoot.
(33:35):
You literally see it for like,it's just a flash.
It takes so much.
Yeah.
They record so much for that.
Yeah, exactly.
I've heard that.
Yeah, it's unfortunately themovie's not really good, okay.
I've seen it.
I was hoping that I'd be, thisreally small part in like a, the
Godfather?
Untouchable.
It's like a really classic mafiamovie.
(33:55):
No.
I mean, the reviews areterrible.
That's funny.
So fun, fun.
I mean, if you ever get theopportunity, to be an extra
it's, it's cool to see anotherway another business works and
all that goes into it.
It's amazing how much time andeffort goes in.
I mean, I was blown away toshoot the scene 15 times.
Just him walking to me.
And cut your hair.
(34:15):
Yeah, exactly.
I love that.
I was on last spring, dinersdrives a friend of mine.
Oh yeah.
Jersey Shore Barbecue here inPoint Pleasant.
And we went there.
They recorded, we were there forabout four or five hours.
We watched the episode and it's.
I think my back for a secondbecause, they're recording they
need the extra footage.
Obviously they can't come back,but it was two days and the show
(34:39):
is a half an hour.
but it's actually not you takeout commercials and obviously
there's three differentrestaurants.
So really it was seven minutesof footage that they took.
And it's crazy how much filmingand what they actually include.
But no, awesome.
This was fun.
This was.
Actually, I'm gonna, send, thismay be an email we send out just
to.
When people have thesequestions, a lot of it is not
(35:00):
just answering those directquestions, but the expectations
of the document, what to expect,why it's written in this way,
the realistic expectation ofchanges and things like that.
I think this is super helpfulbecause, at that point, and I've
had people say, well.
I'm in, I'm a negotiator and I'mlike, that's great to negotiate.
You can ask, but you're not, youcan't change the franchise fee.
(35:22):
Maybe you can delay the opening.
Maybe you get a zip code thrownin, but you're not changing the
royalty because legallyfranchisor really has to treat
everyone the same.
These conversations are greatand it's not just coming from
me.
I'm like, you're hearing itdirectly from Kit, a franchise
attorney.
So I appreciate that this was.
Really helpful.
I really appreciate your time.
I learned a lot.
I got some of my personalquestions and questions that I
(35:44):
get on a daily basis answered.
And yeah, looking forward havingyou back on the show.
So if you think of anything elseor.
Things change in the franchiseworld.
I'd love to have you on back onjust for an update, maybe
changes or kind of like when theUFOC went to the FDV and some of
those other changes.
That's when I got involved that,that's dating myself.
Yeah.
Keep us posted and we'll let youknow when the show goes live.
(36:06):
Thank you.
Thank you.
Appreciate being on here.
Absolutely.
Thanks again.
All right.
Goodbye.
Thanks for tuning in if you wantto learn how to make the
transition from corporate toowning your franchise.
Join Giuseppe on the nextepisode.
You can also follow on allsocial media platforms and
(36:27):
achieve financial and timefreedom today.
Because if you don't ask it, theanswer is gonna be no.
(00:02):
So I tell my clients, look, ifthere's that 1% chance that you
can get it, ask for it.
It's really about understandingall of your rights and
responsibilities and realizingthat you are not powerless in
this relationship, that you dohave rights, and if the
franchisor does mess up, you cando this or that.
it's great that you can ask itto'em in person then and see how
(00:23):
they respond, right?
And whether or not they'remaking eye contact, whether or
not you think they're beingtruthful because you need to
make sure that you arepartnering up with the right
person that's a good fit foryou.
Welcome to the Franchise FreedomPodcast, where you can escape
the corporate trap throughfranchise ownership.
Here's your host, Giuseppe gr,the franchise guide.
(00:47):
Welcome to the Franchise FreedomPodcast.
I'm your host, GiuseppeGrammatical, your franchise
guide, the show where we helpcorporate executives experience
time and financial freedom viafranchising.
Thanks for joining us today.
We have a very special guest.
I think you guys got sick ofjust seeing me.
So we brought on today a goodfriend of mine, kit Higgs from
kit Franchise Law Kit.
Welcome to the show.
(01:08):
Thank you.
Thank you, Giuseppe.
Great.
Happy to be here.
We spoke a while back.
I've been meaning to, to bringyou on as the, franchise
attorney expert.
And we've been getting a lot ofquestions on this topic.
Thanks again for joining us.
If you could give the audience alittle bit of background of who
kid is, how you got into thisfield we'd love to hear that.
Sure, sure.
So somewhat of a long, littlewindy story here, but I was
(01:29):
working as a prosecutor in childabuse and juvenile delinquency,
and my phone started blowing up.
I was actually in trial and Igot, three phone calls in a row.
Thinking it was an emergency.
And so I stepped outta court,called this guy back.
It was Todd Kirby.
I'm not sure if, do you knowTodd Kirby at all Sounds
familiar.
Yeah.
So one of my buddies and hestarted a franchise sales
(01:50):
organization called St.
Gregory Development.
Ah, yep.
Okay.
And needed a lawyer.
And so he said, Hey, kit, wannahire you?
And I was thinking, my gosh, Ithought somebody was in a car
wreck or something was,seriously wrong.
So I said, Hey man I'll talk toyou later on this afternoon,
what have you.
Talk to him later on.
He said, Hey, you look I wannahire you to be our lawyer.
And I knew nothing aboutfranchise law.
(02:11):
I was a prosecutor in childabuse.
Switching over would be a, ahuge change.
And so I said no, I turned himdown.
I would've loved to work withfriends, but I said, I don't
know this area of law and Ican't provide you advice on it.
Well, later on I talked to afriend's father who was a mentor
and over beers and he said kidfranchise law is one of those
areas where you really gotta getyour hands dirty to learn it.
(02:32):
There aren't too many lawschools that actually teach
franchise law, so go try it outand see if it works.
And that's what I did bestdecision I ever made.
So I first started working outjust making sure that.
When he took this role that thesales guys at STG weren't
overselling, that they werefollowing the FTC rules and
regulations on franchise sales?
Well, really learned franchiselaw was when one of the partners
(02:55):
decided, you know what?
There's a void in themarketplace right now in
franchising.
There's nobody doing indoorcycling.
So we created this conceptcalled Cycle Bar, and my first
role as general counsel was towrite the franchise disclosure
document and the franchiseagreement.
Same documents that I reviewnow.
Right.
I actually had to write and ofcourse I didn't write this
(03:16):
myself.
At the time we used this lawfirm outta Chicago, one of the
best law firms out there.
and they helped me write it, andI needed to know everything
about this.
I had a hundred questions backto them.
Why do, why, how do you come upwith a royalty rate?
What are the positive negativesif you do this or that with a
territory size?
I needed to make sure I kneweverything, because at the end
(03:36):
of the day.
I knew that my name was gonna beon this document.
it would look pretty bad if afranchisee were to call me up
and say, Hey, kit, I'mconsidering buying your
franchise.
Maybe this is a candidate.
I wanna know what section 13point 0.4 means.
And if I were to say, geez, Idon't know, let's talk to our
lawyers that look, that wouldlook really bad.
So I needed to make sure Iunderstood everything about it.
(03:58):
And so then once we got our, thedocuments issued, I was taking
what I learned.
Implementing those terms andseeing what works and what
doesn't and then refining it andeach year revising the documents
and really understanding this isa living, breathing document
that should be changed year toyear needs to be, obviously the
FTC requires it, but you know,you've got some changes to the
(04:19):
system.
You need to make surefranchisees are aware of.
Because the whole point of thedisclosure document is to
disclose important informationto give buyers a good
understanding of what they'rebuying into before they're
locked into a contract.
Right?
So that's how I got startedreally understanding the
franchise agreement andfranchise disclosure document.
Then we had franchise openoperating.
It was figuring out what works.
(04:41):
And then once the company gotbought out.
They were about to go public iswhen I decided to start my own
firm.
And since then I've just beenrepresenting franchisees doing
FDD reviews.
So I've done several hundred inthe last year I'll do more than
a few hundred this year.
And so I've got experience thereso I can tell you what's normal
and what's not, and I thinkthat's there.
I bring a lot of value when Iprovide my reviews.
(05:04):
Right.
Yeah.
I mean, the industry offranchising, it's a business in
and of itself When you're doingthe review, you really need
someone that has a background infranchising that really
understands franchise law,especially when you're not sure.
Is this normal wording in anFDV?
Correct.
Absolutely.
I get people all the timeasking, Hey, is this normal?
Is this not?
I just did a review yesterday.
(05:24):
The royalty rate was 40%.
Wow.
Never heard of that.
And yeah.
but it makes sense for thissystem.
And so I was telling thefranchisee look, this is the
highest royalty rate I've seen,but it makes sense for this
business model.
Right.
And so I'm comparing and lookingat all these other business
models and seeing what isindustry standard.
And if there's an outlier, itdoesn't necessarily mean it's
(05:46):
bad.
The franchisor could be reallyinnovative.
They could be doing something alittle bit different.
And I think that's a great thingif you investigate and dig a
little deeper and find out, doesthis actually work?
I agree.
I always, when someone hadlooked and it was, I think it
was over 20, 20% and I said,well, that's definitely higher
than what we normally see.
But the better question is not,is this too high?
(06:07):
It's, what am I getting for thatroyalty?
You have to make sure it.
Sense, especially if they'retaking a lot of the stuff off
your plate, or now you don'tneed an office or an assistant
or bookkeeper because maybebookkeeping is bundle in there.
You want to really see what'sincluded and validate talking
with the franchisees, makingsure that they've been happy,
with the services and thesupport from the franchisor.
(06:30):
Yeah, I get questions a lot andI am not an attorney.
I'll be first to admit that andis this nor normal wording, is
this normal?
And I always refer it back tothe attorneys because, it,
there, there is some wording.
I, again, I'm not an attorneyand I don't understand
specifically what it means or itsounds like the franchise or may
not be able to, are theycompeting with me?
Are they not?
(06:50):
I don't understand, what thislooks like.
I always tell people, speak witha professional in that space And
if you disagree that I, this isa good conversation because I
wanna make sure I understandthis correctly, but when the
point of.
Reviewing this franchisedisclosure document, which by
the way, for everyone listeningin, if you haven't listened to
past episodes, the franchiseagreement is contained within
(07:11):
the FDD.
So you hear all these terms, butthe franchise disclosure
document is the completedocument.
The franchise agreement is inthat document.
But you know, people will say,well, that document really is
written in stone, so why do Ineed a franchise attorney?
It is what it is.
But my understanding is, numberone, you're doing it for the
review, for the peace of mind inthere, making sure that there
(07:34):
aren't any red flags, and maybeeven potentially, I know there's
a couple questions built inhere, but potentially maybe
there is some type ofnegotiation or wiggle room.
Can you talk a little bit aboutthat?
Sure.
Absolutely.
Now most franchisors are gonnatake the stance that there's
nothing negotiable in thedocuments.
And I understand that becausethat's how I dealt with things
(07:54):
when I was general counsel cyclebar, I wouldn't change anything.
But it provided an opportunityfor me to explain why we've got
it in there.
And so if there's an area that Ithink you could potentially ask
the franchisor to make a change,I say ask it.
And so the ask is twofold or theimportance, it's important for
two reasons.
(08:15):
Number one, if they say yes,great.
They will write up the addendumor the amendment and they'll
send it to you, and then youjust send it to me and I'll
review it and say, yep, it saysexactly what it's supposed to.
And there you go.
But the other reason why youshould ask it is, so it does
provide that opportunity for afranchisor to explain why
they've got it in there.
(08:35):
A liquidated damages clause.
When you take a look at thatcandidates say, oh my gosh,
there's a liquidated damagesclause in here.
Yeah there's a reason whythere's one in there.
Have the franchisor explain it.
If they can't explain it, Idunno, maybe it shouldn't be in
there.
Agreed.
Yeah, that makes a lot of sense.
And I mean, the document'swritten in simple, I.
Simple enough terms, but it forsomeone to get through the
(08:57):
document, not saying theyunderstand all the law, but it's
written, I forget what at whatgrade level.
But it's simple enough thateveryone should be able at least
to read through it.
Maybe not understand itcompletely, but there, it's not
overly, it's not an overlycomplicated read if I understood
correctly, correct.
It's just dense.
And it's a lot of pages.
Yeah.
I tell a lot of my clients, lookI'm like the CliffNotes version
(09:18):
that the yellow and blackdocuments he used to use was in
middle school and high school.
I will go through the documentsand raise issues that you
weren't aware of.
Because you may be focused in onan area that you think is it's
worrisome to you, but inreality, it really shouldn't be
where you're focusing your time.
You should be worried aboutanother area.
And so I explain, Hey, look,maybe you should be looking at
(09:40):
this when you've spent most ofyour time looking at that.
That makes sense.
I always tell people, we'll say,well, the franchise agreement
seems to be written in the favorof the franchisor.
And I take a step back and say,you are right.
It's written in the favor of thefranchisor.
but really it's written in thefavor of the brand itself
because.
At the end of the day, they wantall franchisees presenting
(10:01):
themself the same way, the samebrand, the same service, the
colors, the fonts to, all thedetails.
So that they're not makingspecial arrangements.
Well, we're gonna treat you thisway and then all of a sudden,
and treat someone else adifferent way and or give them
all these exceptions.
And ultimately they wanna keepit universal.
They wanna keep every theeverything fair everything the
(10:22):
same.
But on occasion, maybe there is.
Some wiggle room.
I don't know if you can eventalk about that, but, I'd say
what would be an example ofmaybe a negotiation or a change
in an agreement if any?
First you, you brought up a goodpoint, and most, most, most of
my clients, when they're lookingat the Franchise disclosure
document, the franchiseagreement, they see, oh my gosh
(10:43):
the franchisor can do a lot.
There's a lot of may franchisor,may do this, may do that.
Well first they've gottaunderstand that this document is
good for the next 10 years, mostlikely, most franchise
franchisors have 10 year terms.
They're occasionally five yearterms, and sometimes even seven,
but 10 is the most common.
So this document has to be ableto survive all the changes and
(11:04):
economic conditions withcompetitors and with building a
system.
Maybe they've got 10 franchisesnow, but they'll have 200 in two
years.
And so this document's gotta beable to deal with all that
change.
And so You wanna have goodlawyers drafting these documents
that are going to protect thefranchisor and then it's also
gonna protect you, thefranchisee.
(11:25):
And so there are a lot of waysthat you can see actual fairness
in the documents.
One of the areas is a prevailingparty provision.
Anytime I see a prevailing partyprovision, that means basically.
That the franchisors agreedwhoever wins in a lawsuit, if
we've got a dispute and it comesto blows and we either have to
go to arbitration or litigation,if there's a prevailing party
provision, it says whoever winsgets their legal fees paid for
(11:48):
by the losing party.
and when I see that, I think,wow that's really good.
Because if the worst casescenario does occur, if you're
actually right and you proceedthat you will have your legal
fees paid for.
So you.
Not out anything.
and it causes both partiesreally to come to the
negotiations table before theyspend a lot of money and time
(12:09):
going down the path oflitigation.
So that's one area where I seeactually more fairness brought
into this.
Now you mentioned originally dofranchisors.
Are they willing to make changesto documents?
Yeah, occasionally they are.
And I can't predict when theywill do that because it's
dependent upon a variety offactors.
They may say, well, we reallylove this franchisee, so we'll
(12:29):
be willing to bend the rules alittle bit for'em and provide
them maybe a right of firstrefusal on an adjacent
territory, right?
Or maybe give them theopportunity to expand for a
cheaper price.
Maybe give them a discount.
And again if they are willing todo that they will write it up
and then send it to you thecandidate, and then you can send
it to me and I'll review it.
(12:50):
But most of the time,franchisors really don't change
a whole lot.
My review isn't about goingthrough and redlining the
documents and sending you 50pages of changes that we'd wanna
make.
The franchisor would just take alook at that and say, well, no,
we don't make any of thechanges.
Your lawyer just spent,$15,000or you just spent 15,000 the
legal fees for no reason.
(13:12):
It's really about understandingall of your rights and
responsibilities and realizingthat you are not powerless in
this relationship, that you dohave rights, and if the
franchisor does mess up, you cando this or that.
It's really about understandingwhat you're buying into because
it's a 10 year contract Giventhe length of time.
it's very important to reviewit.
(13:32):
Even if you're working withsomeone review the document, go
through it a couple times.
Cover to cover, make sure youunderstand it, mark your own
notes there.
I think that's something Irecommend to everyone.
And the biggest piece of advicehere is get everything in
writing.
So if you are discussingsomething and someone says,
yeah, we could do that, or wecan arrange that, maybe it's we
had someone that needed anextension for personal reasons.
(13:54):
They couldn't meet the sixmonths and it was a pretty good
reason and we will extend it.
I go.
Just get everything in writing.
Let's just play it safe.
It's not that people forget,maybe employees leave within the
organization.
So it's always a safe bet.
one question that came up andmaybe this is case by case, but
you sign a franchise agreement,do the review, you move forward.
You're five years into a 10 yearagreement.
(14:17):
Then you go to sell, obviouslyyou have the ability to sell the
agreement.
You don't have to stay the whole10 years and you could sell it
to someone else.
When that buyer purchases thefranchise, are they really
continuing your franchiseagreement or are they usually
signing a brand new franchiseagreement?
10 years.
Can you I guess what is normalin that case?
(14:37):
Well, that's a great question toask and it's a great question to
ask the franchisor because it isdependent upon the situation.
When I was at CycleBar If youwere selling a franchise and
you've got maybe six years lefton the term, so you're in year
four the incoming buyer we wouldlove to have on a 10 year term.
So what we would do is transferover the remaining term.
(14:59):
So that the document itself,that franchise transfers over,
and then you sign that franchiseagreement, the transfer
assignment agreement, and thenwe reissue a new agreement.
With a 10 year term.
Now there are situations thoughwhere you have a franchise,
let's say, that signed in 2020and with a 7% royalty.
(15:22):
And in 2021, the royalty went upto 10%.
And so in those situations, youcan work the franchisee.
the franchisor will say maybewe'll grant you the right to
have that old royalty for thenext three years.
And then after that you'llswitch over to this other
royalty.
there are certainly tweaks andchanges you can make to it.
But franchisors generally wantyou to be on a longer franchise
(15:43):
term.
They don't want you to have, buya franchise and then you're out
in two years.
ultimately, when you're lookingat a resale you're looking at
both franchise agreements,right?
You're investigating thefranchisor.
Maybe you wanna go out andstart, in a new territory.
You're comparing that to theresale.
So you're kind of doing two,double the due diligence, making
sure you have the whole picture.
Ultimately you're gonna be withthe franchisor, so you wanna
(16:04):
make sure that fits there forthat 10 year 10 year agreement.
Question I get to on.
This is actually one that's beencoming up for some reason a
little bit more often, is whatis included.
And I'm gonna explain dive alittle bit deeper what's
included in the franchisedisclosure document, to give you
a little bit more context, everyyear we're in refiling season,
(16:25):
so every year in the us they'llrenew the agreement.
It'll have last year'sinformation.
So the new F DDS coming out willhave the 2024.
Data in that agreement.
But specifically, I getquestions like, well, okay,
they're giving us a financialrepresentation.
They're giving, which is an item19 or an item seven.
They're giving us a range ofinvestment.
(16:47):
What is normally included isthat every single franchisee in
the system does the franchiseehave to be a franchisee for a
certain length of time.
I guess those are the questionsI get just because it is only
being updated once a year.
Item 19 generally is gonna havefinancial performance
representations spanning a fullyear.
Okay.
And with emerging brands, youmay not have a full year of
(17:11):
financials to to disclose.
And that's really then done on acase by case basis that the
franchise lawyers or thefranchisor's lawyers will decide
what is appropriate in thatcontext.
Okay.
I've seen some where theyinclude just six months of data
and that's all they've got.
And with proper disclosurethough, you can say, look, this
(17:32):
is all we have.
These are the two corporateowned locations.
These are the data, this is thedata, and that's it.
Right?
And some in that situation willsay, well, we only have six
months.
We don't have a full year.
Let's just not disclose thisyear.
Let's disclose when we actuallydo have a full year.
Okay?
So it really is dependent uponthe franchisor's advice.
(17:53):
Perfect.
Ultimately, what I advise is ifyou want some additional
information, that is where thevalidation and the franchisee
call franchise validation calls,which is speaking with existing
franchisees.
You may have someone that, maybewas a few months in, but we're
now in April, so they havethree, three complete months of
this year.
And maybe it's not included inthe FDD, but you can ask'em
(18:14):
like, Hey, how are things going?
Q1 of 2025 was, the investmentin line, what are your numbers
looking like?
So you can absolutely speak withfranchises.
So it's a combination.
It's the agreement.
You can obviously, learn alittle bit more on the on the
validation calls.
And what I will also say in acomment I get is, although the
items are the same, I.
The agreements the way theinformation is kind of,
(18:37):
presented is different.
I've seen DDS that have profitloss of every franchisee I've
had.
Dds item 19, that's completelyblank because maybe they are
newer or the model has changedand they wanna give it time to,
to reflect.
And I have others where it's aparagraph, so there's it,
there's no real, it to, it's myunderstanding.
There's no.
(18:57):
it has to state the numbers in acertain way.
Is that correct?
Correct.
Just can't be misleading.
I've seen some that basicallylook like they're ripped off of
the internet.
That somebody, a bot from ai Didit?
They bought the franchisedisclosure document from, legal
Zoom and then others, they'vehired these artisanal craftsmen
(19:17):
who, they put.
Pictures and, it looks like apainter created it.
You wanna just see the presentor the information be presented
in a way that's not misleading.
It's very easy to understandaverage median highs, lows
disclosing when the locationsopened up.
I think is critical to havethat.
(19:38):
And then depending upon whattype of business it is you're
seeing how they break down therevenue.
and where that's coming from andhow often so you get a better
sense of what you couldpotentially earn.
And of course they're gonna havea disclaimer in there.
Some outlets have earned thismuch, your individual results
may differ, but at least you'llget a sense of what is
potentially achievable here.
(19:59):
And the best item nineteens thatI see are ones where I see the
franchisee doing better than thecorporate locations.
That's when I'm like, wow.
It shows that the model workshere, right?
They're doing better than theones that you've owned and
operated for the last 10 years.
absolutely.
I mean, they factor everythingin the royalties, but you wanna
see that, you wanna see thefranchisees doing better as they
grow.
They're just focusing on that.
(20:21):
One business, the franchisor hastheir location or their
territory.
They're running the franchise.
They have a lot of stuff goingon.
And all that information isreally gathered.
That's direct input.
Even going to the investment,the item seven, which is the
investment range it's all inputsright at, end of the year
they're gathering informationfrom the franchisees.
Maybe they.
Are able to import directly fromQuickBooks or whatever their
(20:43):
accounting system is, butthey're gathering that
information because sometimesyou'll see some ranges, a
hundred to 300,000.
Well, that's a big swing andthere's a lot of variables.
Obviously, if you're buyingleasing equipment or a.
Have a manager in place orrunning it full time.
But that is all in thisinformation's not made up.
These aren't just, estimates.
This is what we think.
It's give us your data.
(21:04):
They put it all, they put it alltogether, and they have these
ranges.
Correct.
Am I correct by that?
Okay.
Yep.
And that's what they'lltypically risk in the first
couple pages of the FDD.
They'll talk about general riskswhen buying a franchise, and
then the next page after thatare special risks.
And if a franchisor is emerging,they'll put in there that, this
is riskier, a potentiallyriskier investment.
It has a short operatinghistory.
(21:25):
And I'll explain to my clients,yeah, it's because item seven
and item 19, I.
If they don't have a whole lotof franchisees open and
operating they don't have allthese other data sets right.
Now, if they had a thousandlocations open, well, those a
thousand locations, they'regonna be using that data to, to
figure out what their item sevenranges are.
The data's gonna be reallysolid.
(21:46):
Item 19, they're gonna show datafrom a thousand locations.
So it's, in emerging brandsyou've gotta look at, all right,
well here's all the informationwe've got.
And do I have enough to actuallymake that informed decision?
Some will say yeah, maybe Ishould wait until the next
year's FDD, especially rightnow.
But you know, the franchisorwill tell you, Hey, maybe the
(22:06):
royalty rate's going up.
You may wanna sign under thisversion now because the next one
will change.
It's very dependent upon thatsituation.
And depending how long it takesfor the refile and getting new
FDD, that territory may not beavailable or the Territories.
For some of these that areselling like hotcakes, The
territory could be gone by thattime.
Any other, I mean, there's allthe parts are equally as
important, but and then I wantto go into kind of your process
(22:29):
and things like that.
But when reviewing, the FDVstandouts, there's so many
different sections such asthere's a legal section, right?
If there's have been anylawsuits, Can you talk to us a
little bit about maybe a generaloverview and then I want to go
into your full process of areasto.
Think about or focus on,considering the whole document
as equally as important.
(22:49):
Sure.
Well, you mentioned litigationand item three and whenever
somebody, when I have candidatesthat see in an FDD litigation,
They tend to get a littlescared.
Oh my gosh.
The franchisor was sued.
And I don't necessarily, I takea look at every case that's
listed.
If they file arbitration, it'sall private.
So I don't know what happened,but if they file in state or
(23:11):
federal court, I can typicallysee what occurred.
most of the time it's just runof the mill stuff, a dispute
that you have with a franchisee.
And there's really not a wholelot there, but if you see a lot
of them.
That then is an issue, right?
And then you look at item 20.
So you see a lot of litigationin item three, maybe three to
five cases.
And then you go to item 20 whereit shows us the outlets.
(23:34):
And you go to the transfersection and you see that they
had 20 transfers last year andthey had 30 terminations.
That may indicate that thefranchisor is having a little
bit of a crisis and maybethey've got a new executive
leadership team that is taking areally hard stance on maybe
minimum performance guarantees,right?
And seeing, all right, well weneed to clean house.
(23:54):
So there's a lot to look at.
And it's not necessarily lookingat one individual portion or
item of the FDD, it's looking atit.
In combination with the others.
So if there is, lawsuits listeditem three, then I go to item
20.
I'll look at trademarks.
Item 13.
That's not something that peopletypically look at, but I wanna
(24:15):
see what.
Potential revenue streamsthey're gonna add on, right?
So maybe they filed othertrademarks that they wanna have.
Also make sure that they own thetrademark.
When you buy a franchise, you'regetting the rights to use the
mark.
The system in the territory.
So you wanna make sure thatyou're trademarked, you actually
have the right to use it.
And occasionally I've seen someissues with that.
(24:35):
It's more of an administrativeside where a different entity
actually owns it.
May have it listed in the FDDbut it's just making sure you've
got the whole thing here.
And I want to check and makesure everything lines up with
what they're telling you.
It's a very important document.
What I advise people on.
And then I want to go into kindof your the process is number
(24:56):
one, a franchise, a franchisorwill give you the FDD at
different points in time.
It may be on the intro call.
It may be on the second call.
The document is extremelyimportant, but you wanna make
sure the franchise, at the endof the day is a good fit.
it's a legal document.
It's not the most excitingdocument, but it is extremely
important to review.
So what I tell everyone is makesure the fits there.
(25:18):
May take you a couple calls, youdive in, dive into the
agreement, and then.
Look into, as you move furtheralong, maybe you narrow it down
to one or two brands, or maybeit is that one brand.
And doing that review now, thereview you can do on your own.
I always recommend looking intospeaking with a franchise
attorney specifically as wementioned, a franchise attorney.
(25:40):
Not, your friend who practiceslaw that knows nothing about
franchising, so it's always agood idea.
It is an investment, but it'sgonna be a thorough review.
It's gonna give you kind of thatpeace of mind.
It's gonna answer all thoselingering questions in the back
of your mind.
Is this normal wording, what doI do in this case?
Can we do an addendum and thatkind of deal?
Highly recommend it, and this isdone later on in the process.
(26:03):
You wanna make sure there's afit, you had a chance to review
it.
And then as you kind of, maybeyou start off with three or four
brands and narrow it down that'swhen you hire someone like kit
to, to do that review for you.
So with that being said, givethe audience maybe what is your
process length of time andanything else, I guess what to
expect when working with you.
(26:23):
Sure.
So I'm typically the last partof due diligence.
It's when a candidate is readyto move forward and they've
typically they're either aboutto go to Discovery Day or
confirmation day, or they'vejust returned.
Right.
And I generally recommend thatyou do the review before you go
to Discovery Day, so you'rearmed with questions that you
can ask them in person.
(26:45):
Because my review is gonnareveal a lot of hard hitting
questions that you want to askthe franchisor.
And it's great that you can askit to'em in person then and see
how they respond, right?
And whether or not they'remaking eye contact, whether or
not you think they're beingtruthful because you need to
make sure that you arepartnering up with the right
person that's a good fit foryou.
(27:05):
So I generally recommend you dothe review.
Alright, well, I'm not sure thatI, I'm 90% there.
I wanna get to 95% and then I'lldo the review.
That's fine too.
Either way before or after.
It's generally right around thattime, right?
So my review is fairly simple.
It's three steps really.
I've got an intro call.
15 minutes over Zoom where Iwanna learn more about the
(27:28):
candidate and what they'relooking at what franchise
they're looking at buying.
Why you're buying, why are youbuying it?
Who else is involved here?
Because I wanna make sure thatthey're also part of the
conversation.
Is it your wife, your brother,your sister your mom, or your
dad?
Have them also in the call.
So first call is just getting toknow them and explaining my
process.
What I do, second step is I send'em the engagement letter
(27:51):
that'll list my flat fee inthere.
My flat fee to review onefranchise is$2,395, and to
review the purchase of multiplesis$2,895.
So I send my engagement letter,list the flat fees in there, all
the candidate does, which is bythis time it really is now my
client.
They electronically sign it andsend me back the FDD.
(28:14):
Then I do my homework.
And then we have the reviewcall.
The review call is an hour and ahalf over Zoom, where I share my
screen, and I have the Zoom AIbots enabled too.
So we have the, I send a notesummary afterwards showing
everything that we talked about.
And so then we go through thedocument, literally cover to
cover pointing areas.
I like areas, I don't like areasthat are unusual in a good way
(28:36):
or bad way.
Questions to ask the franchisor,areas of liability and all of
that.
And at the end of the day, thenthe franchisee candidate should
have an amazing understanding ofwhat's actually in the document.
It shouldn't be as intimidatingas it was beforehand, right?
Which it is, it could be anintimidating document if you've
never read one before.
(28:57):
And then you start readingothers and they all have the
same, setup for the MO for themost part.
No, that's awesome.
It's very inclusive as Imentioned it.
It kind of, it answers a lot ofthe questions and kind of clears
up certain sections because I'veread quite a few agreements and
sometimes I don't know what someof the sections mean or I have
to kind of go back and forth ifthere are additional questions
(29:17):
come up or based off theresponses, there is gonna be
some back and forth.
Correct?
Absolutely.
So you may have five questions,they come back with responses.
Is it more of you communicatingthrough the franchisee yes.
Do you speak with the attorneyson the other side?
Is that, does that happen often?
Okay.
But most of the time it's thefranchisee talking to the
franchisor.
Okay.
I think life would be a lot lesscomplicated if lawyers weren't
(29:38):
the ones that were talking.
The lawyers should be there toformalize things.
and make sure that whateveragreement was made actually is.
So I tell my clients, go.
Ask the franchisor directly.
They'll provide responses, andsure, you can run those
responses by me, right?
Because they wanna know, oh,wait they said, yeah, they
agreed with you, kit.
But they said this.
(29:59):
Is that correct?
Right.
Oh yeah.
It is.
Absolutely.
Feel free to go ahead.
Just getting assurances becausethis is most of the time this,
these are my client's first timebuying into a franchise or
buying a business.
So they have no idea what toexpect.
And so they just wantassurances.
They wanna know is, again, isthis something I should be
doing?
I love that.
That's great.
(30:20):
And I like the idea that you'refocusing on this area because in
the past.
People that are in kind of sameposition, fra franchise
attorneys, they also hadclients.
So there was a conflict if theywere working with a certain
franchisor.
And it's like you had to check,are what's your current client
list?
Can you do an FDD review forthis specific brand?
So it just, it's reallysimplifies things.
(30:41):
Flat fee, it eliminates, well,should I ask this question?
Am I gonna get charged?
So this way it's kind of allinclusive.
It's peace of mind and again.
It's done towards that end ofthe process.
Anything we didn't talk about?
These are most of the listenerswe pulled the listeners a
majority are first time.
We do have some people that owna franchise maybe looking at
(31:01):
additional, but there's a lot ofcorporate executives that are,
I.
Looking to invest in their firstfranchise.
So any other advice you'd liketo to give the audience?
Well, it's just, it's never toolate to engage an attorney.
I'll typically have clientsthat'll, call me up and maybe
it's the day before they go toconfirmation day.
Or even, a night before theysign the franchise agreement.
(31:23):
Call me in a panic.
Hey, I didn't get a review done.
Is there any way you can helpme?
And if I can.
I will I'll move heaven andearth to try to squeeze them in
because I know it's a scarytime.
But it should also be anexciting time.
And you always have to remind'emof that.
Look you're making this changefor a reason.
You've done everything you needto do.
And now you just need to dot theI and cross the T's.
(31:45):
And that's where, I come in andsay, yeah, everything looks
great.
Or, Hey, maybe just ask theselast few questions.
And then, all of your fears ormost of the fears really will
kind of be washed away so thatyou can feel confident moving
forward.
'cause the last thing you wantis a hesitant or reluctant
buyer.
Because if they feel likethey're pushed in, well then
(32:07):
three months down the road, theymay think, oh my gosh maybe I
shouldn't have done that.
No, they should feel confident.
I made the right decision.
I did everything that I neededto do before I bought into this,
and I'm just gonna move forwardand kick ass and take names.
Right.
That's why I encourage people,if you have questions, bring it
up with the franchisor, bring itup with you, on the legal side.
Bring up those questions, jotthem down because you'll forget.
(32:28):
And I have them kind of keep arunning tabs each brand
questions, concerns pending, allthat kind of stuff, because you
want to get it outta your headbecause.
It could be an overwhelmingprocess, especially when you're
searching in the very beginningstages.
We're working together, but youmay be talking with three
different brands.
It does get a little bitoverwhelming if you've never
done this before.
Love that.
I think that's some awesome andsome really good advice fun
(32:51):
fact.
I heard you're a movie star withDe Niro.
Is this true?
Oh man.
yeah.
So yeah, I was in a movie like ayear and a half ago.
I think it was like, I mean,they cut my hair super short,
had to shave my face.
And my role, I was the mare D inwhat was at the time called the
Wise Guys.
Okay.
and Bob De Niro walks up to me'cause he is going to have
(33:13):
dinner or lunch with hi.
The other character and you seeme for like, I don't know, my
wife says it's like a second.
It might be less than that.
The camera kinda sweeps by and Imean, if you didn't know me, you
wouldn't know that was me.
But it was fun.
It, as it was all get out andit's amazing.
That took two days to shoot.
(33:35):
You literally see it for like,it's just a flash.
It takes so much.
Yeah.
They record so much for that.
Yeah, exactly.
I've heard that.
Yeah, it's unfortunately themovie's not really good, okay.
I've seen it.
I was hoping that I'd be, thisreally small part in like a, the
Godfather?
Untouchable.
It's like a really classic mafiamovie.
(33:55):
No.
I mean, the reviews areterrible.
That's funny.
So fun, fun.
I mean, if you ever get theopportunity, to be an extra
it's, it's cool to see anotherway another business works and
all that goes into it.
It's amazing how much time andeffort goes in.
I mean, I was blown away toshoot the scene 15 times.
Just him walking to me.
And cut your hair.
(34:15):
Yeah, exactly.
I love that.
I was on last spring, dinersdrives a friend of mine.
Oh yeah.
Jersey Shore Barbecue here inPoint Pleasant.
And we went there.
They recorded, we were there forabout four or five hours.
We watched the episode and it's.
I think my back for a secondbecause, they're recording they
need the extra footage.
Obviously they can't come back,but it was two days and the show
(34:39):
is a half an hour.
but it's actually not you takeout commercials and obviously
there's three differentrestaurants.
So really it was seven minutesof footage that they took.
And it's crazy how much filmingand what they actually include.
But no, awesome.
This was fun.
This was.
Actually, I'm gonna, send, thismay be an email we send out just
to.
When people have thesequestions, a lot of it is not
(35:00):
just answering those directquestions, but the expectations
of the document, what to expect,why it's written in this way,
the realistic expectation ofchanges and things like that.
I think this is super helpfulbecause, at that point, and I've
had people say, well.
I'm in, I'm a negotiator and I'mlike, that's great to negotiate.
You can ask, but you're not, youcan't change the franchise fee.
(35:22):
Maybe you can delay the opening.
Maybe you get a zip code thrownin, but you're not changing the
royalty because legallyfranchisor really has to treat
everyone the same.
These conversations are greatand it's not just coming from
me.
I'm like, you're hearing itdirectly from Kit, a franchise
attorney.
So I appreciate that this was.
Really helpful.
I really appreciate your time.
I learned a lot.
I got some of my personalquestions and questions that I
(35:44):
get on a daily basis answered.
And yeah, looking forward havingyou back on the show.
So if you think of anything elseor.
Things change in the franchiseworld.
I'd love to have you on back onjust for an update, maybe
changes or kind of like when theUFOC went to the FDV and some of
those other changes.
That's when I got involved that,that's dating myself.
Yeah.
Keep us posted and we'll let youknow when the show goes live.
(36:06):
Thank you.
Thank you.
Appreciate being on here.
Absolutely.
Thanks again.
All right.
Goodbye.
Thanks for tuning in if you wantto learn how to make the
transition from corporate toowning your franchise.
Join Giuseppe on the nextepisode.
You can also follow on allsocial media platforms and
(36:27):
achieve financial and timefreedom today.
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Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
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If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.