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Wednesday
Mar012017

Franchisor 101: Easier SBA Loan Approvals; and Perpetual Agreements

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com
msoroky@lewitthackman.com



Los Angeles Franchise Lawyers

February 2017

 

Barry Kurtz in Practical Lawyer

"Is the business sustainable in the marketplace? Franchises built on fad products or services rarely survive. To be sustainable, the business concept should be unique enough to withstand competition..." Click to read: How to Lead Your Clients to the Purchase of a Franchise

Our Attorneys Recognized

Barry Kurtz, Tal Grinblat and David Gurnick were named 2017 SoCal Super Lawyers in the Franchise/Dealership category. Only 12 attorneys in the entire region were so named. All three are also Certified Specialists in Franchise & Distribution Law, as designated by the State Bar of California Board of Legal Specialization -- less than 60 attorneys in the entire state share that distinction.

New Team Member!

We are pleased to announce that Matthew J. Soroky joined our Practice Group as an associate. He has nearly 10 years' experience in business litigation - and has devoted the last several years to franchise, distribution, licensing and intellectual property matters in both the transactional and litigation contexts. We look forward to introducing our clients to our newest team member. 

FRANCHISOR 101:
Simplification of SBA Loan Approvals

 

As independent small business operators, franchisees may qualify for business loans that are guaranteed by the Small Business Administration ("SBA loans"). However, the SBA considers certain types and levels of control exerted by franchisors over franchisees to create an "affiliation" between them, disqualifying controlled franchisees for the loans because the SBA does not consider them "independent."

Previously, a franchisor could draft an addendum to its Franchise Agreement to remove these controls and, after the addendum and Franchise Agreement were reviewed and approved annually by the SBA or an affiliate organization, franchisees signing the addendum could receive approval for SBA loans. This process was costly and time consuming.

However, as of January 1, 2017, the SBA simplified this process by prescribing a single form of addendum (the "SBA Addendum") that will make any Franchise Agreement kosher. Franchisors are now required to use these 2-page forms to qualify their franchisees for SBA loans, but now no review or approval by the SBA is needed.

SBA Addendums remain effective until either the underlying loan is paid off or the SBA no longer has any interest in the loan. In summary, the addendums modify Franchise Agreements as follows:

  • Change of Ownership: 1) The franchisor has no right of first refusal if the franchisee wants to transfer a partial interest in the franchise to a family member or one of the franchise's present owners. 2) The franchisor cannot unreasonably withhold consent to any proposed transfer. 3) After a transfer, the transferor cannot be held liable for the actions of the transferee.
  • Forced Sale of Assets: Upon the default or termination of a franchise: 1) If the franchisor exercises a right to force the franchisee to sell it the assets of the business but the parties cannot agree on a price, then the price will be determined by an appraiser appointed jointly by the parties. 2) If the franchisee owns the real estate where the franchise was located, then the franchisor cannot compel the franchisee to sell it the property, but rather only to lease it for fair market value for the remainder of the franchise's term.
  • Covenants: If a franchisee owns the real estate where the franchise is located, the franchisor cannot require the recording of any restrictions on the use of the property.
  • Employment: The franchisor may not directly hire or fire the franchisee's employees.

This simplification of obtaining approval for SBA loans will save the SBA time and money, while simultaneously allowing franchisors and franchisees to benefit from SBA loans.

Read: Notice from the SBA 

FRANCHISEE 101:
A Perpetual Franchise

When a franchisee "buys into" a franchise system by paying an "initial franchise fee," the franchisee is typically purchasing the right to use the franchisor's trademarks and business system for an initial term that lasts a certain number of years (usually between 5 and 20).

The franchisor may hope to continue its relationship with the franchisee far beyond this initial term, but nevertheless limits the term in this way so that it can periodically revise the details of the relationship with an updated agreement. The franchisee, by contrast, would understandably prefer that those details remain known and consistent as long as possible.

In H&R Block Tax Services, LLC v. Strauss, Strauss, an H&R Block franchisee, claimed that her Franchise Agreement was effectively "perpetual" and not subject to the kinds of revisions described above. The Franchise Agreement between stated that its term was 5 years and that, unless Strauss was in default, the Franchise Agreement would be "automatically renewed for successive Renewal Terms [of 5 years each]." Strauss operated for 30 years under this agreement until H&R Block told her that it would not renew, but invited Strauss to sign its "current form" of Franchise Agreement. Strauss claimed that the franchisor could not decline to renew the agreement and therefore had effectively just breached the agreement.

A federal court determined that relevant Missouri precedent required that "a contract which purports to run in perpetuity must be adamantly clear that this is the parties' intent." The language in the Franchise Agreement did not meet this standard, and therefore the court found that H&R Block was within its rights to decline to renew it perpetually.

A franchisee that is interested in a "perpetual" Franchise Agreement should be sure that the language in the agreement is explicit on the subject, and should consult with legal counsel before signing to verify that the language meets the standards of relevant state law.

Read: H&R Block Tax Services, LLC v. Strauss

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Tuesday
Sep132016

Franchise 101 Spotlight: The International Franchise Association

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
swolf@lewitthackman.com
gwintner@lewitthackman.com

 

Special Edition

 

Franchise Lawyers

President of International Franchise Association (IFA) Visits Lewitt Hackman

 

For more than 55 years, the International Franchise Association has been committed to improving methods and business practices for all participants in franchising - whether working with the Federal Trade Commission, lobbying on legislation; or collaborating with franchisors and franchisees to improve relationships. The Lewitt Hackman firm has been a strong supporter of IFA, participating in the Association's annual conventions and often speaking at the annual IFA legal symposium.

In recent years, IFA has faced an important threat to franchisors and franchisees - the changing standard on "joint employers" and increasing risks of "joint employer liability." To increase awareness about this issue, receive ideas about IFA member preferences, and meet and greet the many franchise clients of the Lewitt Hackman firm, IFA President and Chief Executive Officer Robert Cresanti traveled from Washington D.C. to visit Lewitt Hackman. President Cresanti spoke with several of our franchisor and franchisee clients and firm attorneys about the joint employer liability problem, other work of the IFA, and developments in franchising.

Mr. Cresanti provided a history of joint employer litigation. In an unprecedented move in 2014, the National Labor Relations Board's general counsel issued unfair labor practice complaints against McDonald's and several of its franchisees, seeking to hold the franchisor partially liable for alleged labor practices because the franchisor established general operating procedures. This is alarming to IFA because most franchisors establish general operating procedures.

In 2015 the NLRB decided a case involving waste disposal company Browning-Ferris. The Board changed decades of practice, deciding that direct and immediate control of an employee is no longer the standard for determining joint employer liability. Based on the Browning-Ferris precedent franchisors could be liable as joint employers by just having the right to indirectly control terms of employment, even if a franchisor never exercised that control. The decision blurred the lines, further threatening the franchise business model.

Mr. Cresanti described the numerous closed doors he and IFA encountered in trying to explain a franchisor's tenuous position in light of the NLRB's decisions. Despite obstacles, he vowed IFA will continue fighting to keep franchise business models thriving in the U.S.

Several Lewitt Hackman clients who attended indicated they wish to get more involved in IFA. Lewitt Hackman has signed up to host regular IFA networking events, and firm lawyers will continue to speak at IFA events. Lewitt Hackman thanks IFA CEO Robert Cresanti for visiting our firm and encourages franchisors and franchisees to thin about involvement in IFA. More information is at www.franchise.org.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2016. All Rights Reserved.

 

 

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