Episode Transcript
Speaker 1 00:00:04 Welcome to another episode of All Things Considered Franchising, powered by Scott, my franchise coach.com. I am your host, Scotty. My All Things Considered Franchising is a podcast focusing on entrepreneurship with within and out of the franchising industry. Although our questions and guests usually are within the industry, we do tend to see to have, uh, guests outside of the industry. Entrepreneurs. Scott, my franchise coach.com is a organization, the consulting form, uh, firm, helping people research and explore business ownership, probably franchises, helping them build the roadmap and kind of understanding their why and introducing them to, uh, opportunities that fit today's guest attorney Nancy Lenard, president and founder of Leonard and Associates. Nancy, welcome aboard. Thanks,
Speaker 2 00:00:58 Scott. How are you today?
Speaker 1 00:01:00 I am great. It's so great to have you because you know, one of the things that's, uh, you know, kind of that misnomer, uh, with people who are investigating, uh, franchises or researching business ownership, maybe, uh, including franchises, is that you don't need an attorney and it's just, you know, it, it, it's just mind boggling sometimes that, you know, I always tell my clients, would you buy a house without a contract <laugh> or sell a house without a contract?
Speaker 2 00:01:27 I agree with you a hundred percent and you know, even if the documents are not negotiable and oh, very often they're not, if it's an established franchise brand, they're certainly not going to negotiate any changes, um, so to their franchise agreement. But that doesn't mean that you should just sign it. Um, it's very, very important to have a legal review because you wanna know what you're entering into. You wanna know what your obligations are. You wanna know what to expect from the franchisor. We view our roles primarily educating the client, and we've represented many attorneys, many franchise consultants like you over the years who are buying for themselves or buying for a family member. And obviously those attorneys, um, understand reading a contract, but this is a unique area of law. And so it is very unique in what the contract says, what you are going to be, uh, entering into, and just having that understanding. And certainly if you're not an attorney or you're not a franchise consultant or somebody in the franchise industry, even more so, um, you know, it's really critical to have that review so that you have a clear understanding of what it is that you're gonna be signing. It's usually a 10 year agreement. It's a very important contract. So yeah, it's very critical to have that legal review.
Speaker 1 00:02:41 Let, let's paint the picture a little bit for our audience and start from page one, so to speak. Um, the, the Franchise disclosure document also referred to or defined as the F D D also contains in most cases the franchise agreement. Yes, on average it ranges anywhere from 350 to 375 pages. It is a very daunting and overwhelming document. Potential franchisees are people that are looking to an invest in a franchise typically receive the franchise agreement, f d d, from the franchisor within the first or second conversation of the due diligence process. So we've got, so it in that retrospect, Nancy, when someone does receive the franchise disclosure document, the franchise agreement, the tendency is to start reviewing it on your own and start to go through 365, 375 pages and basically throw up your hands and just say, this is kind of ridiculous. I'm not getting open to this. Right? So let's take through the steps, at least with your experience and expertise. When someone at that point, once they receive the f D d, when is a good time to start considering going out to an organization like yourself to get the review to dot the I cross the Ts and understand what their responsibilities are going to be and what the franchisor's responsibilities are gonna be outlined in the franchise agreement in the F D D.
Speaker 2 00:04:19 So there are always three things I recommend to do right off the bat when you've gotten a, a brand that you're considering. And that is get that f D D once you have that f d d go through the first 23 items, which are the items of disclosure. Really the first 20, that's why I hesitated for a second, because really 21, 22 and 23 aren't really necessary to read through, and I'm happy to tell you why in a second. But the first 20 really are, and, um, they are what the federal government and in certain states, the state, uh, laws require be provided to you so that you are making an informed decision. And so it isn't quite as daunting cuz that might represent 80 pages or even maybe 50 pages, not 300 pages. You don't need to read the franchise agreement. That's what we are for.
Speaker 2 00:05:08 You don't need to read all the ancillary contracts that are in there. That's what we're for. So really, what do you need to focus in on? Read those first 20 of the 23 items of disclosure. Literally they're called item one, item two, and so on. Especially focus in on items five, six, and seven. Those are the financial disclosures. Item five being the fees you're gonna pay the franchisor or its affiliates upfront. Item six is the, are the fees you're gonna pay the franchisor or its affiliates on an ongoing basis. Item seven is a chart that says what it's likely to cost you to open up the business and operate it initially budget on the high end of the range in that item seven, read the notes that accompany those three. There's a lot of important information in the footnotes, so they're not really in the foot, but the notes that are right behind the body of that.
Speaker 2 00:05:58 Read those notes because there's a lot of important information in there. And then second thing, talk to franchisees. That's really important. And I recommend, I don't know about you Scotty, but I recommend talking to the franchisees as they're listed in the F D D correct. That way you're not getting a skewed list because it's human nature for a person or a company to only put you in touch with people who are gonna give good references. Whether you're an employee looking for your next job, of course you're only gonna provide references of people that are gonna give positive good references. Well, the same is true with the franchisor. They're only gonna give you, put a list of people that they know are gonna say good things. So right. By calling from the list in the f d d, you know, you're getting the real skinny right on it.
Speaker 2 00:06:41 So that's the second thing. And the third may surprise you, Scotty, because, um, you know, I, I mentioned, you know, I I was an in-house attorney at Nutrisystem 25 years ago. They went into bankruptcy with 1800 locations around the US 500 were corporate and 1300 were franchised. And, and they validated. Great. A lot of those franchisees made millions. So they were pretty happy. They validated, you could call from that list in the, uh, in their disclosure document at the time. And, you know, it was, it was great. They validated wonderfully, but anybody looking at their audited financial statements could have seen they were weak. They went into bankruptcy. And within two years, every one of those 1800 were outta business, including the 1300 that were franchised. So it is important to look at the financial health of any franchisor you're considering as well. So those three things will get you a long way. And then I think an answer to your question, the time to contact me is when you've narrowed down from the four or five that Scotty has presented to you to, to the one or two that you're looking to really move further with. And that's a great time. No, that's
Speaker 1 00:07:47 A great, those are great points, Nancy, and I think it's, it, it, it it's important for our audience, uh, to understand that when you're at this point, at least from my educational, um, guidance to my clients is, is that the F D D and franchise agreement is a very, very important document. It should not be taken lightly, but there are a couple things to understand that the, the, the F D D and the franchise agreement is there to protect you as a potential or when you become a franchisee and also to protect the brand Yeah. Or anyone going rogue and to protect its franchisees. But I always try to tell my clients that before you take a deep dive into that f d d franchise agreement with someone like yourself, a franchise attorney, that you really have to, as you just said, really kind of be at your decision point where you're 95, 96, 90 7% sure that that's the brand that you want to move forward with. You've, you've, you've gone through the validation process, like you said, talking to franchisees and not necessarily talking to franchisees that are around your area, but outside of the box in different areas. Correct. Uh, you, um, understand the systems and as I always tell my clients that you feel that you're going to be able to work with the franchisor, get along with them, it's like a marriage. You're gonna disagree totally
Speaker 2 00:09:12 Like a marriage, Scotty. Exactly. It's, it's
Speaker 1 00:09:14 Cause you're under a contract, right? You just can't wake up one morning and say, Hey, you know, I'm closing my doors without absolutely financial consequences. I mean, you can't sell the business, don't get me wrong. So in agreement here that the best time to start reviewing the F D D and franchise agreement is when you've kind of at that 95, 90 6%, yes, this is the brand I wanna move forward with.
Speaker 2 00:09:39 Well, that's the point where you would contact me, right? But I think you should be reviewing that F D D right after you get it. I do wanna clarify a couple things. One, that they give you a four, they tell you you have 14 calendar days, that's their rule. They have to give you 14 calendar days as a minimum. You can take as long as you want. So don't let that pressure you, number one. Um, number two, it is like a marriage, but it is also like a, a a a parent-child relationship. It's both the marriage part is that you wanna really understand who you're going to be with and, you know, understand that the, the sales guy is the courtship stage, you know, the salesperson from the franchisor is, you know, that VP or director of franchise development, that that's the sales end and that's the courtship.
Speaker 2 00:10:30 So you really wanna get an understanding that this is sales and it's courtship and even discovery day or meet the team day is a sales day and you should come away with loving it. Right? Um, the other part of it is, it's a parent-child relationship. Once you sign that franchise agreement, and generally speaking, those franchise agreements are pretty one-sided in favor of the franchisor. And that's a given in franchise. It's just the way it is because like you said, Scotty, they need to exercise control over you. That's part of being a franchise, making sure that you use their trademark properly, making sure that you buy the products and things that, and offer the services that they require of you. Right? That's the parent child part of it, right? So you have to be okay with that because if you're not okay with that, then go have an independent business that you can do your own thing because you have to understand that there is that relationship.
Speaker 1 00:11:18 Right. Um, sticking to the F D D for a couple more minutes here before we go into some of the other things that your firm, uh, offers is, and, and another important steps to becoming a franchisee. Um, what are, and and without sounding the church bells going off or the alarms going off when someone is reviewing an F D D, and again, a lot of brands do what's called an F D D review with their clients, with the prospect. I, I, truthfully, I'm not a big fan of that proponent, but it gives the, it gives the prospect an idea of what's in the F D D. Mm-hmm. <affirmative> in your, and, and, and every franchise system is different because some are emerging brands, some have been around a lot longer, some have 20 locations, some have 150 or a thousand. What are some of the red flags you think someone should really take a deep dive into to really get an understanding or get a, you know, on, on, on that? Why, why is the F D D set up or why does it say that? What are some of the red flags that people should be looking for?
Speaker 2 00:12:24 I'm gonna point out too, right away, well, to sort of, so I want you to understand that item seven, which is the cost to open and operate initially that I told you is important for anybody to be looking at and reading the notes. And item 19, which are revenues of franchises called financial performance representation or F P R, those two items, everybody wants to rely on them. They're not audited by any governmental body whatsoever. They are numbers the franchisor puts out. Now, there has to be a reasonable basis for that. But again, the federal government's certainly not looking at it. The states, some of them are going to question if there's a reasonable basis, but again, relying on it is, um, you should verify, rely and verify <laugh>, so to speak. Right? So in other words, that's a great question to be asking franchisees, what are your revenues and bottom line, what did it cost you to open and operate initially?
Speaker 2 00:13:19 Very important to verify. So that's one. The other part is kind of what I alluded to when I told you about my background having been in ha in house at Nutrisystem. And that is look at the financial health of the franchisor, even in a very successful, highly validated franchise brand like Nutrisystem, their financials were weak because the owners were taking money out, uh, and paying themselves every quarter. So important to look at those financials and when it's an emerging startup brand, even more so, I have been presented with FTDs that literally if you look at their balance sheet, which is all that's required of a brand new brand on opening and starting to sell franchises. So you only know really what they have cash on hand, it's a balance sheet, not much else it's gonna be in there. Um, that they have $500 in their bank account or a thousand dollars in their bank account.
Speaker 2 00:14:14 How do can somebody, and it's a brand that might require 500, 600,000 in the total investment on item seven as to what it's gonna cost you to open up and operate initially. How can they ask you to invest $500,000 in them when they haven't put any money in their own bank account? Now I realize their argument is we're a startup, we just, you know, put whatever the minimum was we had to put in to open the bank account, but what stops 'em from tomorrow going into bankruptcy, right? What stops 'em from tomorrow? Not having the funds to be able to support you to help find, you know, sites for you to help, you know, um, train you to do all the things that they need to do. Nothing if they have, if they're so underfunded when we did represent franchisors, which we don't anymore, but when we did, I always recommended a brand new startup put a hundred thousand in their bank account. At least that shows good faith, good faith.
Speaker 1 00:15:09 Yep, yep. Yeah. And I, and, and, and again, sometimes if these new embr uh, embryonic brands are going into the registration states, the registration states will have a cover letter and say, uh, they may not necessarily be able to meet their obligations, financial obligations. They, some
Speaker 2 00:15:26 States have to
Speaker 1 00:15:26 Be alarming, but again, they may, may not be taking in the future revenue royalties that are coming in. So, I mean, there's a lot to look at, which makes it even more critical and more important to get the expert advice, the guidance and kind of the, the
Speaker 2 00:15:41 Get an accountant involved. Get, have an accountant look at this,
Speaker 1 00:15:43 Get an attorney involved, and really kind of overview it. Yep. Um, again, when somebody does send you the F D D, you're not obligating yourself by signing the receipt page, the item 21. Correct. You're just acknowledging that you received it, the clock starts ticking. They can't offer you a franchise for 14 days. Doesn't mean you have to buy it in 14 days, but, uh, you know, it it, it's good to be on the exercise on the, on the side of caution <laugh>.
Speaker 2 00:16:10 Exactly. And by the way, some states actually require deferment of the initial franchise fee if the funds are so weak. So, uh, I never mentioned why you don't need to look at 21, 22 and 23. So 21, um, is says financial statements. It's what I'm referring to when I talk about looking at the financials of the franchisor. They're almost always in the exhibits. So you don't need to read item 21 cuz they're almost never in, nothing's in there. It's just referring back to an exhibit. Item two is an, uh, a list of all the contracts that are in the exhibits. And item 23 is the receipt says, as you mentioned, it's okay to sign it, it's just a re receipt so that the franchisor can clock that they provided that 14 days, right, that 14 calendar days for you. So that's okay to sign as long as all it is is a receipt saying that you received the F D D.
Speaker 1 00:16:56 Right. And the other thing I just wanna point out to the audience about the, uh, F D D, the Franchise disclosure document. The franchise disclosure document is renewed every year, typically every 12 to 14 months. There's that what we call the re-registration period. Everybody goes in black, we call it in the industry. But what I want people to understand is that when the new F D D comes out, that information that is in there was for the previous year, it isn't for the forecasting of the year coming up, it's the records and what the franchisor, as you said, what they felt that was important to put in. And of course what the Federal Trade Commission requires them to put in. It doesn't necessarily mean that moving forward it's a guideline that if the item seven says between $500 and a thousand dollars to invest, that doesn't mean, as you said, that that's what it's gonna cost you. It's a guideline. Correct. So again, your validation, due diligence, talking to franchisees correct, is going to give you a, a more concrete basis of what the information is supposed to be or should be. Correct.
Speaker 2 00:18:02 And after one year of selling franchises, those financial statements of the franchisor required to be audited, at least an audited opening balance sheet. So those are numbers you should be able to re rely on if the franchisor has been selling for more than a year. Right. And you're right, the list of franchisees and even former franchisees that are in the exhibits that I said you should call people from, that's gonna be updated annually. And it's always 120 days from the end of their financial year. The Franchise War's Financial Year most are on a calendar year, so that's usually April 30th. So you'll see that most fds are dated in March and April for that reason, so that they can stay open and not have a dark period. If they are on the calendar year and they don't get those audited financials and they don't get their F D D updated by April 30th, then they go dark.
Speaker 2 00:18:48 Right. Um, in the states that require, which they're only 13, um, in the us but the states that require that, that f D D be registered with them before anyone can be offered a franchise that resides in the state or a territory in the state, then um, those have to be annually updated as well. And it depends on when the registration was finalized. So it's an, it's a year from the, the registration date. So it's a little different than the annual registration. So they can be off by two. Like if you're in California, you know, you might have, uh, an F D D that has a different date that someone in Pennsylvania where I'm from would have, because Pennsylvania's not a registration state in California is, so mine might be dated in April when the annual regular one is updated and the California one might be dated in June because that's when they registered initially.
Speaker 1 00:19:35 Right. And one, one last quick point on the F D D, uh, before we get into the other three services that, uh, your firm, uh, handles cuz I think they're important services, the item 19, the, uh, the, the, the franchise performance revenue numbers, the numbers in general, you know, a lot of people put a lot of, try to put a lot of emphasis on the item 19. And as I try to tell my clients that you have to be careful with the item 19 because when, when somebody says the average is and it's the top 25%, you have to understand that in an average there's a high and there's a low and then you're in the middle. Exactly. So as much as, and, and franchisors can only discuss revenues or financial performance that is disclosed in the item 19, if they don't have an item 19, then they can't disclose and it makes even more important your validation on the outside. Anything you want to add to that? Yeah,
Speaker 2 00:20:35 As I said, those are numbers that the franchisor puts out that aren't audited. And so it is po very important no matter what's in there to, to, you know, talk to franchisees and verify it. Um, and uh, secondly, if they, so 10 years ago it was more the norm not to have an item 19 disclosure. And the reason behind that was because it was felt to be misleading. The federal government felt it was misleading and so they were discouraging you from having item 19 disclosures. And then all of a sudden things changed and it became a disadvantage to not have an item 19 disclosure as a franchisor if you didn't put in numbers in there, even based on corporate locations. If you were a relatively new franchise as opposed to franchisee locations, you know, then, um, it was a disadvantage. And today that's the case. If you don't see an item 19 disclosure, I look at it and say to a client, you know, you may wanna check on this because it to me, if they're not putting one in there, then that means they're not proud of their numbers and maybe their numbers are not great great. Because most franchises today. Yeah. But
Speaker 1 00:21:41 The other way to look at it too is, is that I, and I know I was with a brand that we did not have an item 19 and we were very proud that we didn't post the item 19 because we really wanted those prospects to go out and talk to the franchisees because like, like you said, a franchisor can really just kind of, there there's no set pattern to what you put in an item 19. The Federal Trade Commission isn't saying your item 19 has to be based on this and this, it can be pretty much anything as long as it can be documented and, and, and, and and shown to be true. So we always like to say, go out and talk to the franchisees
Speaker 2 00:22:21 And that's wise advice, wise advice, but there has to be a reasonable basis that is required. But that doesn't mean that if they're not in any registration state, as I said, the federal government's never gonna question it so they can, so again, if it's a new brand and they're not in registration states like California and New York and on the east coast it's Rhode Island, New York, Maryland, and Virginia. And then there's a whole slew in the Midwest and on the west coast it's Washington State, California and Hawaii. You know, if you're not in one of those registration states, um, there's nobody even looking at it. So it is always important to validate those numbers. It is the cause of more franchise litigation than almost anything else is mis misrepresentation or fraud in their item 19 disclosure. So it, the word to the wise is always whether there is one or isn't. But I think after Covid having no, um, cuz I think your background is from prior to that having no item 19 disclosure today is kind of a, a, a statement that maybe they didn't make it too well. True.
Speaker 1 00:23:22 Yep, that's true. Yep. But again, uh, you know, when you look at the largest franchise system in the country, in the world, but close to 50,000, I won't name 'em, everybody can figure it out. They have never had an item 19, which is not, and they don't
Speaker 2 00:23:35 Need to and they don't need to do that. Right. <laugh>. Right, right.
Speaker 1 00:23:38 So anyway, um, we're talking with Nancy Lenard, president and founder of Leonard and Associates a uh, franchise, uh, a franchise attorney or her firm focuses in on working with franchisees. Some of the other services that you do, Nancy, that are important are creating an a a, an entity when somebody is going to move forward and invest in a franchise. This is an important step because it's really should align with the tax, uh, pattern that you wanna follow. Obviously if you're doing a Rob's rollover, you have to have a certain entity. Um, anything you wanna add about entity before, you know, we get jump into the other two things. Just a
Speaker 2 00:24:17 Real quick statement. Um, it's very important to have a separate entity and by that we mean a corporation or a limited liability company. Typically, if you're using Robs, they're going to roll everything over, that's a rollover of your 401K or ira and it'll be rolled over into what's called a C corp. But if you're not doing that, we can establish, we don't handle Robs that's specialized companies handle that. But if you're not, we, we can set up that entity as a corporation or a limited liability company, L L C in any state in the country. We represent clients in every state in the country. Um, and, uh, very important to run your business under that separate legal entity to separate out liability from you personally. You don't wanna be personally liable. And with that said, if you have multiple locations, if this is a brick and mortar business, you have three units, three separate locations, three separate entities, people, right?
Speaker 2 00:25:07 Yep. Do it after one because what happens if, let's take a gym or a massage business or a, a food business or whatever you want it to be as a franchise and somebody spills water on the floor and it's not cleaned up fast enough and the next person comes in, slips and falls and has a heart attack and dies un route to the law, to the ground. It sounds like a law school exam question. Um, that's a 10 million lawsuit, most likely. And you probably only have a mil to 2 million in liability insurance on that location. And if you have three units owned by one corporation or one L L C, you've lost all the assets of those screens.
Speaker 1 00:25:43 Great advice having an L l C for each unit. Uh, right. In some cases, maybe even each territory, cuz it may not have to be a brick and mortar. But again, a discussion with your firm would be, should I, if I'm buying three territories of a home service type brand, should I have a separate llc? But again, that's, that's open for discussion. Not as much, but it's a, it's open for discussion. Yeah. Uh, the other important part, um, in, in, in setting yourself up, especially if it's a brick and mortar, is a lease. A lease. That makes sense. Uh, the last thing you want to do is 12 months after you open, you look at your annual p and l review and you realize that your landlord is making more money than you are <laugh> <laugh> or if you wanna transfer or sell your business. So how important is the lease and should someone go out to someone, a firm like yours, cuz franchisors in most cases are helping people negotiate the lease, but should somebody doctor their and cross their Ts and have a second set of eyes like yourself looking at that lease?
Speaker 2 00:26:43 Yeah, lemme explain how that works. Cuz that's a great question. So generally people think that leases are boilerplate and after they negotiate the business terms for a retail lease, let's say, um, that that's all they need to do. Okay? The realtor negotiated the rent and square footage and the term and maintenance obligations and renewal and maybe money towards the buildout, which is called a tenant improvement allowance and so forth. And the realtor did a great job and negotiated all these wonderful things. We get involved in everything else. So that's just the, the tip of things. That's just the beginning, that's the business terms and they're important. They, no question, but everything else is also important. It is not boiler plate, Elise is, is clearly not boiler plate. Right. And it's very, very important to understand that people don't realize that. And so we get involved in negotiating, we will add clauses. What about representations and warranties from the landlord? Things like Americans with Disability Act compliance. So if somebody's coming into your massage business or your restaurant and they're in a wheelchair or they're on crutches and the curb is too steep or they can't get handicapped parking spots and they sue you under the Americans with Disability Act
Speaker 1 00:27:52 Yep.
Speaker 2 00:27:53 You have that representation of warranty from the landlord that can be save you tens of thousands of dollars. Um, we make sure, you know, the remedies and the, and um, the opportunity to fix those remedies. Uh, fix any defaults are, um, you know, clearly stayed out state, stated out so that you, um, are protected and personal guarantee that we have lots of ways to limit that. Making sure when you're ready to sell the business, which you talked about, that you can freely do that without having the landlord blow up the deal because you know, the, the buyer didn't meet all the conditions that they've required in the lease. Um, that's
Speaker 1 00:28:31 What the other big one on that is it when selling is, is that sometimes leases are set up where the original lease holder still is the original lease holder and they're setting up the buyer as the sub-lease and that that bus person goes out of business, the original lease holder is still responsible for the lease.
Speaker 2 00:28:50 Yeah. I don't like those. I never, I never, I never, um, recommend that my client do it as a sublease if he's the, he or she is the seller. And likewise, a landlord wants to keep you on as a personal guarantor. So personally you could be guaranteeing the assets, uh, the, I'm sorry, the financial obligations of the, uh, of, of the buyer after you've sold the business. So when you're a personal guarantor, you're personally guaranteeing all the financial obligations of your corporation or L l c under that lease. Well down the road the landlords love to hold you on the hook even after you've sold the business. So now you're gar personally guaranteeing that means bank accounts, your cars, your home, and the states that allow it, you know, all of those stocks and bonds, all of those things are backing the financial obligations now of someone you've sold your business to.
Speaker 2 00:29:42 What are you gonna do if they default? Now you're on the hook personally, right? Absolutely. So again, loads and loads of things in that lease that are really important. And there's even things like relocation clauses where you've picked out this great location in a shopping center and um, and now the landlord can move you freely as many times as they want, by the way, not just once right round in that shopping center locations and now your, your client, your customers can't find you or the location isn't as desirable cuz nobody can see where you are any longer. There's no visibility from the street or there's no foot traffic or, and maybe they'll pay for the cost of moot, but are they gonna pay for the build out again? Are they gonna pay for the new signage and all of the things that are ancillary expenses? So again, so much in a commercial lease that's important to negotiate.
Speaker 1 00:30:29 And lastly, real quickly, cuz we are just about out of time here, um, resales, uh, I I I always tell people that, you know, this is an important part to have that, uh, buyer seller agreement, that letter of intent follow a process. I mean, handshakes are great and you know, head nods are great or high fives are great, I'm gonna buy it. But <laugh>, you know, the last thing you want to do is buy a business and then two weeks later get two weeks later get a letter in the mail certified letter or somebody's attorney, the buyer, the seller's attorney calls up and says, Hey, by the way, you have to pay my, uh, my, my client's back taxes. Um, because you didn't, so again, it pretty important that you, you dot your I and cross your ts on the, uh, the buyer seller agreement.
Speaker 2 00:31:16 You understand, Scotty, you hit the ta, the you hit this on the, on the, on the, on the note on the head or whatever the, because I'm gonna tell you that um, in many states, believe it or not, many, many and it's spreading across the country, many states right now hold a buyer responsible for the seller's state unpaid taxes. So you really talked about that, right? It's right on target and it's right on, it's very timely because this is new, the laws are new, it's spreading across the country to many, many states. So it is important to get tax clearance from the state so that you aren't responsible as a buyer, but even as a seller it's important to have counsel. You need counsel on your side that understands what you're going through, that understands franchise law, that understands what the documents should say that draws up the documents in your favor.
Speaker 2 00:32:05 Whether you're a buyer or your seller with a buyer. You have all the reps and warranties that protect you as a seller that you can make. It might be as, as is a deal as possible so that you're not representing that the equipment and so forth are gonna be in great condition the day after the business is sold. Um, there's just so much that's, it's really important to have an understanding and either side seller or buyer, it should be you should have counsel and really you need to have counsel on your side through the entire business ownership and that's really the reality. Um, and very important.
Speaker 1 00:32:38 The other thing on the resales lastly here is, is that people don't understand is, is that when you're buying a resale, a franchise, that there's an existing franchise contract agreement. So you also have to get an understanding of what the terms are left in the existing contract cuz you're buying the existing and will the franchisor renew you new contracts? The other caveat to that is, is that the new contracts that you have potentially have to sign when the old one expires may have higher royalties, completely
Speaker 2 00:33:09 Different
Speaker 1 00:33:10 And higher fees,
Speaker 2 00:33:11 Different fees. Everything can be different.
Speaker 1 00:33:13 There's a lot to know.
Speaker 2 00:33:14 And likewise with the lease when you're, when you're buying an existing franchise business, you have to understand what the lease terms are that you're now inheriting. Right?
Speaker 1 00:33:24 So
Speaker 2 00:33:24 Bonus
Speaker 1 00:33:25 Is Yep, exactly. Absolutely.
Speaker 2 00:33:27 There is, again, in buyer or seller, you, you need to have cancel. And one other point, if you're a buyer and you're new to the franchise system, there's two different parts to that relationship. You need to know the fra franchisor franchisee side and making sure you wanna be a franchisee in that system and doing all the validation that we talked about. Yes, absolutely. At the beginning of this, uh, podcast. And then you also need to understand the buyer's seller side, get tax returns and see PN current PNLs and you know, have someone look at the lease, have someone look at the franchise agreement, have someone who's representing you drop up that asset purchase agreement and understand it. So those are two different things and both sides are really important when you're a new franchisee to a system or about to be looking to buy an existing, uh, location in that system.
Speaker 1 00:34:16 Yeah, my father used to tell me, always put yourself in a position where nobody's gonna be knocking on your door at one or two o'clock in the morning wanting a check from your <laugh>. You need to be in court the morning.
Speaker 2 00:34:26 For sure. For sure.
Speaker 1 00:34:28 We've been talking to Nancy, president and founder of Leonard Associates. Nancy, what is the best way for people to get ahold of You want some more information? Yeah,
Speaker 2 00:34:37 It's www dot, I'm gonna, it's uh, backwards, so, uh, www.leonardandassociates.com. It's all as in my name and is spelled out in the website. So L A n A r d A n d A s s oci i t e s.com. Or you can reach
Speaker 1 00:34:54 Me, get up on the screen as well so people can Perfect.
Speaker 2 00:34:58 Or you can reach me by email at nard leonard and associates.com or my phone (215) 392-0030 and I'm at extension 1 0 1 and I encourage anybody to reach out to me anyway that you like.
Speaker 1 00:35:12 Just general questions. I mean, uh, yeah, it's better and there's a lot of
Speaker 2 00:35:16 Information, a lot of information on my website. I have videos that go over a lot of the things that I mentioned during this, uh, podcast as well. A lot of blog posts, videos and so forth. So. Great,
Speaker 1 00:35:26 Great. Well you've been listening to all Things Considered franchising. I'm your host Scotty, my powered by Scott, my franchise coach.com. You can reach me at 8 6 0 7 5 1 9 1 2 6 or email me at Scott Scott my franchise coach.com. Uh, thanks again, Nancy. My pleasure. I'm sure we'll have you back again and, uh, to our listening audience, have a great day and uh, talk to you soon.
