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Revised SBA Franchise Agreement Addendum

Earlier this year, the Small Business Administration (“SBA”) rolled out a standard form of SBA Addendum to Franchise Agreement for use by franchisors and lenders in making SBA guaranteed loans to franchisees. In lieu of the SBA Addendum to Franchise Agreement, franchisors are permitted to use a prior addendum that was negotiated by the franchisor and the SBA in connection with either a 2015 or 2016 version of the franchisor’s franchise agreement known as an SBA Negotiated Addendum. Use of the SBA Negotiated Addendum requires the franchisor to certify that the terms of its current franchise agreement, especially those relating to affiliation, have not changed from its 2015 or 2016 franchise agreement.

The SBA Addendum to Franchise Agreement is designed to modify the following provisions in a typical franchise agreement:

 

Change of Ownership.

A franchisor may only exercise a right of first refusal only if the proposed transferee is not a current owner or family member of a current owner.  Also, franchisor may not unreasonably withhold its consent to a proposed transfer. Finally in the event of a transfer, the transferor will not be liable for the acitions of the transferee franchisee.

Forced Sale of Assets.

In the event of a required sale of the business or personal assets upon termination of the franchise agreement, the value will be determined by an appraiser chosen by franchisor and franchisee. Franchisee is not required to sell any owned real estate but may be required to lease the real estate for the remainder of the franchise term for fair market value.

Covenants.

If the franchisee owns the real estate where the franchise is operating, the franchisor may not record any covenents restricting the use of the property.

Employment.

Franchisor may not hire, fire, schedule or directly control franchisee’s employees. Any temporary employees must be employeed by the franchisee and not the franchisor.

 

 

NASAA Releases Commentary Addressing Financial Performance Representations

Though not a required disclosure, approximately half of all franchisors now provide Item 19 Financial Performance Representations (FPR’s) in their Franchise Disclosure Documents (FDD). On May 08, 2017, the North American Securities Administrators Association (NASAA) adopted additional commentary designed to clarify certain address issues relating to Item 19 Financial Performance Representations. Among the issues the FPR commentary is designed to address includes:

  1. General guidance as to how important terms like Gross Sales and Net Profit are calculated when part of a franchisor’s FPR;
  2.  How and when data may be disclosed based on company-owned, franchisee and managed outlet operations;
  3. Disclosure of sub-set data including best performing units;
  4. Requirements for disclosure of averages and medians;
  5. Use of forecasts; and
  6. Guidelines for required disclaimers.

The FPR Commentary is to become effective 180 days after adoption by NASAA or 120 days after a franchisor’s next fiscal year end for franchisors having an effective FDD as of the date of adoption.

 

What is a Franchise Under Illinois Law?

As this is my first blog post, I thought starting with some basic franchise information would be a good idea for this and the next few blog posts. In this vein, one of the most basic questions for consideration is what exactly is a franchise. As a business person, it is important to recognize whether a potential business relationship is a franchise in order to comply with both federal and state franchise laws. If the relationship meets the definition of a franchise, then the franchisor typically will be required to provide information in a prescribed format known as a Franchise Disclosure Document (“FDD”) as well as register the FDD if required by state law.

Definition of Franchise Under Illinois Law

According to the Illinois Franchise Disclosure Act (“IFDA”), a “Franchise” means a contract or agreement, whether oral or written, between two or more persons by which:

  1. a franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services, under a marketing plan or system prescribed or suggested in substantial part by a franchisor; and
  2. the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and
  3. the person granted the right to engage in such business is required to pay, directly or indirectly, a franchise fee of $500 or more.

Illinois Franchise Law Elements

Under the IFDA, marketing plan or system means a plan or system relating to some aspect of conducting business, including but not limited to:

  • specification of price, or special pricing systems or discount plans;
  • Use of particular sales or display equipment or merchandising devices;
  • Use of specific sales techniques;
  • Use of advertising or promotional materials or cooperation in advertising efforts.

A franchisee’s business is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate if the franchise agreement or other agreement permits or requires the franchisee to identify its business to its customers primarily under such trademark, service mark, trade name, logotype, advertising or other commercial symbol in a manner likely to convey to the public that it is an outlet of the franchisor.

A franchise fee means any fee or charge that a franchisee is required to pay directly or indirectly for the right to enter into a business to sell, resell or distribute goods, services or franchises. A franchise fee may may be present regardless of the designation or form of the fee. In addition, a franchise fee  may be payable in a lump sum or installments.

Avoidance of an Accidental Franchise

Regardless of what label the parties place on a business relationship, if the relationship meets the above definitional elements of a franchise, the relationship is an Illinois franchise. Recognizing when a business relationship is a franchise is important so as to prevent an “accidental franchise.” An accidental franchise can be created when someone sells a franchise without realizing the business relationship is franchise. And, as the saying goes “ignorance of the law is no excuse.”  Consequently, the relationship may well be subject to franchise registration and disclosure laws including the IFDA and/or other states’ franchise investment laws and/or the Federal Trade Commission’s Franchise Rule. The consequences of a violation of  these laws can be potentially severe, even where no harm was intended. We at Law Office of O. Terry Shaver, LLC have extensive experience in structuring franchise and other forms of business relationships, please feel free to contact us if we can be of assistance. 

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Franchise HandshakeWelcome to the Franchise, Dealership and Distribution Law Blog. We intend to provide you with general information concerning ongoing legal issues and news in connection with the franchise industry both in Illinois and nationwide. I appreciate your interest and hope you find the topics on which I write to be informative and useful to you, whether you are an attorney, franchisor, franchisee, or a business person with an interest in the franchise industry.

This blog is for informational purposes only. It is not intended to provide legal advice, not does it create an attorney-client relationship. If you have a question regarding a particular issue or need legal advice, please feel free to contact us at  Law Office of O. Terry Shaver, LLC. We will be happy to speak with you.