Questions from the Audience

The Pillars of Franchising show airs live every Thursday at 4:00 CT/5:00ET. Because we are a live show, we encourage viewers to call in and ask questions of our guests or our Million Dollar Mentors. Going forward, we will feature some of your questions in every issue of the magazine. If you have questions during one of our shows, we welcome you to call in during showtime at 323-580-5755 or email us ahead of time at yourdream@pillarsoffranchising.com

Kristin Selmeczy: An audience member has asked, “If you are a multi-unit franchisee, do you need different lawyers for each state that you’re in?

Jerry Akers: Well, maybe yes, maybe no. Because we deal with a fairly large law firm in our state and in our city, and each of the attorneys has a different specialty – many of them are licensed in multiple states. So, for instance, if, if you want to do business in your state and an adjacent or neighboring state, it’s fairly likely your attorney or one of his associates will be licensed in that state and can take care of it for you. If you want to go three or four states over or in a different region, then it’s possible you will need a different attorney. But I would consult with my attorney first because he’s my trusted advisor. We talk about that all the time – utilizing your trusted advisors -- and tell him the situation. He or she will help you on that. I’m going through that right now because of the clinic I’m buying. The owner passed away, and we have a lot of attorneys involved in that because it involves the widow, the corporate office and me. So, it’s complicated. My advice is to lean on your local attorney who you have a relationship with. Tell them the situation and they’ll help. I actually l had something in South Dakota, and I asked my attorney if he could find me an attorney in South Dakota. Coincidentally, he went to law school with somebody from South Dakota. There are resources out there, so don’t let it slow you down.

K.S. We have a question from Minnesota. This is a good one that an old cohost used to ask. What are the first three items in the FDD you should read? And what does Jerry recommend to read first?

J.A. Well, for me, first off, I hate FDD's because they’re like 400 pages long, fine print legalistic stuff. And I don’t know if I understand some of them. I’ll just be honest with everybody, but for me, there are two things that I look at first, and I base everything else because these items are not going to change. I look at schedule 19 because I want to see what the money looks like. Yes. I want to see the worst performing locations and the best performing ones on revenue, profit, expenses, etc. And I want to look and see if they’ve had any lawsuits against the corporation and what those lawsuits look like.

J.A. Because sometimes when a franchisor is starting up, there may be some discrepancies and there may be some lawsuits. And now it’s 20 years later. And although they’re still in the FDD by law, they really don’t mean anything at this point in time. But if there was one last year or in the last five years where a franchisee or a group of franchisees sued the franchisor, I’m going to want to know more about that. And that’s going lead to some very pointed questions when I do my discovery day or when I continue to work through the process of vetting the franchise system. So, for me, I look at those two sections. I look at the money section and I look at the legal section and I read the rest of it or have my attorney do it, or both of us do it. I don’t really get into much more detail after that because frankly, the rest of it is just boilerplate stuff. And I know for a fact, the franchisor is not going to change that for me. Reading it so I know what’s in it is important. But reading it so that I can try and get something changed is not of interest to me.

K.S. Okay. There are a couple of items in the FDD that are of interest to me. When I looked at one franchise, there was something that caused me to opt out of that model. And that was Item eight, which told me where I had to buy my supplies. And in this particular franchise, the reason that popped out is that in, in that particular franchise, it was an incestuous relationship in which all of my marketing had to go to one company who happened to be the brother of the founder and the CEO of the brand I was looking to buy. And so, my FDD and my franchise agreement said, ‘Hey, you have to do direct mail. And it has to be through this company. And oh, by the way, guess what! This company owner happens to be the brother of the CEO of the franchise brand.’ And I was like, “no, no, no!” That situation has really prompted me to look through that section. And then I tend to spend some time with my clients who are looking to buy franchises on Items 5 and 6 as well.

J.A. So, to your point about the incestuous relationship, I’ve looked at a lot of FDD’s and very few, franchisors do that. That’s a red flag and I’m surprised you found one that did it because anybody that pays any attention would catch that. And more importantly, if that came up later after you bought the franchise, that’s grounds for you to sue them, and none of those franchisors want that on their FDD. Some franchise systems may give suggested vendors like, say, for office supplies. But they don’t really require specific vendors. And so, you have the opportunity to go somewhere else. There may be some things that are mandated. Things related to the brand would come to mind. For example, the golden arches for McDonald’s perhaps might be something they get from one vendor because they want them all to look exactly the same. There are times when there is some logic behind having the same vendor. But we like competition in franchising. So typically, you’re going to have options and you can probably go out and find your own options if you want to.

K.S. From San Francisco. Do I need to use a broker to buy a new franchise, or do you use one only for an existing franchise location?

K.S. No, you don’t need a broker at all. However, I can tell you that using a broker makes all of the work that Jerry did in his book a lot quicker and a lot easier. It provides opportunities that maybe you won’t find on your own. You can use a broker or not in both situations. I used a broker, and it was one of the best decisions that I could have made because I would never have thought to buy a franchise. It was not necessarily what I was looking for, but I couldn’t be happier that I did. It worked for exactly what my family needed at the time. And it’s turned out to be a great business model. Do you have any thoughts?

J.A. I’ll reinforce that. I think that 90% of the time you should use a broker, no matter what kind of business you’re looking at. To Kristen’s point, they take a lot of the work out of it. They vet the other side. So, you have less to worry about and you know what you are getting or not getting. They’ll actually catch problems in the offering in the real estate and in other areas when you buy a franchise. So, I think it’s a good idea. The only time I don’t necessarily think it’s necessary is for instance is if you know somebody that’s already in that franchise group yes. And you’ve been tracking their success for a while and they know you, and they’ve said, “Hey, if you’re thinking of a franchise, this is the one to be in because it fits for you.”

J.A. Then you can probably go directly to that corporate group and work with their franchise rep. And they can help you with that. The franchise rep is really a broker that doesn’t make money off of it because they’re paid a salary to help bring people in. You’re still getting a lot of the same resources when you go that route, but you don’t have an unbiased third party. If you have any concerns, get a broker involved. They will give you some good guidance.