BBP Blog

Why Don’t More Franchisors Disclose Franchisee Results?

by Ed Teixeira

An Item 19 disclosure is an optional franchisor disclosure made in the Franchise Disclosure Document (“FDD”). It presents the financial performance of the franchisor affiliates, franchisees and company-owned units. It’s been reported that 25-40% of franchisors make a disclosure under Item 19. Based upon various discussions with industry experts I will err on the conservative side and say it’s probably around 30%.

There are numerous reasons why more franchisors don’t provide an Item 19 disclosure:

Difficulty in obtaining consistent and credible data from the franchisees. The fear that some data is not accurate.
Complexity of gathering, verifying and presenting the data especially on the part of large franchise systems.
Disclosing financial data that can be viewed by competitors.
Mixed financial results, whereby some franchisees perform poorly.
Reluctance to project future financial performance to prospective franchisees.
Impacting the due diligence process of prospective franchisees, whereby some could be swayed by the disclosure when making a decision to purchase the franchise.

I expect these reasons will continue to play a role in the decision not to make an Item 19 disclosure.

Franchisor benefits from an Item 19 disclosure:

Can provide credible financial data to franchise prospects (providing it’s verified).
Sets the franchisor apart from those franchisors that fail to make this disclosure.
Can accelerate the franchise prospects due diligence process.
Forces the franchisor to gather franchisee financial results and thus better monitor the network.
Can boost the sale of new franchises.
Can be used by the franchise prospect to conduct a more thorough financial analysis.

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Posted on 3/31/2011 12:01 PM By Ed Teixeira
In: [Legal & Tax Issues], [Franchises] | No Comments »

Disclosing Initial Franchise Fees

by Jeff Fabian

Item 5 – Initial Fees

Item 5 is where franchisors must disclose their “Initial Franchise Fee” and certain other related information. If the franchisor offers different “levels” or “packages”, each of the alternative initial fees has to be disclosed. If the amount of the Initial Franchise Fee is tied to the size of a franchisee’s territory, this must be disclosed as well. Any required pre-opening purchases from the franchisor or its affiliates must also be disclosed in Item 5.

Information that franchisors must disclose in Item 5 includes:

The amount, range or formula for calculating the Initial Franchise Fee
Whether any “application fees” will be credited toward the Initial Franchise Fee
Whether full or partial refunds are available (for example, if the franchisee is unable to lease a suitable location within a specified time period)
Whether the franchisor offers an installment plan (though the franchisor may opt to disclose this in Item 10)

If a franchisor does not offer refunds or installment terms (which is not unusual), it should include a “negative disclosure” to this effect in Item 5 (i.e. “We do not offer full or partial refunds under any circumstances.”).

Item 6 – Other Fees

Franchisors must disclose all fees and other amounts to be paid to the franchisor or its affiliates after the franchisee opens for business in Item 6.

Fees and other payments commonly charged by franchisors include:

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Posted on 3/29/2011 12:00 AM By Jeff Fabian
In: [Franchises] | No Comments »

The Legal Nightmare Continues...

Fellow Intermediaries and Brokers:

More good news… The State of Nevada may bring a criminal indictment against me in this case.

I have decided to retain the additional attorney who was the State’s first Administrator of the Nevada Securities Division when it was developed to be a real division in the mid-80s. He is considered to be the Nevada Division of Securities “expert.” My regular attorney and I are meeting with him tonight.

Can you spell N I G H T M A R E ?

Len Krick, MBA, SBA, CMEA
Certified Business Intermediary
Merger and Acquisition Master Intermediary

Posted on 3/25/2011 10:48 AM By Len Krick
In: [Legal & Tax Issues] | No Comments »

Fellow Intermediaries and Brokers

by Len Krick

First I would like to thank all of you who sent me so many great expressions of sympathy and support. It’s nice to know that I am not alone out there. I appreciate that you have “circled the wagons.”

Secondly, I can tell you that our efforts, to-date, to get the original claims in the civil suit dismissed have not succeeded, so the legal actions are still on track. As you can imagine, I am spending a lot of time and more money than I have to defend myself. No more racing for Len in the foreseeable future, that’s for sure. I now work to pay legal bills. It seems ironic since I present a workshop for the IBBA called “Minimizing Business Broker Liability: An Ounce of Prevention…”

Thirdly, yesterday I received the attached subpoena from the State of Nevada alleging violations of state securities law. While this was, no doubt, prompted by the original case where I was named a third-party defendant in a civil suit, this is much broader. As you will see, they are asking me to produce all my records since January 2006. Those records will include several deals, in addition to the original transaction, where the listing was for the sale of the business’s assets, but the parties decided, sometimes at the last minute based on tax considerations or continuity of existing contracts, to morph the deal into a stock sale. So, the State will have evidence of numerous potential “violations” through the years. Each one is identical to the original one:

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Posted on 3/24/2011 2:14 PM By Len Krick
In: [Legal & Tax Issues] | No Comments »

From the Desk of Tom West: SEC Suit

by Tom West

The letter to members of the M&A Source from Len Krick (see previous blog entry) should be read by all business brokers. We don’t know how far this will go and more importantly, what the ramifications will be. The unfortunate part of this is that Len is one of the good guys. He is a leader in the profession, always willing to share, works hard, has been very successful, does nothing wrong,...and look what happens.

If this case didn’t have so much importance in the workings of our business, we could say, "Well, these things happen." Of course, in this case, Len had nothing to do with what happened over the past five years. The deal closed that long ago. But, because of the asset sale changing to a stock sale, Len is in the middle. He had no decision in the change and informed all of the parties of the situation and his concern. They went ahead and paid him, and now, due apparently to the poor decision-making of the new owner (the buyer’s son-in-law), the seller, Len, and Len's firm have been sued.

Hopefully this case will die a quick death and court will see what actually happened and dismiss it. But, as Len points out, if it goes further, we may all pay the price.

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Posted on 3/7/2011 12:46 PM By Tom West
In: [Legal & Tax Issues], [State of Industry] | No Comments »

Dear Fellow M&A Source Members:

by Len Krick

As most of you know, I have a dual “Main Street” and “M&A” practice in Las Vegas. I try to do things by the books, minimize my exposure to liability, and document everything I do. I have also been involved in the effort to have the SEC address licensing requirements for business brokers for a long time. Back in 2005, when all we had was the IBEC letter, I drafted a document, entitled “Stock Sale Acknowledgment, Notification, and Disclaimer,” to disclose the fact that I didn’t have an SEC license and didn’t intend to structure a deal as a stock sale. This document was based on the IBEC No-Action letter (1986) and I did the things it said I should do, and didn’t do the things it said I shouldn't do; I performed in accordance with the IBEC letter. In every deal I was involved in, which morphed into a stock sale, I obtained the signatures of both the buyer and seller. I never had a party refuse to sign it.

Subsequently, as soon as the CBI No-Action letter came out in the Fall of 2008, I updated the document to reflect the CBI letter “clarified” points. Shane Hansen, the attorney for the Task Force, has reviewed this agreement. Most of you know that I freely give it to anyone who requests an electronic copy; I have a sample in the workshop handout materials for my IBBA workshop “Minimizing Broker Liability.” Countless numbers of business brokers and intermediaries now use this agreement as a band-aid, when an ordinary asset sale turns into a stock sale. However, the SEC laws are still in force and a “no-action” letter is merely SEC staff’s opinion on that specific case.

It’s really no big deal to get a series 7 or 62/63 license; that’s not the point. I took two companies public on NASDAQ and was president of one of them; I simply do not want to get involved in anything that requires more SEC reporting. So, I choose not to get licensed. If I did big deals all the time and they tended to start out or morph into stock sales, maybe it would make sense.

Three weeks ago something occurred that I thought you might want to know about because it might be used as a legal precedent regardless of which “side” wins. If I prevail, then that will be good for all of us. If I lose, I believe that it will be really bad for all of us. That assumes that I am not the only one in the world who was forced to conclude a transaction as a stock sale, unintentionally.

Here’s a quick overview:

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Posted on 3/7/2011 12:34 PM By Len Krick
In: [Legal & Tax Issues] | No Comments »

62 Reasons for Sellers Hiring Brokers

by Ted J. Leverette

Do you have a response ready for sellers hesitant to use a business broker? Arm yourself with numerous reasons why using a business broker benefits the seller.

Access broker or advisor’s database of potential buyers and investors
Advertising run and paid by broker
Affiliated brokerage or advisory offices may attract more buyers
Assistance during escrow closing
Background check on potential buyers run by broker or advisor
Broker or advisor can confer with seller, legal and tax counsel about terms of sale
Broker or advisor understands and can depersonalize negotiations
Brokers and advisors enable buyers and sellers to access a broader pool of potential partners
Brokers and advisors have broader third-party prospective from done deals and failed deals
Brokers and some advisors know how to sell businesses; most sellers don’t

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Posted on 3/7/2011 12:26 PM By Ted J. Leverette
In: [Marketing] | No Comments »

BizBen’s Busineses Sold in California

from BizBen.com

This list from BizBen.com of small and mid-sized businesses sold in Caliofornia presents a real picture of how the economy influenced the sale of businesses. See the startling contrast from 2007 to 2010.

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Posted on 3/7/2011 12:21 PM By bizben.com
In: [State of Industry] | No Comments »