I had the pleasure this year along with fellow franchise attorneys, Gerry Wells of Rita’s Franchise Company and Allan Hillman of Garcia & Milas, to present at the ABA Forum on Franchising Annual Meeting in San Diego. The best part of our program, Working with Sales Agents and Brokers, was the enthusiastic participation of the audience. I want to take the opportunity to relay some useful information provided by members of our audience:
- New guidance on franchise sales brokers and agents may be on the horizon. The North American Securities Administrators Association’s (NASAA) Franchise and Business Opportunities Project Group now chaired by Assistant Chief Counsel in the California Department of Financial Protection & Innovation, Theresa Leets, told us that the NASAA Franchise Project Group will be focused on considering a model for third party franchise seller registration. What that structure may look like still remains to be seen, but we will be on the lookout for any requests for public comments should a model be proposed.
- If your franchise system has a program in place to compensate franchisees who refer new prospects to the system, then these franchisees may constitute sales agents. Under the Amended FTC Rule, a franchise “seller” is a “person that offers for sale, sells, or arranges for the sale of a franchise.” 16 CFR § 436.1(j). It includes a franchisor’s employees, agents, subfranchisors and representatives, but it contains a narrow exception for existing franchisees “who are not otherwise engaged in franchise sales on behalf of the franchisor.” At least one state examiner, however, taken a broader approach and determined that the franchisees who participate from a formal program and receive compensation are brokers.
- Many disputes between franchise systems and third-party sales brokers involve transfers and resales. Many audience members relayed horror stories arising from a third-party broker demanding large portions of the purchase price from the franchise system when a franchisee sells its unit to a buyer, even where the franchisor (as is most common) is only entitled to a transfer fee, not a portion of the sale price. The best advice is to delete and negotiate out any payment on transfers or resales in a consulting agreement with third-party franchise brokers. These resales are between the selling franchisee and a willing buyer – not the franchisor.
- Be on the look-out for franchise brokers who act in both the role of franchise start-up consultant and sales broker. Many of these promoters reduce their consulting fees to provide advice regarding the structuring of a new franchise system and operations manual and FDD drafting drastically below market. Then they attempt to earn back these amounts by taking an ownership interest in the franchise system and requiring exclusive sales broker engagements post-franchise launch. If you have a business client who is approached by one of these promoters, then review the proposed contract very carefully and make sure the potential start-up franchisor knows what it is signing.