Guiding You Through the Legal Maze^sm

        Choosing the right franchise attorney, like choosing any other professional, is a difficult and sometimes haphazard undertaking. Specific qualifications and experience should be reviewed to determine who can provide high quality legal services. In addition, the fees for preparing a basic franchise disclosure document, franchise agreement and related documents can vary greatly. How do you know which attorney is giving the best "value," based on quality and price?

        To assist you in this task, we have prepared a series of questions for you to ask prospective franchise counsel to help you determine the qualifications and experience of the attorney. An attorney with proven expertise in franchising will tend to work more efficiently and provide a higher quality of service. As to each question, I have taken the liberty to answer it on behalf of Keith J. Kanouse, P.A. Some of my answers, while believed to be accurate, are general in nature and are not intended to be a legal opinion. Legal advice can only be rendered on the basis of specific facts.

        I trust that this will be informative to you and will give you a sufficient basis to make an informed decision.

        A1.    The ABA Forum on Franchising is the preeminent national organization of franchise attorneys including the "Who's Who" of the franchise bar. It is responsible for publishing the Franchise Law Journal and conducting seminars on franchise law. The ABA Forum on Franchising is easy to join (there are no prequalification requirements) and, therefore, membership is no guarantee of competence or experience, however, membership should be considered a minimum qualification requirement and you should think twice about retaining a franchise lawyer who is not an active member. I have been an active member for many years. Additionally, I have been appointed by the Governing Committee to be the Forum's liaison to the ABA's Standing Committee on Lawyer Competence and to the ABA Standing Committee on Specialization.

        A2. The International Franchise Association ("IFA"), headquartered in Washington, D.C., is the world's largest and most respected international association of franchising companies. Franchise service providers (attorneys, consultants, etc.) can belong to its Council of Franchise Suppliers (CFS). I was a member of the IFA Council of Franchise Suppliers for several years and served on its Advisory Board.

        Q3.     Are you a member of the Franchise Law Committee of The Florida Bar or the franchise law committee of any other state bar? Do you actively participate in its activities?

        A3.     Yes, I was a Founding Member of the Franchise Law Committee of The Florida Bar ,  I am a former chair and have actively participated in its functions.

        A4.     The Florida Franchise Association is Florida's version of the IFA. I was a Charter Member of the Florida Franchise Association.

        A5. Yes, I have participated as faculty, including serving as program chair, in many seminars sponsored by legal organizations such as the Franchise Law Committee of The Florida Bar, the ABA Forum on Franchising, the ABA Annual Convention, and the General Practice Section of The Florida Bar, and by businesses and academic organizations such The Florida Institute of Certified Public Accountants, the South Florida Business Journal and the Licensing Executives Society USA/Canada. The topics of such seminars have included "Representing Established Franchisors," "Outlook for Franchising in Europe in 1992," "Franchisor's Control of Real Estate," "Business Expansion Strategies Including Franchising," "How to Buy a Franchise" and "The Inadvertent Franchisor."

        I regularly attend the annual meetings throughout the United States of the International Franchise Association and the ABA Forum on Franchising as well as other Florida Bar conferences, committee meetings, etc. I was one of the speakers (and the only private practitioner from Florida) at one of the recent annual meetings of the ABA Forum on Franchising in New Orleans, Louisiana, attended by over 500 franchise attorneys from the United States, Canada and Europe. I was Program Chair for The Florida Bar's Franchising Committee's seminar in December 1992.

        A6.     Yes, I have written many articles relating to franchising. Articles include ""The Role of an Attorney in Purchasing a Franchise," "Government Sources of Expansion Money," "Franchise Law Specialty Certification - A Benefit to the Public and Legal Profession," "Outlook for Franchising in Europe in 1992" and "Franchising in the Pacific Rim." I have been co-editor and co-author of the Florida CLE book entitled Florida Franchise Law and Practice and a second edition of the book entitled Franchise Law and Practice, such as "Dual Distribution" and "The Real Estate Aspects of Franchising."

        I have also written 3 books: "Understanding an Offering Circular and Negotiating a Franchise Agreement," "Negotiating a Business Lease," and "Selecting the Best Entity to Own and Operate Your Business." I am also one of the authors of "Franchising 101" published by the U.S. Small Business Development Centers.

        A7.     I devote most of my time to franchise law.

        A8.     A FOC is an acronym for a Franchise Offering Circular, a basic franchise disclosure document required by the Federal Trade Commission (FTC) Franchise Rule and the laws of certain states to be given to a prospective franchisee.

        A9. A FTC Disclosure Statement is a basic franchise disclosure document issued pursuant to the FTC Franchise Rule which governs franchise sales in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The use of a FOC also satisfies the FTC Franchise Rule. Most franchisors use a FOC because certain states will not accept a FTC formatted disclosure statement.

        A10.     This is a trick question. The FTC Franchise Rule is a "disclosure" rule only. There is no requirement that your franchise offering be registered with, or approved by, the Federal Trade Commission or any other federal agency. However, it must be properly prepared and timely delivered to prospective franchisees as part of your compliance with the FTC Franchise Rule.

        A11.     An overwhelming majority of experienced franchise lawyers, including me, will usually recommend the FOC format. The reason for this is that the UFOC format will be accepted in the states requiring registration whereas the FTC format usually will not be accepted. While you can use the FTC format in 35 states including Florida, Puerto Rico and the U.S. Virgin Islands, if you intend to develop a national franchise program and intend to sell franchises in some of the more populous states such as California, Illinois, Minnesota or New York, the FTC format will usually not be accepted in these states without substantial modification. There may be limited circumstances when you want to use the FTC format, but then you may be precluded from selling franchises in, and perhaps to residents of, the franchise registration states.

        A12.     The FOC format is slightly more comprehensive, requiring 22 items of information to be disclosed, whereas the FTC format requires 20 items of information to be disclosed. Many of these disclosure items are similar. The average person may not easily recognize the difference between the two formats. Unlike the FTC format, the FOC format requires audited financial statements from the inception of franchising, including the prior three years of operation, disclosure of the franchisor's obligations and disclosure of changes in franchisees over a three-year (instead of a one-year) period. Also, the FOC format requires disclosure of litigation and bankruptcy matters for a longer period of time than does the FTC format (ten years versus seven years for litigation and fifteen years versus seven years for bankruptcy). There are additional disclosure obligations under the FOC format including advertising program and computer systems. These are only some of the differences.

        A13.     There are 11 states that require a basic franchise disclosure document, franchise agreement and other materials to be registered and reviewed by a state agency before a franchise sale can be effectuated within that state or to a resident of that state. These states are California, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia and Washington. In addition, four states have filing/disclosure laws: Hawaii (must file a FOC with the state and deliver a FOC to prospective franchisees, but there is no approval process), Oregon (no notice is required, but must deliver a UFOC to prospective franchisees), Michigan and Wisconsin (must file a Notice of Intent with the state and deliver a FOC to prospective franchisees including a state-soecific cover page). You are obligated to register a franchise offering in the State of Florida and certain other states having business opportunity laws unless you are exempt (e.g., if you have a registered trademark and do not guarantee the franchisee's investment).

        A14.     Yes, the following states have laws that may regulate the relationship between a franchisor and its franchisees to a certain extent, particularly with respect to termination of the franchise relationship. These states are: Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, South Dakota, Virginia, Washington and Wisconsin as well as the District of Columbia. Also, Florida's general franchise law regulates misrepresentations in connection with franchising.

        A15.     No, but this fact will need to be disclosed in your FOC (Item 12) or in your FTC Disclosure Statement (Item 1). Also, a federally registered trademark may qualify you for an exemption from regulation under certain state business opportunity laws, which are somewhat similar to but not as restrictive as franchise laws, such as in Connecticut, Maine and North Carolina. Failure to have even a state registered (versus a federally registered) trademark may require registration under the states' business opportunity laws such as the business opportunity laws in Florida. Generally, a federally registered trademark should be obtained as soon as possible as this is the "cornerstone" of your franchise system. Furthermore, the failure to have a federally registered trademark may be troubling to prospective franchisees since the opportunity to use an established trademark is one of the assets a franchisee is attracted to buying.

        A16.     I can prepare drafts of the FOC and Franchise Agreement within 30 days of your response to our franchise questionnaire and have it finalized within 30 days thereafter. However, at the time I commence assisting you in structuring your franchise program there will be numerous issues in which you will need to work closely with franchise consultants and accountants in formulating your franchise program such as market analysis, business plans, financial statements and projections, insurance programs, earnings claims and franchise marketing plans. We need to receive information in these areas to prepare properly the FOC, Franchise Agreement and related documents that reflect your franchise concept, industry and business philosophy. Merely giving you a boilerplate FOC and Franchise Agreement or basing your franchise documents on your competitor's UFOC and Franchise Agreement would be doing you an injustice and lay a weak foundation for your business expansion.

            A17.     Yes, I have clients who have registered in all of the registration states. An experienced franchise attorney should have clients who are operating in many of the franchise registration states.

            A18.    CCH Business Franchise Guide is indispensable to franchise attorneys, particularly in the treatment of state franchise laws, regulations and new developments. I own and currently subscribe to CCH Business Franchise Guide on CD-ROM. In addition, my library contains many other books and treatises on franchise and distribution law.

            A19.     While the traditional franchise transaction (a single-unit franchise) is the most common, more sophisticated and financially strong franchisees are demanding a multi-unit or multi-level arrangement. This can take several forms such as an Area Development Agreement (where a franchisee agrees to open a number of his or her own units in a given area within a specified timeframe), a Subfranchise Agreement (where a franchisee agrees to act as a "subfranchisor" and sell and service franchises on behalf of the franchisor) and an Area Representative Agreement (where a person performs certain selling and servicing functions on behalf of the franchisor who contracts directly with a franchisee). I have been involved with all of these structures and hybrids thereof and can advise a client as to which format is the most desirable under the circumstances. Such structures are not mutually exclusive and an experienced franchise attorney can help you better understand the benefits and risks of each structure.

            A20.     Yes, my clients are diverse and I have experienced the legal issues involved in both starting up and rapid growth of franchise systems.

            A21.     Yes, I have been involved in international franchising in Canada, the Caribbean, Europe, Central and Latin America and the Far East. We have prepared International Master Franchise Agreements, are familiar with foreign franchise laws and competition laws and work closely with foreign counsel. I am a member of the Committee on International Franchising of the International Bar Association in London, England. I recently visited Japan, Korea and Hong Kong as part of a Franchise Delegation of the People to People Citizens Ambassador Program. With continued growth of a global economy, international franchising will offer special opportunities in the 1990s for U.S. franchisors.

            A22.     Yes, an experienced franchise attorney will not automatically conclude that franchising is the best way to go. You should be advised to take one step backwards and analyze where you are and where you want to go to determine which course of action is best for you, such as company-owned expansion, pure licensing, distributorships/dealerships, franchising, multi-level marketing, independent sales representatives, joint ventures, etc. No course of action is "ideal," each has its advantages and disadvantages. No course of action is mutually exclusive of another (e.g., dual distribution involving company-owned units and franchised units). Each expansion format should be explored to see which is best for you based on your business, status of the industry, financial condition, your desire to control the operation, etc. Only after this analysis is completed, and franchising in concluded to be the best course of action, should you commence developing a franchise program.

            A23.     If you choose a FOC format you are required to have audited financial statements certified by an independent certified public accountant for all future years and for the last three years of operation. If the franchising company is newly formed, an opening audited balance sheet will suffice. Under the FTC format unaudited statements for prior years may be used. Such use is permitted under the FTC format, however, only to the extent that audited statements have not been made and provided that such statements are accompanied by a clear and conspicuous disclosure that they are unaudited. Audited financial statements will be required for future years. In addition, if you provide the franchisee with any historical financial information, statistics, financial forecasts, or other revenue and expense information, there are specific rules to be followed regarding the preparation of "earnings claims" which become part of either disclosure format. You need to have an accountant and an attorney experienced in these matters.

            A24.     Yes, the FTC Franchise Rule has detailed regulations as to when the basic disclosure document must be given to a prospective franchisee, when you can take money from a prospective franchisee or require the prospective franchisee to sign the franchise agreement or other documents, what you can and cannot say to a prospective franchisee, etc. In addition, certain states regulate franchise sales (you must be registered in such state before you can offer a franchise in such state or to a resident of such state) including pre-approval of advertising materials directed at prospective franchisees. You need counsel experienced in these matters to assist you and your advertising agency in preparing your sales materials to prospective franchisees, state franchise registration, and a detailed sales compliance manual.

            A25.     You may end up receiving quotes which are very low ($5,000 to $7,500) to those which are very high ($30,000 or more). The middle level is about $15,000 to $20,000. The quote for legal fees may be misleading. Make sure you understand what services are included in the quote and what services are excluded. It is your responsibility to determine which quote has the best "value." Since the franchise agreement reflects your franchise program you want to lay a proper foundation, be firm but reasonable with your franchisees, and have enough flexibility in the franchise agreement to anticipate changes in your industry and business, demographic changes, technological changes, etc. You need to have an attorney and other franchise consultants who understand these issues. This franchise agreement will be your legal contract between you and all of your franchisees. It imposes a number of legal rights and obligations on your part. In addition, an improperly structured franchise agreement may create liability for you under state franchise relationship laws, state "Little FTC" laws, antitrust laws, trademark laws, etc. Furthermore, an improperly or poorly drafted FOC or FTC Disclosure Statement may create liability for you under the Federal Trade Commission Act by exposing you to a civil penalty of up to $10,000 per violation per day and under state "Little FTC" acts. Violations may also give franchisees the right to rescind the transaction and sue you for damages including their attorneys' fees and costs. It is vitally important to have the proper documentation from the very beginning. My fees fall within the middle of the spectrum and depend on the scope of the services for which we are engaged. You must consider the expenditure of funds to create your franchise program to be an investment rather than an expense.

            A26.     To commence franchising, you should expect from your legal counsel, in addition to the FOC and franchise agreement, a comprehensive nondisclosure and noncompete agreement for execution by the franchisees' owners and/or employees. This document helps protect your proprietary information and restrict unwanted competition. You should also consider a guarantee executed by the principals of the franchisee and their spouses and/or some other security device (e.g., security interest, letter of credit) to help make sure you recover unpaid royalties, advertising contributions, and other obligations of the franchisee to you. You should also receive a comprehensive memorandum explaining your sales obligations and restrictions under the FTC Franchise Rule, so you know how to sell franchises legally once you have received the franchise documents from your legal counsel. You should also expect your legal counsel to work closely with your accountant to obtain proper financial statements for inclusion in the FOC and work with your trademark counsel to obtain a properly registered federal trademark and insure proper disclosure in the FOC. Your legal counsel should also work closely with your advertising/marketing agency, if any, to coordinate in the preparation of a marketable set of legal documents which have consistency with your manuals and advise such agency regarding restrictions on how it may legally promote your franchise. Your legal counsel should also work with your insurance agent or risk manager to insure that the insurance provisions contained in the franchise agreement cover the type of risks, amount of coverage and deductibles which are appropriate for your business operations. Make sure all these services are part of the services for which you are quoted any legal fee.

                        I include all of the above services as part of my standard representation, in addition to several other services such as preparation of appropriate financing statements and power of attorney relating to the franchisee's telephone number and Yellow Pages listing. I do not impose any extra charges for such services. I understand you have budgets and do not want to be surprised by additional fees that an experienced lawyer should have anticipated.

                        In certain circumstances you may need additional legal services, such as state franchise registrations, a memorandum explaining your general obligations under the franchise laws of states other than Florida where you may be franchising, real estate related documents such as leases, state trademark registrations, formation of a franchising company, and other services needed as part of your franchise program. I regularly provide these services to our clients.

* * * * * * * * * * * * * * * * * *

                        I trust you find this memorandum informative. If you have any other questions or would like further clarification please do not hesitate to contact us. We would be happy to answer your questions. A tear-out sheet listing these 26 questions is attached for you to ask other attorneys to assist you in making an informed decision.

Keith J. Kanouse

Q1.         Are you a member of the American Bar Association Forum on Franchising? Do you actively participate in its activities?

Q2.         Are you a member of the International Franchise Association Council of Franchise Suppliers?

Q3.         Are you a member of the Franchise Law Committee of The Florida Bar or the franchise law committee of any other state bar? Do you actively participate in its activities?

Q4.        Are you a member of the Florida Franchise Association?

Q5.         Have you spoken or attended any franchise seminar in the last 3 years?

Q6.         Have you written any articles or books involving franchising?

Q7.         What percentage of your practice is devoted to franchising?

Q8.         What is a FOC?

Q9.         What is an FTC Disclosure Statement?

Q10.        How long does it take to register my franchise offering with the Federal Trade Commission?

Q11.         Which do you recommend my using, the FOC format or the FTC format?

Q12.         What are some of the differences between the FOC format and the FTC format?

Q13.         What states regulate the sale of franchises?

Q14.         Are there any other state franchise laws of which I should be concerned?

Q15.         Do I need to have a federally registered trademark to engage in franchising?

Q16.         How long will it take you to prepare my FOC and Franchise Agreement?

Q17.         Have you been involved in registering a franchise in the franchise registration states?

Q18.         Do you own and currently subscribe to Commerce Clearing House (CCH) Business Franchise Guide?

Q19.         Have you been involved in any of the various multi-unit and multi-level franchising structures?

Q20.         Do your franchise clients include start-up and mature companies with in excess of 100 units?

Q21.         Have you been involved in international franchising?

Q22.         Are there other ways for me to expand my business besides franchising?

Q23.         What are my obligations with respect to financial statements?

Q24.         Do the franchise laws regulate franchise sales?

Q25.         What does it cost for the services of a franchise attorney to start a franchise program?

Q26.         What should I expect from a legal standpoint in order to commence franchising?

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