International Franchise Association 46th Annual Legal Symposium May 5-7, 2013 JW Marriott Hotel, Washington, DC

Best Practices in Franchise Administration Meredith Flynn Allegra Network LLC Plymouth, Michigan Michael S. Levitz Nestlé USA Minneapolis, Minnesota John M. Richardson McDonald’s Corporation Oak Brook, Illinois

Introduction Today there are a vast number of franchised product and service concepts, none of which is identical to any other. While, from a consumer perspective, a franchised pizza parlor and franchised tax preparation service may be vastly different, from a franchise administration perspective these and other franchised businesses have a lot in common. Each involves a franchise agreement for a set period of time, the licensing of a trademark by a franchisor to a franchisee, and the need for the franchisor to comply with applicable franchise laws. Because of these common elements, often the franchise administrative procedures that work well for one franchisor will work well for other franchisors. Similarly, by virtue of being in the franchising business, franchisors often encounter similar challenges relating to the legal aspects of their businesses, such as maintaining system standards or engaging the services of outside counsel. This paper seeks to share the authors’ perspectives on meeting these challenges. In the context of this paper, a process, method or routine that can work effectively is a “best practice” that is worthy of sharing. To be clear, a “best practice” is not a turnkey way to do something, because a franchisor’s processes need to take into account the particular characteristics of the franchise and the franchisor’s way of doing business. But they are often a good starting point. For example, franchisors offering franchises in the United States must comply with the Federal Trade Commission “Disclosure Requirements and Prohibitions Concerning Franchising” (the “FTC Rule”), which requires franchisors to provide prospective franchisees with a “Franchise Disclosure Document” (“FDD”) having a very specific 23-item format.1 However, the FTC Rule permits each franchisor to determine whether to include an Item 19 “financial performance representation” in its FDD.2 Each franchisor offering franchises in the United States must, at least annually, update its FDD3; and this paper starts by offering best practices for effective FDD updating, and registration in states having laws that regulate the sale of franchises. At the end of this paper we have also attached several checklists and other materials that your franchise legal department can adapt to its specific administrative needs.

1. Creating a Plan for Effective FDD Registration The process of creating a plan for developing and filing the Franchise Disclosure Document (“FDD”) should be considered with great care. The registration statutes incorporate a comprehensive enforcement structure to address abuses and misrepresentations.4 The franchise laws in general are designed to protect against unlawful business practices in the sale of a franchise and are often written in the broadest terms.5 Not only is the failure to register and use an FDD a violation of

1 16 CFR 436 2 16 CFR 436.5(s) 3 16 CFR 436.7(a) 4 See Section 1.1, below. 5 See, for example, California Franchise Investment Law, California Corporations Code § 31201, making it “unlawful for any person to offer or sell a franchise in this state by means of any written or oral communication … which includes an untrue statement of a material fact or omits to state a material fact

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applicable state franchise laws6, but so is the intentional making of an untrue statement and the omission of a material fact to a prospective franchisee.7 The plan you develop for drafting the FDD, and properly filing it in those states that require such registration, is a key element for any successful franchise system. 1.1. Setting the FDD calendar

- Annual Renewal The first step in drafting the FDD should be the setting the calendar. Not only do you have to give management adequate time to complete a questionnaire related to the franchisor’s disclosure obligations and provide franchise seller disclosure forms to persons who “solicit, offer or sell” franchises, but you also have to find a way to obtain accurate information on key aspects of the franchisor’s business and, possibly, historical background on the company’s financial performance. Mix in having to juggle filing deadlines in multiple states or having to file separate disclosure documents for different brands, and you indeed have a challenging few months during FDD season. However, while daunting, this is an undertaking you will be well prepared to handle if you stay organized and persist. To start, you have to know your registration obligations and your filing deadlines. This will allow you to work backwards in setting your calendar.8 The FDD must be updated at least annually, generally within 120 days after the end of the franchisor’s fiscal year end under the Federal Trade Commission’s (“FTC”) amended franchise rule, which was made final on January 23, 2007 (the “FTC Rule”)9. Under state franchise laws, an annual renewal is also required, typically 90 to 120 days after a franchisor’s fiscal year end. Each annual renewal requires the filing of an updated FDD and financial statements. If you fail to file a timely renewal, you may be left with a lapsed registration and may not be able to offer or sell a franchise in a particular state during that period. The FTC does not require that you file the FDD with the FTC or other federal agencies. For non-registration states, you can begin using your completed FDD immediately. However, in the 14 registration states, the FDD must be registered before it may be used. Registration States

• The registration states are California,10 Hawaii,11 Illinois,12 Indiana,13 Maryland,14 Michigan,15 Minnesota,16 New York,17 North Dakota,18 Rhode Island,19 South Dakota,20 Virginia,21 Washington22 and Wisconsin.23

necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 6 See for example, Maryland Franchise Registration and Disclosure Law, Code of Maryland, Business Regulation, § 14-214. 7 See footnote 5, supra. 8 See Sample FDD Preparation Timeline, attached as Appendix A. 9 16 CFR 436; 72 Fed. Reg. 15444 (March 30, 2007). 10 California Franchise Investment Law, California Corporations Code, §§31000, et. seq. 11 Hawaii Franchise Investment Act, HRS §482E. 12 Illinois Franchise Disclosure Act of 1987, 815 ILCS 705.

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• In 4 of the registration states – Indiana, Michigan, South Dakota and Wisconsin – you can submit your notice form and filing fee (the “notice states”).24 In these states, unless the state agency in charge of franchise registration takes the unusual step of deciding to review your filing, you will receive a letter that provides an effective date when you can begin offering and selling your franchise.

In the other 10 registration states, you file registration documents, a filing fee and obtain approval prior to offering and selling your franchise. In Hawaii, the FDD is effective 7 days after the filing of all required documents and filing fees, but the state examiners have the right to issue a stop order at any time after the waiting period has lapsed.25 In the other 9 states, the examiners review the filing to determine if it meets the state’s disclosure requirements. 26 Once the examiners have reviewed the filing and determined it meets their requirements, the state will issue an effective date when you can offer and sell franchises. Exemptions

• Various state laws provide exemptions based on the nature of the franchisee, the franchisor, or the offering. For example, California, Illinois, Indiana, Maryland, New York, North Dakota, Rhode Island, Virginia and Washington have exemptions based on the franchisor’s net worth and experience.27 If the franchisor qualifies for an exemption, it generally must provide disclosure to prospective franchises and file those materials with the state.

• Florida and Utah, while not registration states, require the franchisor to file an annual notice to claim an exemption from their business opportunities laws28 (i.e., Section 559.802, Part VII, Florida Statutes, states that anyone offering a franchise in Florida is exempt from the Sale of Business Opportunities Act provided they meet the

13 Indiana Code, § 23-2-2.5 14 Maryland Franchise Law, COMAR, § 14-201, et. seq. 15 Michigan Franchise Investment Law, Mich. Comp. L. §445.1501, et. seq. 16 Minnesota Franchise Act, Minnesota Statutes § 80C. 17 New York Franchise Sales Act, N.Y. Gen. Bus. L. § 680, et. seq. 18 North Dakota Century Code, Title 51, Chapter 51-19. 19 Rhode Island Franchise Investment Act, Rhode Island Code, Chapter 19-28.1. 20 South Dakota Franchise Investment Law, SDCL, Chapter 37-5B. 21 Virginia Retail Franchising Act, Code of Virginia § 13.1-557, et. seq. 22 Washington Franchise Investment Protection Act, RCW 19.100. 23 Wisconsin Franchise Investment Law, Wisconsin Statutes Chapter 553. 24 See, Indiana Code, § 23-2-2.5-10.5, Mich. Comp. L. § 445.1507a, SDCL, § 37-5B-4, Wisconsin Statutes § 553.26. 25 HRS § 482E-3. 26 See, for example, Minnesota Franchise Act, Minnesota Statutes § 80C.05. Note that the Illinois Franchise Disclosure Act of 1987, 815 ILCS 705/10, contemplates automatic effectiveness 21 days from filing, and the Maryland Franchise Law, COMAR § 14-218, contemplates automatic effectiveness 30 days after filing, but the regulators in these states routinely issue preliminary comment letters to effectively stop the clock. 27 See, for example, RCW 19.100.030(4). 28 Florida Sale of Business Opportunities Act – Florida Statutes, § 559.802; Utah Code Annotated, § 13-15-4.5.

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requirements of the law and annually file an exemption application before offering a franchise).

• For start-ups, there are one-time exemption filings that must be made in Kentucky, Nebraska and Texas.29

Once you have control over registration filing deadlines, or any exemptions, and you confirm these dates with counsel, our suggestion would be to create a list of each state’s expiration date and renewal filing date. For Hawaii, for example, the FDD must be filed within 90 days after the fiscal year end, which may require a franchisor to file by late March if they have a December 31st year end.30 Once you have determined your earliest filing date deadline, you then build your calendar to include the following (among other tasks):

• Questionnaires should be sent to management related to Item 3 of the NASAA Guidelines (see Section 1.2 below)(i.e., have they filed as a debtor in bankruptcy or been a principal officer at a company that has filed for bankruptcy; do they have pending against them an administrative, criminal, or material civil action alleging a violation of a franchise, antitrust, or securities law, or alleging fraud, unfair or deceptive practices, or comparable allegations; have they been convicted of a felony; and so forth).

• Franchise Seller Disclosure Forms31 are used to identify to state regulators, individuals who will engage in franchise selling activities within the respective state, and must be sent to, and completed by, persons who will “solicit, offer or sell” franchises.32

• Request updates for all required disclosures to comply with the Items of the NASAA Guidelines ),33 which includes obtaining Item 3 litigation updates, including but not limited to the following:ongoing litigation matters and franchisor versus franchisee litigation filed in the previous calendar year, including from affiliates); Item 6 and 7 investment fees which take accounting time to verify; Item 8 rebates which can involve confirming fees with outside vendors; Item 19 financial performance representations; and Item 20 outlet and franchisee information. You should build in to your calendar at least one month for the delivery of such items.

• Financial Statements are required to be included in Item 21. Work with your auditors to ensure they provide you with audited financials on time. Typical timing for an April 1st FDD filing might be as follows:

• January to March – Ensure auditors are working on prior year financials.

29 Kentucky Sale of Business Opportunities law, K.R.S. 367.807; Nebraska Seller Assisted Marketing Plan Act, § 59-1722, Texas Business & Commerce Code, § 51.003(b)(8). 30 HRS §482E-3. 31 NASAA Guidelines, Form D. 32 Id. 33 See Section 1.2, regarding the 2008 Franchise Registration and Disclosure Guidelines promulgated by the North American Association of Securities Administrators.

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• Second week in March – Auditor to provide management report to franchisor and draft opinion and consent.

• Third week in March - Redlined version of FDD to be provided to auditor; management rep letter provided to auditor.

• Fourth week in March - Final FDD for the April 1 filing to be provided to auditor and signed final consents delivered to franchisor.

• Send your draft to management for review and comment (i.e., build in two weeks to work through issues).

- Amendments Under the FTC Rule, a franchisor must revise it’s FDD within a reasonable period of time after a fiscal quarter if a “material change” occurred during the fiscal quarter. 34 Most state franchise laws have similar requirements, but the timing may be different.35 Not every franchise sales laws defines “material change” the same way. Generally speaking, a change is material if it would be reasonably likely to influence a prospective franchisee’s franchise purchase decision. “Material changes” typically include an increase to the fees charged to franchisees; significant negative changes in the financial condition of the franchisor; material litigation filed against the franchisor; or a significant change in the franchisor’s management or their disclosure obligations under Item 3 (litigation) or under Item 4 (bankruptcy). You should build in mechanisms for determining when a “material change” has occurred, especially for large franchisors. One example might be to attend the quarterly meeting with auditors to stay current on material business trends or to listen in on earnings calls. You might also request to be put on various email distribution lists that are sent to management to ensure you are in the best position to gauge when a matter may be deemed material to the business. . If possible, as a best practice plan for material changes (e.g. fee increases) to coincide with the annual renewal so you can reduce preparation time, the need for any updated financial information, and filing costs, as well as avoid an extra interruption to franchise selling activities. The process of planning the calendar for an amendment will be different than the annual renewal. You do not have the same obligation to refresh the entire document as you would with the annual filing. You do should send out management questionnaires and seller disclosure forms. You are permitted to update the document to reflect the material change only, but all material changes must be reflected. In addition, assuming the financial statements have not changed materially, you may not have to get the auditor’s consent for the amendment. While these allow you to produce an amendment in a shortened time frame when compared to the annual renewal, you will still need to

34 16 CFR 436.7(b) and (c). 35 For example, ILCS 705/11 requires the filing within 30 days following the end of the franchisor’s fiscal quarter to reflect any material change occurring during that quarter; Minnesota Statutes § 80C.07 requires the filing within 30 days after a material change.

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consult management and you may want to undertake a certain amount of refreshing if the disclosure that can be easily updated. 1.2. Strategies for collecting data for FDD Items On June 6, 2008, the North American Securities Administrators Association (“NASAA”) adopted the 2008 Franchise Registration and Disclosure Guidelines (“Guidelines”) which act as the set of disclosure rules for states with franchise registration and disclosure laws.36 The Guidelines adopted the disclosure requirements of the FTC Rule. As of July 1, 2008, the registration states will only accept for filing FDDs that are prepared in compliance with the Guidelines. Under the Guidelines, the FDD must consist of 23 categories (or “Items”) of information that are generally obtained from multiple sources.37 For franchisors, especially medium to large franchise systems, the task of pulling together information that is responsive to the requirements of the Guidelines must be a collaborative effort. Many prospective franchisees will want information on initial investment costs; other start-up and ongoing fees; terms of the franchise and other agreements; management and their background; exclusive territory; training obligations; the franchisor’s right to terminate the agreement; restrictions on products and sources; rebates on franchisee purchases; pending litigation; renewal and transfer rights; and cancelled and transferred franchisees. The franchisor has to disclose these material terms in a way that is fair and accurate. From year-to-year, some of this information will change and some of it will remain the same. The franchise agreement, and provisions such as the territory rights, may not change; the training program will be consistent; the royalty payment may not vary; and so forth. However, to disclose these items and represent them as being fair and accurate, you have a duty to find the right contacts in your system to verify what changes have occurred and probe and analyze their conclusions. You should also keep a log of how you obtained the information and from what sources. From the outset, it is important for management to understand the critical importance of providing franchisees with an accurate view of what they are purchasing, and the importance of maintaining the company’s good standing with state franchising regulators. Once this message is conveyed, your ability to obtain their cooperation and assistance will be greatly enhanced. For medium to large franchisors, we would suggest making a list of the information you need for each FDD item and cross referencing that list with your contacts in various departments. For example, your corporate lawyers may be able to provide you with information on corporate acquisitions, affiliate changes, changes in the list of agents for service of process and vendor rebates. Your HR department will be able to provide updated information on management changes and corporate start dates for Item 2. Your litigation team or outside counsel will be able to provide updates for Item 3. Accounting or treasury will be your primary source for confirming initial investment fees, rebates and FPRs; and I/T will be able to provide you with information on any required computer system purchase and a range of costs. By coming back to these same 36 http://www.nasaa.org/wp-content/uploads/2011/08/2008UFOC1.pdf 37 Id. This is consistent with the FTC Rule, 16 CFR 436.

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contacts year after year (or quarter after quarter), they will anticipate your inquiries. The key is to communicate to these various contacts within your system the importance of the FDD to the business and the ongoing obligation to update any material terms. 1.3. Reporting on rebates Under Item 8 of Guidelines, franchisors must report on whether they or their affiliates “will or may derive revenue or other material consideration from required purchases or leases by franchisees.” The requirement to report on rebates is of keen interest to regulators. While finding such information is not necessarily difficult, the process of understanding your core business and determining whether suppliers or vendors are offering rebates can be more time consuming than you might at first envision. Within many large franchise systems, the scope and breadth of the business may be difficult to survey. For example, most businesses contract with credit card companies to process customer payments. Those companies may charge different rates throughout the year for this service and may need to reconcile any overages by paying the franchisor. Such payments or other offering special incentives must be disclosed in Item 8. Service providers such as office supply companies (Office Max, Office Depot, Staples), delivery services (Fed Ex), beverage suppliers and so forth may offer rebates for meeting sales volumes and you should have the right contacts to determine and size and scope of any rebate program. The process of compiling rebate information can be made more efficient by using a spreadsheet designed for that purposes.38 1.4. Financial Performance Representations Under Item 19, a franchisor must make a decision about whether to disclose a “Financial Performance Representation,” or “FPR” 39, which is defined as “any representation, including any oral, written or visual representation, to a prospective franchisee, including a representation in the general media, that states expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits”40. If the franchisor does not include a formal, written FPR in its FDD, the franchisor cannot make representations to prospective franchisees regarding actual or potential financial performance of company owned or franchised units. If the franchisor decides to include an FPR in its FDD, it cannot discuss any earnings information other than that which is contained within the FPR. The franchisee and their advisors are left to make their own projections for their units based on that disclosure and company sales personnel should be cautioned not to make FPRs – orally or in writing. 1.5. Working with regulators/Keeping Current on filing procedures For the handful of registration states where you may expect to receive comments, it is obviously important to respond to any questions by examiners as soon as possible to

38 A sample Supplier Income Matrix is attached as Appendix B. 39 16 CFR § 436.5 (s). 40 16 CFR § 436.1(e),

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avoid having a prolonged dark period with no sales. There is often the tendency on the part of company management to consider the FDD to be done once filed. If you set an expectation with management that inquiries from state examiners are common, and should be handled expeditiously, you will help to lessen any anxiety if you receive an inquiry. Furthermore, franchisors should rely on experienced franchise counsel to review their filings to identify trends or “hot spots” for regulators. Experienced counsel should know what issues are being raised by regulators and can help a franchisor avoid common pitfalls. In addition, at renewal time, it is a good idea to visit the website of the state agencies that regulate franchising in the registration states for any updates to their requirements. Below is a helpful list of websites:

Registration States

Notice State

Website

California www.corp.ca.gov/Laws/Franchise/pdf/310111UFDD.pdf

Hawaii hawaii.gov/dcca/sec/registration_forms/franchise_filings

Illinois x www.illinoisattorneygeneral.gov/consumers/franchise.html

Indiana x www.in.gov/sos/securities/2806.htm

Maryland www.oag.state.md.us/Securities/info_for_franchisors5.pdf

Michigan x www.michigan.gov/ag/0,4534,7-164-48127-198444--F,00.html

Minnesota mn.gov/commerce/images/Franchise_Registration_Checklist.pdf

New York www.ag.ny.gov/sites/default/files/pdfs/bureaus/investor_protection/ Franchise%20Registration%20Information%20Sheet.pdf

North Dakota www.ndsecurities.com/registrations/details.asp?catID=3&ID=3

Rhode Island www.dbr.state.ri.us/divisions/securities/franchising.php

South Dakota x www.sdjobs.org/securities/franchise_registration.aspx

Virginia www.scc.virginia.gov/srf/bus/franch_regis.aspx

Washington www.dfi.wa.gov/sd/franchise.htm

Wisconsin x www.wdfi.org/fi/securities/franchise/bdgerreg.htm

Having an effective FDD registration process is critical to ensuring that a franchisor can continue to offer and sell franchises in compliance with laws, enabling the franchisor to lawfully enter into franchise agreements and related contracts with franchisees.

2. How to Establish Methodology for Efficient Contract Processing

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Contracting is at the core of any franchising business, from franchise agreements that contemplate long-term relationships, to supply agreements for the franchise system. Because franchisors repetitively prepare, circulate, and execute contracts, it is in the franchisor’s best interest to ensure that it has an efficient contracting process. This section will explore the hallmarks of an efficient contracting process. Webster’s Dictionary, in part, defines “efficient” as “productive without waste.”41 The efficiencies of a contracting process can manifest in a number of ways, including: reduced preparation time; reduced potential for errors; systematic compliance with laws; and reduced litigation risks. A significant way to reduce risks is to manage expectations; and a well-thought-out contracting process can go a long way to managing expectations by making sure that the appropriate agreements are in place at the appropriate times. This section will focus mostly on franchise agreements. However, with the exception of franchise sales laws considerations, the ideas and concepts discussed, from process ownership to internal communications, can be applied to virtually any type of contract the franchisor wants to systematically manage. 2.1. Process Ownership One of the initial decisions that must be made when defining a franchisor’s contracting process is “ownership.” Having a process owner is obviously important from an accountability standpoint; someone needs to ensure that the process, once implemented, is followed. But by determining the process owner before the process is designed enables the process owner to have input into what the process will look like, which will facilitate “buy in” and a smoother implementation. Who will function as the “Contracts Administrator?” Is managing the franchisor’s contracting process a “legal” function or a franchise “sales” function? Is there a different process for supply chain contracts? There are no wrong answers; but there are considerations, ranging from internal resources to whether there is a desire to build checks and balances into the process. If the franchise sales team is commissioned based on number of contracts signed, then perhaps the Contract Administrator should be part of the franchisor’s legal team. 2.2. Tracking Tools Irrespective of sophistication, tracking the contract process is important to ensure that contracts are properly approved, executed on behalf of each party, and properly retained. Tracking tools can range from something as simple as an in-file checklist, to something as complex as a cloud-based relational database accessible from computers all over the world. We will explore more sophisticated tracking tools will in the next major section of this paper. Ideally the information tracked should be readily accessible. While a start-up franchisor may be able to track contracts file-by-file, that approach is not effective for a franchisor with more than a handful of franchises. Consider that the information tracked may be

41 Webster’s New Collegiate Dictionary, 1980, G. & C. Merriam Co.

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needed for diverse purposes. By way of example, in a jurisdiction with franchise disclosure laws, the franchisor will most likely need certain information regarding its franchise agreements to prepare its disclosure materials. It will not be efficient if that information must be garnered from the respective file each year. Ideally the franchisor will use a relational database tool. A non-relational database is like a series of index cards, where all the pertinent information about a single franchise must be on a single card. In contrast, a relational database allows different types of records to be connected. For example, a franchisor may use one kind of record to track each franchised unit, and another type of record to track each of the co-franchisees. If there are 3 co-franchisees, the records for each would be linked to the unit record. Consideration should also be given to whether it is sufficient to have a current piece of information, or if historical information is also important. By way of example, if a franchisee’s mobile number changes, it may not be necessary to systematically record the franchisee’s old mobile number. On the other hand, if the same prospect is disclosed several times, the franchisor should retain information about each disclosure. Similarly, when a franchise is transferred to a new owner, the franchisor should retain information about the former franchisee, which, depending on the jurisdiction, may be relevant to disclosure law compliance (e.g. Item 20 of a U.S. franchisor’s Franchise Disclosure Document)42. 2.3. What to Track To architect an efficient contracting process, it is important to think beyond the physical document, and consider the entire relationship represented by the contract. In the franchising context this means thinking about everything from presale disclosure, to the insurance certificates required by the franchise agreement. Similarly, the entire contract lifecycle should be considered; key dates, such as agreement date, commencement and expiration should be recorded. Further, you should, at a minimum, track the information required to be presented in the FDD, especially Item 20. Information about the document form itself should be captured, such as name or type of form (e.g. “Franchise Agreement”) and version date. Tracking versions can be helpful if a franchisor ever wants to quickly determine the number of any particular form of agreement in use, such as, by way of example if the franchisor is facing litigation over the interpretation of a particular provision. The name and address of each franchisee should be captured; as should any information that would be included in the franchisor’s disclosure materials, such as, in the United States, any negotiated changes within the scope of Item 5 of the franchisor’s

42 Item 20 is a compliation of information about franchisees and franchised outlets, including outlet locations, franchisees who have left the system, the number of franchises that have transferred, been terminated, or otherwise cease operation. Item 20 is a resource for prospective franchisees who, as part of their due diligence, desire to contact current and former franchisees.

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FDD.43 Disclosure materials preparation can be simplified if the franchisor has all relevant contract information in one place. Thought should also be given to tracking the execution process. This will enable the franchisor to more easily capture whether a franchise agreement sent to a prospect for signature has been returned signed. Knowing when a contract was sent to a prospect for signature, and returned to the franchisor signed, can also be important to ensure compliance with disclosure laws.44 Consideration should be given to the types of reports that the franchisor may desire to generate, so that any information that the franchisor would like to have in the report is tracked. Perhaps, by way of example, the franchisor will want to be able to generate a report showing the time between when a franchise agreement is signed, and the outlet opens. A good starting point for designing a contracting process is to create a flow chart (illustrated below) depicting all the steps that the process will need to include. Again, think beyond the document. If the franchise agreement includes a specific territorial grant, does the franchisor routinely perform an encroachment analysis before issuing the franchise agreement, or during a post-execution site selection process? In either case, there should be an “encroachment analysis” box on the flowchart. Continuing with this example, in the box identify what information the franchisor will systematically capture, which could be as simple as “yes” to identifying the date and by whom performed. In laying out the flowchart, consideration should be given to which events are dependent on one another and which are not. For example, contract issuance should only come after disclosure, but (assuming the franchise agreement is for a specific site) the encroachment analysis may be performed either before or after disclosure, and therefore those steps are independent. The contracting process can itself be isolated, or can be part of a bigger franchise sales process.

Thank You for Your Interest

Communication

Yes

No

Encroachment AnalysisDate Performed: [Date]

Performed by: [Text]Sign-Off: [Check Box]

DisclosureFDD Date: [Date]

Date Furnished; [Date]Acknowledgement of Receipt Date: [Date]

Agreement PreparedPreparation Date: [Date]

Prepared By: [Drop Down]Agreement Date: [Date]Commencement: [Date]

Franchisee Name(s): [Obj]

Discovery DayAttended On: [Date]

Invite to Continue: [Yes/No]

No Conflict

Site Change Process Conflict

Agreement ReviewedReview Date: [Date]

Reviewed By: [Drop Down]Approved for Issuance:

[Yes/No]

Corrections Needed

Send to FranchiseeDate Sent: [Date]

F-Up Calendared: [Date]

2.4. Don’t Forget About Communications

43 See FTC Rule 16 CFR § 436(e), and NASAA Guidelines with respect to Item 5, requiring disclosure of any initial fees that are not uniform. 44 A sample Franchise Agreement Checklist is attached as Appendix D.

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As noted above, the contracting process is about much more than the physical document. It is therefore important that the process contemplate communications. It is important for the franchisor to understand that, if it is implementing a new contracting process, then it may need to revise some of the communication documents it has already been using. It is also important that the franchisor’s communications be consistent with its regulated franchise disclosure materials, and as well as the franchise agreement itself.

2.4.1. Internal Communications When designing a contract process, it is important to consider internal communications. If the execution of the franchise agreement means that the franchisor’s opening team can go to work, then the process should contemplate that internal notification. If a prospect must pass an interview before a franchise agreement will be issued, then anyone needing to know the interview has been passed should be so-informed.

2.4.2. External Communications Similarly, external communications are important, and should be contemplated by the franchisor’s contracting process. If, for example, the franchise agreement expiration date is a fixed period from when the unit begins operation, then, as a best practice, the franchisor should confirm the unit opening date and the franchise agreement expiration date in a communication to the franchisee. Another example would be that if the franchisor has a relationship with the lender, then the franchisor may want to communicate to the lender at certain points. Similarly, if the execution of the franchise agreement means that the franchisee is authorized to contract with system vendors for equipment, then the process should contemplate the franchisor informing system vendors of the new franchise relationship. 2.5. Internal Approval Process An internal approval process is a way to prevent potential problems from developing. The specific elements of an approval process will depend on the unique characteristics of the franchisor and the franchise system. From a business perspective the approval process should ensure that whoever needs to “sign-off” on a contract does so, before it is provided to a prospect. Depending on the circumstances, a franchisor that sends a prospect a franchise agreement to sign before all internal approvals in place may find itself in an awkward, or even litigious situation. The approval process is an opportunity to make sure that any prerequisites to entering the contract have been satisfied. For example, the approval process may require that a person on the franchisor’s finance team has conducted a positive financial review of the applicant. If the applicant is a corporation, the approval process may include verifying that the franchisor is in receipt of the appropriate corporate documents. If a franchisee is seeking to establish an additional outlet, the approval process may include the head of operations confirming that the franchisee’s existing operations are up to the system

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standards. Using a standardized form is an effective way to ensure that all prerequisites are satisfied before proceeding to the next phase of the sales process.45 2.6. Pre-Execution Process – Disclosure Perhaps the most prophylactic element of an efficient contracting process is a systematic means of verifying that legally-required franchise sales disclosures have been made. In the United States, federal and state franchise sales laws require that a prospective franchisee be provided with the franchisor’s current FDD46 at least 14 days prior to when the prospect signs a binding agreement or makes any payment to the franchisor.47 Other countries have similar laws, and a number of states have business opportunity laws that can be triggered by non-compliance with federal laws. The Contracts Administrator, incident to preparing any franchise agreement or other agreement within the scope of franchise disclosure laws, should verify that any requisite disclosures have properly been made, and that issuance of the franchise agreement will not be premature. The process could even include the internal steps to be taken when issuance would be premature (e.g. internal communication to sales person). 2.7. Preparation Ideally, not only will the Contract Administrator systematically record any information inserted into the franchise agreement, such as document date, but will be able to access any information previously received by the franchisor, and necessary for preparation, such as the name and address of the franchisee. An objective of designing an efficient contracting process should be to make sure that information is recorded in the franchisor’s tracking system as soon as possible, so anyone needing that information at a later point can easily access it without needing ask anyone else for that information. As a best practice, a second franchisor representative should routinely review any prepared franchise agreement before it is sent to the prospect for execution. If the franchise agreement is prepared by the franchisor’s legal team, then it would probably be good to have a business person involved in the actual sale review the franchise agreement before it is sent for signature. Even if the preparation is merely filling in the blank parts of the agreement, a second set of eyes is a good way to prevent an embarrassing situation, such as the misspelling of the franchisee’s name. 2.8. Execution Timing As noted above, it is important that, in the case of an agreement within the scope of franchise sales laws, contract execution comply with those laws. However, in designing a contract process, the franchisor should also give consideration to how its contract process fits into its overall unit development process. In particular:

45 An example of such a form is attached as Appendix C. 46 This paper does not attempt to address each of the specific instances in which a “franchise seller” may have a disclosure obligation. 47

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• The franchisor should give consideration to whether it will enter into any binding agreement with a prospect prior to completing the franchisor’s application process, and any related discovery day or prospect interview. Given the potential applicability of franchise relationship laws, it may be incumbent on the franchisor to only enter into a franchise agreement after any prerequisites, other than perhaps completion of the franchisor’s training program, have been completed.

• Given the confidential nature of the franchisor’s training program, it is incumbent on the franchisor to ensure that it enters into a franchise agreement before providing training related to the operation of the franchise. A franchisor may use a separate confidentiality agreement for this limited purpose, but will need to be mindful of the applicability of franchise disclosure laws to that separate agreement.

• For most franchisors, few aspects of the franchise relationship are as risk-laden as the period when a franchisee is obtaining financing, and making real estate decisions and commitments. It is therefore incumbent upon the franchisor to design a contract process that will ensure that the franchisor and franchisee have an agreement in place covering responsibility for such things as site selection before the franchisee makes any significant financial commitments.

2.9. Execution Process As a best practice, a franchisor should sign a franchise agreement only after the franchisee has done so. Because the franchise agreement grants a trademark license, it is critical that the franchisor know with certainty whether any franchise agreement has been fully-executed. Moreover, typically a franchisor will receive a franchise fee when the franchisee submits a signed franchise agreement. If the franchisor signs first, and the franchisee returns a signed agreement without the franchise fee, then the franchisor will need to deal with whether the execution itself was deficient; and may even need to take formal steps to terminate the franchise agreement in the absence of payment. In a jurisdiction with disclosure laws, compliance should again be considered immediately before the franchisor counter-signs the franchise agreement, in case the prospect must be legally be disclosed with materials that are more current than when the franchise agreement had been prepared. If the franchisor uses a closing statement to obtain confirmatory statements from the franchisor related to the franchise sales process, then the contract process should contemplate its preparation, dissemination to the franchisee, and receipt by the franchisor after having been signed by the franchisee. Irrespective of the particular process details, as a best practice the franchisor should methodically track the entire execution process, using an electronic tool such as a database, or a simple but comprehensive checklist.48 2.10. File Administration; and Post-Execution Process As noted above, the contracting process is about much more than the physical document. It is therefore important that the process contemplate communications, as

48 A sample Franchise Agreement Checklist is attached as Appendix D.

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well as file management. It is also important to recognize that the contracting process does not end when the contract is signed.

2.10.1. Documentation / File Management The contracting process should define what gets placed into any physical or electronic filing system. If the term of the franchise commences upon the opening of the unit, then the franchisor will need to document the unit opening date, as well as any corresponding expiration date, and, if applicable, the date by which the franchisee must exercise any option to continue beyond the initial expiration date.

2.10.2. Self Audits As a best practice, a franchisor should periodically audit its electronic records and physical files to confirm internal adherence to the franchisor’s contracting process, focusing in particular on any areas where a failure to follow the process could introduce legal risks. Most notably, the franchisor should confirm compliance with franchise disclosure laws. The audit should be performed by a person who is not responsible for managing the contracting process.

2.10.3. Records Retention Some franchise sales laws require a franchisor to retain documents relating to the offering and sale of a franchise for a specified period of time. Because the signing of a franchise agreement is the culmination of the franchisor’s selling activities, the franchisor should give thought to whether the contracting process is an appropriate vehicle to deal with those records retention requirements. 2.11. Other Agreements In most instances the franchisor’s contract processing will focus on the franchisor’s franchise agreements. However, in devising a comprehensive process, the franchisor should consider other agreements that it would like to systematically track.

2.11.1. Franchise-Related Agreements There are a host of agreements that related to the franchise relationship. Examples include:

• Product Test Agreements

• Area Development Agreements

• Personal Guarantees

• Leases

• Subleases

• Extension Agreements

• Secondary Location Agreements

A franchisor can have completely separate processes for each type of contract it enters into. However, a better approach may be to have a process that can be adapted to various contracts, particularly when those contracts add to or modify the terms of a franchise agreement. For example, if a franchisor desires to know when a particular franchise agreement expires, then it would not want to miss any date that was established by an extension agreement.

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2.11.2. System-Related Agreements There are also a host of agreements that a franchisor may enter into in connection with the system, and which it may desire to systematically process and track.

• Consulting Agreements

• Services Agreements

• Supply Agreements

Each franchise system is different, and the degree to which a franchisor will benefit from systematically processing any particular type of contract will depend on the size and complexity of the franchisor’s business, as well as the number of similar relationships it has in place.

3. Gaining Efficiencies through Technological Solutions Franchising predates fax machines, email, smart phones, tablets, the “cloud,” and cloud-based CRM solutions. We now live in a world where we can access our email over devices that fit in our pockets. Since the early days of franchising there have been significant technological changes, a number of which can be leveraged to make a franchisor and its legal team more efficient. In the last section we examined the makings of an efficient contracting process. Even if a franchisor has been successfully using its existing contracting process for years, it may benefit by reexamining that process in light of technological advances. This section explores some technologies that can enhance a franchisor’s contracting processes, as well as other aspects of its business. 3.1. Data Sharing Across Organization Data entry is laborious, time consuming, and prone to errors. It does not make a lot of sense, from an efficiency perspective, if any piece of information needs to be entered into a franchisor’s database more than once. This presupposes, of course, that the franchisor is using a database. If a multi-unit owner has ten units, and moves to a new home or office, how many records will the franchisor need to update? If the answer is any more than “one,” the franchisor has an opportunity for increased efficiencies. Ideally data should be accessible at any time from any place. Practically speaking, that means that the franchisor needs to have a database solution that can be accessed by employees over the internet. This is possible using either a database that resides on the franchisor’s own servers, and which is capable of being accessed remotely; or by using a cloud-based data storage solution. In common parlance, “cloud” refers to information housed on someone else’s servers, and accessed over the internet. Using this cloud storage model, a number of companies have created highly adaptable “Customer Relationship Management” solutions. These CRM solutions have advantages over traditional database tools and data maintained on a franchisor’s own servers:

• The CRM solutions include “software as a service” (or “SaaS”) to enable management and reporting on the data using standard web browsers.

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• SaaS is very flexible to enable customization to the particular organization’s needs.

• The data is highly secure (banks and government agencies are among the customers).

• The data is constantly replicated to ensure redundancy, so that data can be accessed even if a particular data center is off line.

• If the franchisor needs more data space it can simply pay for the additional storage space, as opposed to needing to buy a bigger or additional server.

• If a server becomes obsolete, or defective, the CRM solution provider deals with it, and the franchisor is not even aware that something was changed.

• The CRM solution has a business model that fosters constant improvements including new capabilities to maintain competitiveness.

• There are numerous third-party add-on tools available to provide additional SaaS functionality, as well as to integrate with legacy systems.

Data sharing is by itself a significant efficiency. But, let’s go a bit further, gilding the lily:

• What if there was a way for the franchisee to update the information, so that the franchisor would not need to do so? The technology exists.

• What if a lead form completed on the web was immediately inserted upon completion as a record in the franchisor’s database, and the appropriate person received an alert? The technology exists.

• What if the franchisor wanted to expose a select portion of its data to anyone surfing the web, such as unit locations? The technology exists.

Among the CRM solutions on the market are:

• FranConnect

• Microsoft Dynamics CRM

• NetSuite CRM+

• Oracle CRM

• RightNow

• Salesforce.com

• SAP 360 Customer

• SugarCRM When evaluating different CRM solutions, beyond financial considerations, the following should be considered:

• Does the CRM solution integrate with your preferred electronic signature tool?

• Can the CRM solution be connected to share data with the franchisor’s legacy systems?

• What third-party add-ons of interest to the franchisor are already available?

• Can persons who do not have extensive IT backgrounds easily make programmatic changes?

• Does the CRM solution work on mobile devices?

• Can franchisees be given access to certain information?

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• Can select information be exposed externally?

• When implementing a CRM solution, it is important to consider data security from both internal and external perspectives. While data sharing is a significant efficiency, certain data (e.g. social security numbers) should only be accessible by persons having a business-need for that information. Most CRM solutions have flexible security structures, so that information that should only be seen by a particular person or group (e.g. legal department) can be appropriately restricted.

3.2. Electronic Signatures / Digital Signatures In the early days of disclosure, in the United States, if there was no personal meeting, then the UFOC was typically mailed to a prospect. If the franchisor was lucky, the prospect would promptly return a signed acknowledgment or receipt. However, not infrequently, the acknowledgement of receipt was returned only after the franchisor reminded the prospect of the need to return it. We are living in a different world. The UFOC is now the FDD, and electronic communications can be received just seconds after being sent. The laws have evolved too. Many countries have laws permitting electronic signatures, including the United States49, Canada50, and countries within the European Union.51 The U.S. law is formally the “Electronic Signatures in Global and National Commerce Act” 52 and commonly referred to as “E-Sign.” The act defines:

The term “electronic signature” means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.

Just as a person’s “x” can act as that person’s signature, all that is required for an electronic signature to be binding, under E-Sign, is the intent to be bound.

3.2.1. Legal Effectiveness In the United States an electronic signature is as valid as a wet ink signature. The same may not be the case in other countries. From an evidentiary prospective, not all marks are the same. Just as some cases require a handwriting expert, some situations may require authentication of an electronic signature, which is one of the reasons the tools discussed below exist.

3.2.2. Tools Today there are a number of electronic signature tools available. These include:

49 Electronic Signatures in Global and National Commerce Act 15 USC § 7001 (E-Sign), et. seq. 50 Personal Information Protection and Electronic Documents Act (S.C. 2000, c. 5). 51 Directive 1999/93/EC of the European Parliament and of the Council of 13 December 1999 on a Community framework for electronic signatures. 52 15 USC § 7001(5).

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• Adobe Echosign®

• AssureSign

• CoSign

• DocuSign

• FDDPlus

• Sertifi

• Silanis

In general, these tools are designed to provide any required consumer disclosures, authenticate the signer, capture and record the electronic signature, and transmit the electronically-signed document to the parties. When evaluating different tools, beyond financial considerations, the following should be considered:

• Is the tool compliant with the laws of the countries in which the franchisor is doing business?

• Is the tool cloud-based or does it require software to reside on the franchisor’s equipment? Will the other party need any specialized software?

• Is there a version of the tool designed to integrate with the database being used by the franchisor?

• Will the tool work on a mobile device?

• What would the authentication process look like?

• References (preferably from franchisors). 3.2.3. Process

The specific electronic signature process will vary somewhat by the tool, as well as any database integrations. In general, the document will need to be set up for electronic signing, which is a rather simple process. This can be done in advance in the case of a document routinely sent for signature using the tool; or on a one-off basis. Typically an email communication will be sent to the recipient, containing a link to a webpage, where the document will reside. The recipient will either need to login, or register and create a “signature.” Depending on the sensitivity of the document, the franchisor can determine the appropriate authentication option, such as being comfortable that the message was directed to the franchisee’s known email address, requiring the entry of a separately provided access code, or even biometric telephone authentication. 3.3. Disclosure Tracking The typical franchisor will send out more FDDs, or the local equivalent, than the number of agreements it will enter into during the same period. An e-sign tool is a great way to make disclosures. A franchisor can receive an acknowledgment of receipt in a matter of minutes, instead of days or weeks. The savings associated with less paper, and fewer mailings will probably exceed the costs of the e-sign tool, while making the franchisor a bit more “green.”

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If that e-sign tool is integrated with the franchisor’s database, then it becomes even more efficient, because key information such as signature date, as well as a copy of the signed document, will appear in the franchisor’s database without the franchisor needing to take any additional action. 3.4. Unit Inspections in a Digital Age While unit inspections are an operational function, the determination that a franchisee is not in compliance with system standards is necessarily a legal issue. Imagine a technological solution that looks something like this:

(1) The franchisor’s field representative walks into a franchised unit, and opens an app on the representative’s tablet device, which immediately connects to the franchisor’s database over the internet;

(2) Based on the GPS information identified by the tablet, the app recognizes which unit the representative is in;

(3) When the representative selects the app’s “inspection” button, an inspection form opens and is populated with the name of the representative, the date, and unit identifying information;

(4) Any unique relevant information (e.g. no public restroom) is already taken into account by the inspection form;

(5) The representative, while inspecting the unit, completes the form on the tablet; (6) When the inspection is completed, the representative goes over the inspection

results with the unit manager, and has the manager sign the form on the tablet; (7) Upon selecting the “complete” button the inspection results are saved in the

database; (8) The database sends an email communication to the franchisee, with the

inspection results; (9) If the results were non-passing, a notification is sent to the legal team; (10) The legal team begins the default notice preparation using a template that pulls

inspection and other information from the database; (11) The overnight delivery shipping documentation and record are created from the

database; (12) The package tracking information is automatically inserted into the database; (13) The default is tracked in the database, and email reminders are sent to

appropriate persons at the end of the cure period. This is not the future; all of this is possible today. It can be done with a cloud-based CRM tool with mobile capabilities, with e-sign and shipping integration add-ons. 3.5. Digital Retention We are in an age where documents, including franchise agreements, can be maintained electronically. Particularly when a document has been executed electronically, there is

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no real benefit to maintaining it in a physical file. Even if the franchisor desires to maintain its physical files, there is still a benefit to having copies of contracts that can be accessed from anywhere on the franchisors network, or, even better, over the internet. A physical file can only be accessed in one place, and when someone is available to access it. An electronic file accessible via the internet, can be accessed from anywhere in the world, and at any time, even when there is nobody in the office to pull files, scan documents, and send them by email. 3.6. Notice by Email Email has become a customary way of communicating. Email is efficient, because it can be sent directly from the device on which it is composed, received almost immediately upon being sent, and it’s inexpensive. The sending and receiving devices may be ones that typically reside on a desk, or in a briefcase, handbag or pocket. Our email often goes where we go. It logically follows that communications to an email address can be a very efficient means of providing notice. Contracts typically define the acceptable manner of providing notices, and a notice given in a manner not contemplated by the contract could be defective. From a contractual perspective, there is no reason why a provision contemplating notice by email is not enforceable. Of course, depending on the type of notice, applicable law may specify requirements for notice that would not be satisfied by an email notification.53 In drafting a contractual notice provision, the same considerations apply with respect to email as apply in the case of any other type of notice. Is the notice effective when sent, or when received? Because the person transmitting an email message has control over when that message is sent, but not when it is received; and can establish when it was sent, but not necessarily when it has been received, the better approach is to specify that an email communication is effective when sent.54 What happens if a person’s email address changes? While a person’s email address could change, the same is true of that person’s home or office address. In fact, it is more likely that a person whose physical address changes will have the same email address before and after the move. Just as a notice provision can require each party to inform the other of any physical address change, a notice provision can require that each party notify the other of any email address changes. An email notice provision might look like this:

Each party shall at all times maintain an active email address to which the other party may transmit any NOTICE required or permitted by this AGREEMENT. Any electronically transmitted NOTICE shall be deemed

53 See for example, California Franchise Relations Act, Cal. Bus. & Prof. Code § 20030, requiring that a notice of termination or nonrenewal “be posted by registered, certified or other receipted mail, delivered by telegram or personally delivered to the franchisee.” 54 Wright v. Dixon, No. E2012-00542-COA-R3-CV(Tenn. Ct. App. Oct. 3, 2012) (email notice received after contractually specified cut-off time was not effective, where notice provision specified notice was effective upon receipt).

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effective immediately upon being sent. An electronically given NOTICE may be transmitted directly to the receiving party, or through an electronic document delivery service. NOTICE electronically given, if properly addressed, shall be effective without regard to actual receipt, unless receipt was prevented due to a technical issue or malfunction within the control of the party giving NOTICE. The initial email address for each party is set forth on the first page of this AGREEMENT. If either party changes its email address, then that party shall immediately, by email NOTICE, provide its new email address to the other party.

A franchisor that wants to avoid dealing with occasional email address changes can eliminate that dynamic by establishing a franchisor-hosted email system where the franchisor assigns each franchisee an email address. 3.7. An On-Line Franchise Operations Manual We are living in a world of on-line content and e-readers; a world where individual have reference materials, like dictionaries, on their smart phones; and where people entering the workforce may be more adept at navigating on-line content than using a book index. Given the current state of technology, a franchise operations manual can be, and perhaps should be, on-line. An on-line manual has some significant advantages compared to the traditional printed manual, including:

• Ease of Updating: It is much simpler to revise a web page than it is to print, send and document the sending of new pages to every franchisee.

• Searchable Content: A user not quite sure where to find certain information can search the manual’s content as simply as using Google® to search the web.

• Analytics and Activity Tracking: Paging through a printed manual does not create a record of who looked at what and when. An on-line manual can be set-up to track this information.

• Selective Access: A franchisor offering more than one version of its concept (e.g. standard and express versions) can selectively expose relevant portions of its manual to particular users. Similarly, a franchisor can selectively expose content based on whether the particular user is a franchisee, the franchisor’s employee, or the franchisee’s employee.

Most legal considerations applicable to a printed manual are no different in the case of an on-line manual (e.g. vicarious liability analysis based on franchisor’s right to control franchisees’ hiring practices). While these issues will not be discussed here, as a best practice the legal department should use the transition of a printed manual to one that is on-line as an opportunity to review the entire manual to ensure that all related legal risks are properly managed. There are, however, some issues that need be considered in the context of an on-line manual, as well as some additional issues that arise because the manual is on-line.

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Therefore, the franchisor’s legal department will have a significant role in the creation of the on-line manual, giving consideration to the issues discussed below.

3.7.1. Whether the Franchise Agreement Contemplates an On-Line Manual

At the outset legal counsel will need to determine whether the provisions of its franchise agreements’ can reasonably be construed as giving the franchisor the latitude to provide an on-line manual. If the relevant language does not support an on-line manual, then the franchisor can still transition to an on-line manual, but should plan on printing the on-line content for any franchisee who requests a hard copy. Of course, the franchisor should make sure that future franchise agreements expressly give the franchisor the right to provide an operations manual in the medium of the franchisor’s selection.

3.7.2. Intellectual Property Protection and Vendor Contract Issues The franchisor’s legal counsel will need to consider intellectual property issues and other contractual matters that could become important over the course of the relationship with a vendor retained to create and host an on-line manual.

• Works for Hire: A vendor in the business of preparing and hosting web-based manuals will have a considerable interest in protecting the intellectual property associated with the on-line functionality of the manual. However, it is important that the agreement retaining the vendor’s services make clear that all substantive content of the manual is owned by the franchisor, and that the manual is a “work for hire” under copyright law.55

• Confidentiality: The vendor agreement should prohibit the vendor from disclosing the content of the manual to any third party. While the vendor may host the manual, the franchisor must maintain the right to determine who has access to all or any part of the manual.

• Ease of Dissemination: There are a number of technical means of disabling standard printing and similar functionality to reduce the potential for unauthorized copies of portions of the manual. However, just as a person can inappropriately photocopy a paper-based manual, a determined individual can find a way to copy portions of an on-line manual. On the other hand, a franchisor can have certain session identifying information display on each web-page forming a part of the manual, which will enable the franchisor to identify the user and session date. This information may act as a deterrent to inappropriate copying, and will be evidence of willful conduct if the identifying information is obscured.

• Harmful Code: Because franchisees, as well as the franchisor, will be accessing the on-line manual, the franchisor should insist that the vendor represent and warrant that its servers and systems are and shall remain free of harmful code and malicious code, including code commonly referred to as “viruses” “Trojan horses” and “worms.”

55 17 U.S.C. 101.

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• Indemnification from Third-Party Claims: Because the on-line functionality of the manual may be subject to patent claims, the franchisor should require that the vendor indemnify the franchisor and its franchisees from any patent infringement claims related to the proper use of the on-line functionality furnished by the vendor, as well as any costs necessary to modify or move the manual to the extent necessary to remedy any actual infringement. The scope of the vendor’s indemnification obligation should also extend to harm caused due to a breach of the vendor’s warranty that its servers and systems shall remain free of harmful code and malicious code.

• Pricing Structure: There are a variety of pricing models that could be used for an on-line manual. These include pricing per licensed user, pricing per user session, or a flat rate per year. The legal department should help the franchisor determine whether a particular pricing model makes sense for its franchise system. As a best practice the vendor contract should contain a specific price increase formula (e.g. annual increases tied to CPI; 2% per year; etc.) to ensure that a pricing model that makes sense at the outset does not become too expensive in the future.

• Plan for the End: Just like death and taxes, the end of any contractual relationship is a certainty. In addition to owning the content, the vendor agreement should require that, in connection with any ending of the relationship, the vendor must provide the manual content to the franchisor in a format that is easily movable to another vendor, and, could obligate the vendor to reasonably and in good faith cooperate to assist with the transition.

3.7.3. Access Within the Franchised Outlet It is not unusual for a franchisor to require that its paper-based manual be at all times maintained, securely, within the franchised outlet. The franchisor may also require the franchisee or its manager to use portions of the manual to train the franchisee’s employees. Not only is it important for the franchisor to consider whether accessing an on-line manual may present challenges that a printed manual does not, but there are legal issues if the franchisor creates a set of dynamics that make it difficult for a franchisee to carry out its obligations. By way of example, if a QSR franchisor requires that its franchisees to use the manual to train employees how to prepare recipes, but not every outlet has access to the internet, then the franchisor will need to anticipate these dynamics, and address them through some alternative means, such as providing a separate recipe book.

3.7.4. Password Management The franchisor or its on-line manual vendor will need to establish a system for assigning user names and passwords. Of particular importance is ensuring that access is disabled whenever franchise ownership changes, or when an authorized user’s employment ends (e.g. a franchisee’s manager). While theoretically a group of persons can share a user name and password, as a best practice every person should have a separate user name and password, to enable person-specific tracking, and person-specific disabling. Note also that, in some instances, a shared user name and password may violate the agreement between the franchisor and the on-line manual provider (e.g. if fee structure is based on number of authorized users).

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3.7.5. Downloadable Content If the franchisor permits users to download manual content to computers or other devices, then the franchisor will need to consider the precautions and procedures it will implement to ensure that the downloaded content remains secure, and to prevent access to the downloaded content once the user is no longer part of the system. To some degree the protections may take the form of traditional contract language as opposed to technological solutions. But there are ways to programmatically disable device functionality under certain pre-defined conditions (e.g. if the user fails to log in with device for a certain number of days).

3.7.6. Manual Updates As noted above, it is much easier to update an on-line manual than it is to update a paper-based manual. However, because the franchisees won’t get the new content in the mail, the franchisor will need to establish a process to inform franchisees when changes are made, and provide a reasonable period of time for the franchisee to come into compliance with the new or revised requirement. Ideally, at time of log-on, the on-line manual application will also inform each user that a change has been made, and the message will remain in place until the particular user accesses the revised content. It will also be important for the franchisor to be able to establish the exact content of the manual at any particular point in time, in case there is any question about whether a particular set of circumstances represented a deficiency on a particular date.

3.7.7. Page Designations to Enable Citation / Archival Because the manual will establish “system standards” that, if not complied with, would give the franchisor good cause to declare a breach, each page of the on-line manual should be numbered or otherwise designated in a manner that will enable a notice of default or other legal communication to reference specific portions of the manual. Ideally each page will also contain a last revision date, so that if a particular deficiency was observed prior to the last revision, then the person preparing the notice can access and properly refer to the prior content. It is also important for the franchisor or is vendor to have a process in place to replicate the entire manual, as of any specific date, for litigation purposes.

3.7.8. FDD Content The first part of this paper discussed effective FDD registration and amendment planning. Even if existing franchise agreements contemplate an on-line manual, the implementation of an on-line manual will likely have an impact on FDD preparation.

• Item 7: The initial investment tables and the FDD cover page will need to be updated if the initial investment costs change because the franchisor is requiring franchisees to obtain equipment and/or internet access to facilitate access to the on-line manual.56

56 16 CFR § 436.5(g), requiring the franchisor to list, in a table format, the initial investment range of the franchise being offered.

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• Item 8: While ideally the on-line manual will be accessible from any platform using any common web browser, if for some reason the franchisor insists that the franchisee purchase a particular computer or device from a specified source, then the franchisor will need to identify the requirement in Item 8.57

• Item 11: The franchisor will also need to make sure that any required equipment and software is identified in Item 11. If the franchisor includes the manual table of contents, as opposed to providing access to its manual during the franchise sales process, then table of contents will need to be revised to reflect the on-line manual’s organization. Identifying the particular number of pages may be challenging given the nature of on-line content. Reasonable options include a page count based on a printed copy of the manual, or determining the number of pages based on the number of words that would typically fit on one page of a printed manual.

4. Strategies for Resolving Franchise Disputes In-House There are several high profile examples of franchise disputes that have made the news in recent years and have led many in the franchise industry to ask, “Isn’t there a better way?” While a franchisor, to prevent the loss of its trademark, has a legal need under the Lanham Act58 to control the quality of the goods and services sold under its trademark, and certainly has an incentive to do so from a business perspective, the franchisor should be guided by principles of fairness and consistency as it develops its approach to compliance with system standards and policies. This section will briefly address some of the best practices for resolving – and avoiding – franchise disputes internally. 4.1. Establish Franchising Standards to Set Expectations Every franchisor should have as its cornerstone a set of franchise standards upon which franchisee performance is measured. The franchise agreement alone is generally not sufficient to set forth the system’s expectation for meeting standards and performance. When looking at financial and operational success there should be a detailed set of criteria upon which the franchisee is measured. As set forth in a recent Franchise Law Compliance Manual article:59

W]hat does ”adequate financial performance” mean? Is there adequate capital to handle the ups and downs of the yearly business cycle? When should reinvestments be made to the physical plant? What does a proper training program look like? Franchising standards should be developed to answer these questions.

4.2. Establish a Business Review Program

57 16 CFR § 436.5(h), requiring the franchisor to, in Item 8, identify, among other things, any sourcing restrictions imposed on the franchisee, including any required sources of equipment. 58 11 U.S.C. § 1127 (Lanham Act, Section 45) (“A mark shall be deemed ‘abandoned’ … [W]hen any course or conduct of the owner, including acts or omission as well as commission, causes the mark … to lose its significance as a mark.”). 59 Brian Cole, Andra Terrell, John Richardson & Sandra Wall, Franchise Operational Issues, in Franchise Law Compliance Manual, p. 290 (Jeffrey A. Brimer ed., 2d ed. 2011).

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Depending on the franchise term, it may be advisable for your system to set regular meetings with franchisees to review their progress against the set of franchise standards that have been developed for all franchisees. The decision of whether to renew a franchise term should be, and often is, determined with regard to how well a franchisee is performing financially, but by building a robust set of franchise standards upon which performance is measured on several levels, and by reviewing a franchisee’s progress against those standards on a regular basis, you accomplish two goals. First, you provide the franchisee with regular feedback and with measurable goals to be achieved. A franchisee wants to know where their opportunities lie, and where the franchise system can be stronger. Scheduling a regular business review (i.e., once a year) gives the franchisee an opportunity to hear from management about what they can do better to drive the business forward. Second, in the event the franchisee is not succeeding, it provides them with adequate notice of their shortcomings and together the parties can set the stage for resolving disputes before a situation becomes dire.60 A good business review program provides that element of communication that is essential to a successful partnership. 4.3. Develop Assistance Programs for Franchisees To the extent feasible, providing financial assistance to franchisees who have seen a loss in their business due to factors beyond their control establishes a tone of partnership and conciliation. Financial assistance can come in the form of reduced royalties or rent payments to help offset the franchisee’s loss of cash flow. While the strength of the franchise system, and its size, will often dictate whether such a program is feasible, franchisees will be in a better position to withstand the ups and downs of their local competitive marketplace and will be less likely to see the franchisor as the problem. Some franchisors may want to consider temporarily waiving a franchisor’s obligation to make marketing fund contributions. Because some franchisees may legitimately feel that a non-contributing franchisee is getting a free ride at the expense of the other franchisees, instead of waiving the marketing fund contribution obligation, the franchisor desiring to relieve a franchisee of that particular financial burden should contribute an amount to the fund that would otherwise have been contributed by the franchisee. In this way the franchisor, as opposed to the fund, will absorb the financial impact of the arrangement.61 Irrespective of the particular assistance program, as a best practice the franchisor should ensure that whatever assistance it agrees to provide is memorialized in writing, to ensure that there is subsequent misunderstanding concerning the limits of the relief

60 See, Travelodge Hotels, Inc. v. Elkins Motel Associates, Inc., 2005 WL 2656676 (U.S. Dist. Ct., DNJ Oct. 18, 2005) (noting that under extreme circumstances, inconsistent quality assurance inspections can constitute a breach of the implied covenant of good faith and fair dealing). 61 A sample marketing fee waiver is attached as Appendix E.

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that the franchisor was willing to provide, or the limited, specific circumstances under which the franchisor had been willing to provide relief.62 4.4. Communicate Expectations to Franchisees Early When Performance Lags;

Document Communication From a legal and business perspective, notice and communication are key determinants of whether a dispute can be settled early or whether the dispute leads to litigation. Depending on whether the franchisor has the resources, it would advisable to document all instances in which a franchisee’s performance – whether it’s operational or financial – has fallen below minimum standards. When a franchisor looks to default or terminate a franchisee under the franchise agreement, the franchisor should ask how a court would view the dispute and whether the franchisee had adequate notice of the problem and was given adequate time to cure. If the franchisor stays silent when a franchisee fails to meet minimum standards, then the franchisee may allege that the pattern and practice of past dealings waives, modifies or estops the franchisor from enforcing their system standards. By addressing the deficiency directly, the franchisor can avoid any confusion about what is required to comply with system standards. 4.5. Adopt a Collaborative Model While the franchisor defines the business model, it would make sense in any franchise system for management and franchisees to develop a partnership that involves franchisee input on key business decisions and the formulation of franchising policies. While each side has its perspective, putting in place committees and a formal deliberative process whereby franchisee input is sought will help a franchisee system avoid an unexpected sea change that can alter a franchise system. While respect is an obvious hallmark of any good relationship, building a system of checks and balances with franchisee participation on system decisions will help lessen the number of internal disputes and lead to a stronger business. 4.6. Give Franchisees an Opportunity to Exit System by Selling Franchise with

Value If a franchisee is not performing at minimum acceptable standards, and a decision is made to not renew the franchise relationship when the current franchise term expires, it would make sense to allow the franchisee a certain period of time in which to sell its franchise to another franchisee for value. This may include committing to another buying franchisee that it will receive a new franchise term upon the sale of the business. Nothing causes more turmoil for a franchise system than a franchisee who believes it has been wrongly denied a renewal of its franchise, and would leave with nothing but their tangible assets to sell. By giving a franchisee the opportunity to exit the system with value, the franchise may be transferred to an operator who meets the system standards and the franchisor is in the position of having avoided a legal battle with the

62 See, Crown Central Petroleum Corp. v. Waldman, 515 F. Supp. 477, 484 (U.S. Dist. Ct, MPA 1981) (gas station operator contended that contractual obligation in dealer agreement was not material, because supplier had previously waived that provision).

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current operator while continuing the business relationship with a franchisee who meets – and hopefully exceeds – system standards.

5. Budgeting: The Ins and Outs of Accruals and Planning63 As a cost center rather than revenue producer, legal departments often encounter pressure to limit or decrease their budgets. In contrast, well-crafted documents, policies and strategies often save franchisors significant dollars over time. It is crucial that whether an organization employs in house counsel or external counsel, the lead administrator understand the business goals and issues of the organization. There will always be unanticipated legal expenses, but these can be minimized through the management of risk and planning. 5.1. The Givens: FDD Renewals and Amendments The primary goal of a franchise legal department is to maximize the amount of time that the franchisor is able to sell its concept. Beyond minimizing the number of hours that annual renewal preparation requires through the efficiencies afforded by technology, it is advisable that the administrator of the FDD be intimately involved in the strategic decisions of the business. Involvement affords the administrator the ability to advise management when the strategy constitutes a material change, to plan for an amendment and to execute it within the permissible time frame, thereby minimizing “black out” periods. Various factors, and in particular, material changes, will influence the number of amendments a franchisor will file during any given year. Material changes may include new litigation or changes in franchise program terms. Outside of the typical amendments to the FDD, there are any number of corporate issues that can impact the FDD. Examples could include:

• Acquisitions of competitors.

• Changes to the corporate structure.

• Introduction of new concepts. 5.2. Litigation Strategy: What are Your Company’s Chief Goals for Litigation? Beyond the transactional aspect of managing a legal department is the litigation aspect which is more difficult to anticipate and manage and can be exponentially more expensive. Similar to a franchise system defining it’s distinguishing characteristics and mandating them through its standards and operating manuals, so should your litigation strategy be defined. Litigation strategy will vary by franchisor and be influenced by any number of factors including but not limited to economic factors, competition, the maturity and type of concept, the value of the brand name, etc. For example:

63 The Association of Corporate Counsel is a good information resource with respect to in-house legal department budgeting. Its website address is: www.acc.com.

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• The franchisor of a well-known national brand may take a more aggressive approach to trademark enforcement than a lesser known brand with a competitor in an undeveloped market.

• The franchisor of quick service restaurants may take a more aggressive approach to enforcing supply chain adherence than a franchisor whose product specifications are less stringent.

• The franchisor of a mature concept with many competitors may take a more aggressive approach to non-compete enforcement to maintain market share than the franchisor of a new concept with little competition.

Few franchisors have the wherewithal or appetite to fully enforce all of the provisions of their franchise agreements all of the time. Prioritization of the franchisors strategy and goals, which can and will change over time, is a key step in managing litigation expenses. 5.3. Things you Can’t Anticipate: Third Party Lawsuits, Etc. As with the adage “the best defense is a good offense” a great deal of litigation can be avoided with the tracking and auditing of information as well as the institution of processes that reach all functional areas of an organization. Key to the effectiveness of these processes is to educate staff with the business perspective behind the legal issues. Even with the best processes and education it is nearly impossible to predict all legal expenses. Possible unanticipated litigation might include:

• Vicarious liability claims based on alleged fraud on the part of a franchise member.

• Accidents or negligence caused by the franchisor’s employee.

6. Effective Management of Outside Counsel Many in-house lawyers and business people often feel that the job of managing outside counsel is a full-time job itself. Outside attorneys are hired to make their clients’ lives easier and to add a level of expertise that may not exist on the in-house staff or they may act as a smaller company’s primary counsel. The problem, of course, is to make sure you are incenting outside counsel to work as effectively as possible while keeping fees under control. Lawyers rates have increased over the past 15 years, but their clients’ willingness to continue to pay exorbitant fees has waned. According to the 2012 Chief Legal Officer (CLO) Survey from Altman Weil, which surveyed over 200 general counsel about their outside lawyers, “CLOs continue to express deep skepticism about law firms’ willingness to change their service delivery model, rating firms’ seriousness about change at a median 3 on a 0 to 10 scale for the fourth year running.” In an article in The American Lawyer (Catherine Dunn, Survey Shows In-House Counsel Challenging Firms on Value, Service (Nov. 7, 2012)), CLOs were identified as wanting to see greater improvements in several keys areas including cost reductions, non-hourly based pricing structures, more efficient project management and improved budget forecasting.

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With the trend turning to alternative fee and billing structures – and rightly so – this section will address some practical tips for getting the most from outside counsel at an attractive price. 6.1. Sign a Scope of Representation Letter Every company should develop a standard attorney hire letter that governs the terms of the engagement and sets forth the fee structure. Among others items that should be addressed, the letter should state:

• The attorney has no conflicts in representing your company;

• The manner in which billings will be invoiced (i.e. monthly) so you have a regular interval to monitor fees;

• How out-of-pocket expenses and other services (i.e., faxes, copies, overnight mail) will be paid;

• The number of attorneys who can participate in the engagement and attend events such as court hearings and depositions;

• The firm must check with you before conducting legal research that may be unnecessary or which your legal department has already conducted;

• A reasonable time period for submitting pleadings and other documents to you for review prior to submission (i.e., you must receive them seven days before they are due to be filed);

• Ownership of the materials prepared for your company constitute your legal property; and

• Outside counsel is obligated to your standards of business conduct. A well-drafted representation letter sets the tone of your business relationship and can help you and counsel avoid unnecessary confusion. 6.2. Use Firms that Understand and Have Learned Your Business Model In the Altman Weil survey referenced above, CLOs indicated that when it comes to influencing their hiring decisions, what mattered most was a demonstrated understanding of their business and industry. Indeed, a firm that has deep knowledge of your business or has a proven expertise in the area of law that most directly affects your business has a big advantage. However, you may be in an industry that firms do not practice in often (i.e., that have a more niche focus, or your particular corporate practices are nuanced and outside of a law firms general practice). It is becoming an accepted practice for corporate clients, and corporate legal departments, to demand that clients attend business trainings, read and review background materials and learn about their business at no cost. Outside counsel should be willing to invest in your relationship by taking the time to expand their knowledge of your particular business and you should feel it is acceptable to provide counsel with materials that they should review and learn at no cost, especially if they plan to provide you with service on an ongoing basis. 6.3. Develop a Deep Bench

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Outside counsel’s willingness to accept certain conditions is obviously contingent on their leverage in the marketplace. If they are the only law firm that has an expertise to service your needs, they may charge more for that expertise. However, in most industries, there are many law firms that can do the job and do it well. The key is to invest your time – i.e., meet with several firms and start some firms with smaller projects to gauge their service level and their ability to control costs. By creating relationships with many firms, and insisting that they each understand and learn your business, you will be in a better position to leverage your power as the client and insist on excellent service at a fair rate. 6.4. Strategies for Controlling Costs There are several strategies for controlling costs, but they all require you to be a skillful project manager. If you are able to negotiate a flat or alternative fee structure, it can allow you to control costs and set the expectation with management for your outside legal budget. However, an even better arrangement might be to have your counsel charge by the hour, but cap the fees at a reasonable limit. For example, legal fees for a real estate/development project may never exceed $15,000, but could be much lower depending on how thorny the permitting and land use and zoning issues are and the time spent. The benefit to this approach, as opposed to a flat fee arrangement, is the firm is incented to continue providing quality service because there are fees yet to be earned. You might also consider a bonus for a successful result. You should insist on a few additional practices:

• Require outside counsel to provide an exact accounting of their time (i.e., measured in .25/hour) with a description of the legal work performed;

• Insist that the relationship partner contact you as the bill rises at certain intervals (i.e., as the bill increases every $10,000, the partner should provide you with a status report);

• Insist that the law firm assemble an engagement team that includes paralegals and administrative staff that will perform routine administrative functions at a reasonable per hour rate; and

• For ongoing litigation or other matters, if costs exceed the budget for a task, ask the firm to accept a reduced percentage of its fees upfront with the rest going to a hold-back pool to be paid later if the firm meets certain success metrics.

7. What They Didn’t Tell You About Running a Franchise Legal Department The primary task of a franchisor’s legal department is typically to develop and maintain FDDs such that the franchisor can sell franchises and generate revenue. A contract administrator can expect to interact with the development or sales department on a regular basis to ensure compliance with disclosure rules, supply franchise agreement packages, review and file promotional materials, etc. However, also critical to a franchisor’s ability to continue to sell franchises is the franchise communities’ success which a franchisor would argue is tied directly to compliance with the franchise standards. Effectively managing these standards requires that a compliance officer be integrally involved in the day-to-day interaction with operations, technology, marketing

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and other franchisee facing departments to ensure that there is adherence to standards and if not, that proper actions and remedies are sought on a consistent basis. 7.1. Resources Effective management of a franchise legal department requires access to a variety of legal advisors who specialize, at a minimum, in the following areas:

• Transactional

• Litigation

• Intellectual property (trademarks and patents) Franchisors expanding into international markets will require counsel specializing in international law. In addition, as franchise systems encounter franchise members with financial difficulty will require counsel specializing in bankruptcy. 7.2. Beyond the FDD and Franchise Agreements A franchisor’s legal department is also tasked with the review and drafting of documents beyond the franchisor-franchisee relationship. This myriad of topics might include:

• Vendor/supplier contracts

• Non-disclosure/confidentiality agreements

• Facebook contests/sweepstakes

• Broker network contracts

• Website terms and conditions

• Equipment reseller agreements Conclusion While every franchised concept is unique, the nature of franchising necessarily means that franchisor legal departments routinely encounter many of the same situations and circumstances, from FDD preparation to outside counsel management. A franchisor can ensure that its franchise administration program is efficient and effective, and leads to compliance with applicable laws, by carefully crafting procedures for routine and recurring situations.

Appendix A – Page 1

FDD Preparation Timeline

Task Department responsible Due date

Updates to Item 20 and Exhibit C-both divisions Compliance 18-Feb

Revisions to equipment schedule-print Technology 18-Feb

Revisions to equipment schedule-sign Technology 18-Feb

Revisions to supplemental disclosure-both divisions Development 18-Feb

Updates to projected marketing expenditures-sign Marketing 18-Feb

Updates to projected marketing expenditures-print Marketing 18-Feb

Updated training schedule and course content-both divisions Operations 18-Feb

Updated software expenses-both divisions Technology 18-Feb

Projected openings by state-both divisions Development 18-Feb

Department specific program updates-both divisions Department heads 18-Feb

Update and develop prospective earnings claims Compliance 18-Feb

Updates to royalty schedules Accounting 18-Feb

Update stats for number and volume of acquisitions/number of completed MatchMakers-both divisions Accounting 18-Feb

Updates to head of NAC/FAB contact info Marketing 18-Feb

Revisions to initial investment schedule-both divisions Development 18-Feb

2012 total revenue and income from suppliers Accounting 18-Feb

2012 average center sales-sign division Accounting 18-Feb

2012 income statement and 2013 budgets for all ad funds-both divisions Accounting 18-Feb

Review of advertising materials reflecting new fees and earnings claims to be filed in registration states Compliance/Development/Accounting 1-Mar

Update of officer/director questionnaires Compliance 1-Mar

New York verification form/annual report Compliance 1-Mar

Review first drafts of amended FDDs VP Compliance 4-Mar

Appendix A – Page 2

Review by master regions and leadership team Masters/Leadership 11-Mar

Final advertising materials reflecting new fees and earnings claims to be filed in registration states due Compliance/Development/Accounting 14-Mar

Complete state franchise applications and request checks for filing fees Compliance 15-Mar

Master region and leadership team comments due Masters/Leadership 16-Mar

Review final draft VP Compliance 18-Mar

Audited financial statements for 2012 Accounting 22-Mar

Executed auditors consent form Accounting 22-Mar

Revoke unaccepted FDDs Compliance 23-Mar

Restrict access to FDD site Compliance 23-Mar

FILE FDDs Counsel 23-Mar

Update development websites to reflect new fees and earnings claims Development Post filing

Update Validation Day presentation and materials and webinars Development Post filing

Review of new documents with development staff VP Compliance Post filing

Distribute information on new fees to staff VP Compliance Post filing

SBA registry update Counsel Post filing

Upload new FDDs to FDD site Compliance Post filing

Confirm state approvals and communicate Compliance Post filing

Unrestrict access to FDD site Compliance Post filing

Make reference copies of new FDDs for management and development; post to SharePoint Compliance Post filing

Appendix B – Sample Supplier Income Matrix

Appendix B

BILLED BY FRANCHISOR

Includes programs and products that the franchise members pay us directly for. Item Department 2012 Total

Ecommerce Technology MarketBuilder Marketing Equipment Technology Software Technology Trade show rentals Marketing Marketing materials Marketing Market Analysis Marketing Marketing Insider Marketing Canadian MailDirect Marketing

BILLED BY THIRD PARTIES VENDORS WITH FRANCHISOR RECEIVING COMPENSATION Includes programs and products that the franchise members pay to a third party vendor through which we receive compensation.

Item Department

Cost per item

How we’re paid 2012 Total

Referral program

Technology

eg. 5% of amount billed to franchisees; 2 cents per record

Constant Contact Marketing Packaging Technology List suppliers Marketing

Appendix C – Internal Prerequisite Form

Appendix C - 1

APPLICANT AND TERRITORY SUMMARY CANDIDATE INFORMATION Candidate(s) for review: Spouse (indicate if non-operating): Currently

employed:

Additional partner: Franchise Development Manager Brand and Business Type for Consideration

Allegra MatchMaker Signs Now MatchMaker

Allegra Start up Signs Now Start up Allegra Resale Signs Now Resale REQUIRED DOCUMENTS Franchise Application _______ Item 23 Receipt _______ Resume _______ Two previous year’s tax returns _______ Financial statements _______ Personal Profile _______ Credit Report _______ Background Check _______ DD214 for Veteran discount _______ DEMOGRAPHICS New Territory/Resale Location (describe)

Business count:

Population:

Number of independent print/sign shops in market area:

Describe competition in the market: FINANCIAL QUALIFICATIONS Franchise fee: Veteran: Working capital: Net worth: FUNDING PLAN – How will the investment funding be executed? Indicate all sources of funds that will be drawn from to support the candidate’s financial plan.

Appendix C – Internal Prerequisite Form

Appendix C - 2

NETWORK INFORMATION Sign and print shops currently in network within 30 miles

Sign:

Conflicts with exclusive territories Centers listed for sale in market Distressed centers in market If MatchMaker, is there a current owner on the Acquisition Program?

Franchise members in territory with FA who have not opened or identified a business.

FEEDBACK ON MARKET Regional Operations Director: Development Coordinator:

DEAL NARRATIVE (Development Manager Summary)

Appendix D

FRANCHISE AGREEMENT CHECKLIST INDENTIFICATION File Name Brand Location Center ID Number FRANCHISE AGREEMENT DOCUMENTS SENT RETURNED

Franchise Agreement (2) _____ _____ Exhibit A (Legal Entity) (2) _____ _____ Exhibit B (Insty-Prints Rider) (If applicable) (2) _____ _____

Exhibit C (Collateral Assignment of Phone Number) (2) _____ _____ Exhibit D (Guarantee and Assumption of Obligations) (2) _____ _____ Exhibit F (Representations & Acknowledgement Statement) (1) _____ _____ Exhibit G (Advantage Addendum) (2) _____ _____ Exhibit H (MatchMaker Addendum) (2) _____ _____ Exhibit EFT Authorization (1) _____ _____

State Riders (If applicable) Illinois _____ _____

Maryland _____ _____ Minnesota _____ _____ New York _____ _____ North Dakota _____ _____ Rhode Island _____ _____

Washington _____ _____

RELATED DOCUMENTS Mutual Release of previous owners (for resales) _____ _____

Purchase agreement (for resales and MatchMaker) _____ _____

FINANCING SBA Addendum (If applicable) _____ _____ 401(k) Addendum (If applicable) _____ _____

Appendix E

Temporary Marketing Fee Waiver

1. This Temporary Marketing Fee Waiver (this “Temporary Waiver”) is dated [DATE OF WAIVER] (the “Waiver Date”), and is entered into by and between:

1.1. [NAME OF FRANCHISOR] (“Franchisor”); and

1.2. [NAME(s) OF FRANCHISEE CONSTITUENTS] (individually and collectively the “Franchisee”)

2. This Temporary Waiver temporarily modifies the Franchise Agreement dated [DATE OF FRANCHISE AGREEMENT], pertaining to Outlet Number [NUMBER] (the “Outlet”).

3. Franchisee has documented to Franchisor that Franchisee, through no fault of either Franchisee or Franchisor, is presently experiencing severe financial hardship in connection with the operation of the Outlet.

4. In order to ease Franchisee’s financial hardship, while under no obligation to do so, Franchisor hereby temporarily waives the monthly “Marketing Contribution” (“Monthly Contributions”) for a period of twelve calendar months (the “Waiver Period”); during which time Franchisor will contribute an amount to the System Marketing Fund sufficient to cover Franchisee’s Monthly Contributions:

4.1. Starting [FIRST CALENDAR MONTH, YEAR], and

4.2. Ending [FINAL CALENDAR MONTH, YEAR] (the “Final Month”).

5. Except as otherwise contemplated by this Temporary Waiver, Franchisee will not be obligated to pay Monthly Contributions during the Waiver Period. Franchisee will resume paying Monthly Contributions immediately following the Final Month, irrespective of whether Franchisor timely begins invoicing.

6. Franchisor may cancel this Temporary Waiver if Franchisor formally declares Franchisee to be in default of its obligations under the Franchise Agreement at any time during the Waiver Period, in which case Franchisee will be obligated to pay Monthly Contributions that become due after the cancellation date. Otherwise this Temporary Waiver will continue until it expires at the end of the Final Month.

7. Franchisee acknowledges that this Temporary Waiver does not in any way modify Franchisee’s other financial obligations under the Franchise Agreement, including, if applicable, Franchisee’s obligation to pay Local Marketing Contributions. Franchisee further acknowledges that, irrespective of any future circumstances, nothing in this Temporary Waiver shall imply an obligation on the part of Franchisor to subsequently provide Franchise with any relief from any of its obligations under the Franchise Agreement.

Franchisee: (signature)

Please print name:

Accepted by: (on behalf of Franchisor)