Andrew Sherman | The Legal Side of Franchising

These days, Andrew Sherman is a lawyer advising entrepreneurs looking to grow through the franchise model or invest in franchise businesses. It’s a topic this partner at Seyfarth Shaw LLP and expert on business growth knows well from personal experience as a young man.

In this episode we switch things up a bit and talk about how to determine if your existing business might be worth franchising or licensing, including three main factors you must consider.

We also talk about why the past stereotypes about franchisees have been blown out of the water in the current era… and what the new type of franchise relationships that are emerging mean for you if you invest in this business model.

Tune in for details on all that, as well as…

  • What today’s low interest rates mean for small businesses seeking funding
  • The difference between franchising and licensing
  • How to determine if franchising is a fit for your career reinvention
  • What you must consider as you determine your role in a potential franchise
  • And more

Listen now…

Mentioned in this episode:

Transcript

Giuseppe Grammatico: Welcome to the Franchise Freedom Podcast. I’m your host Giuseppe Grammatico, your franchise guide, and today we have a very special guest. Today we are speaking with Andrew Sherman. Andrew is a partner and chair of the corporate department in the Washington DC office of Seyfarth Shaw with over 850 lawyers worldwide. He is the author of 26 books on business growth and he has appeared as a guest and commentator on all the major television networks, as well as numerous regional and local television broadcasts and national and local radio interviews.

In 2003, Fortune Magazine named him on the top 10 minds in entrepreneurship. And in February of 06, Ink Magazine named him one of the all-time champions and supporters of entrepreneurship and business growth. Andrew, welcome to the Franchise Freedom Podcast.

Andrew Sherman: It’s great to be here. I’m really looking forward to our time together.

Giuseppe: Yeah, this is great. And we had booked this a while back and really looking forward to our conversation. So, with, and by the way for everyone listening, this is Andrew’s first podcast, so definitely give us your feedback. I’m sure this is going to be the best one. So, you know, mark those comments in the comment boxes. But all joking aside, fill us in, for everyone listening in, a little bit on your background. How did you get started in the business you’re in and what does that journey look like?

Andrew’s Entrepreneurial Journey

Andrew: Sure, thanks for asking. I’ve had a little bit untraditional journey compared to some of the other franchise practitioners. But I started college early at 16 in the 1970s and got into entrepreneurship. I eventually became a college dropout, not something I’m recommending to others, and started a business in the late 70s. That became very successful. And we turned to the franchise model as a means for expansion. So here I am, you know, 17, 18-year-old kid, and I’m already a franchisor in the early 80s.

Some people remember that interest rates climbed to 18%. I can’t believe I’m even citing that rate as the current interest rates that we have. And it caused some real pain to our business. I went back to school at night and finished up my degree and went on to law school in the early 80s. And decided that rather than being an entrepreneur or franchisor, I would spend the rest of my career supporting entrepreneurs and franchise concepts, and that’s what I’ve done. I’ve been practicing law for 35 years.

As you mentioned, I’ve written a bunch of books, including books on franchising, business growth, and entrepreneurship. And a lot of our time is spent counseling either emerging franchise concepts that are looking to grow through the franchise model or more established franchise concepts, and sometimes, large multi-unit developers kind of, you know, sophisticated financial types who are looking to acquire big chunks of franchise businesses. And it’s been a very rewarding career and really looking forward to chatting some more over the course of the podcast.

Giuseppe: Yeah, no, that’s great. And you’ve definitely been around, yes, 18% interest rates. I remember my parents telling me about that where I think inflation was at extreme highs as well. So it’s crazy given the rates we’re at right now.

Andrew: Yeah, I mean, I’ll give you a context. When I came out of law school, my wife and I, we were already married in law school, and we bought our first house. And most of my friends were getting mortgages at 11, 11.5, and I thought I was the smartest guy on the block because I had a 10.75 mortgage. That was a different time for sure. But it is interesting because, you know, one of the things I try and do is connect the dots.

So you take an issue like interest rates and how they have fluctuated and been historically low and looks like you’re going to maintain that level. And you say, Okay, well, what does that mean for franchising? What does that mean for business growth? What does that mean for entrepreneurship? The interest rate markets are a little weird right now because, while the rates are historically low.

We still have problems, as you know, for small businesses and entrepreneurs want to get access to those rates and access to bank loans. So, you know, you want to always look at what’s going on in the capital markets, but then be able to connect the dots, you know, back to specific industry verticals or specific opportunities that some of your listeners may be evaluating. You know, it does a small business owner know good to hear about historically low-interest rates if they can’t get access to that money the way that the fortune 500 companies can.

Giuseppe: Yeah, and that’s actually a very good point. I had a conversation probably about an hour ago, we work with, you know, some of the big funding companies out there and they were working very closely with franchise companies. And the SBA, you know, Small Business Association is, they are, you know, lending is taking a little bit longer, there’s definitely backlog, but more importantly, you need to have your information prepared, ready to assess, and they are asking a lot more questions.

So, you know, franchise or not, you know, business plan needs to be put together what your plans are, you know, are you doing this full time, are you keeping your job? You know, what did those financials look like? I mean, they’re asking more questions as they’re assessing the risk. So, a little bit different of an environment. Favorable in the interest rate, but it is taking, a little bit more difficult and taking a little bit longer to get these loans. So I recommend kind of, to your point, just be prepared, have all your financials together, so they’re readily available and nicely organized for these lenders to take a look at.

You know, I was going in one direction, but we had talked before and, you know, we talked about, so a lot of people listening in, they are looking to invest in possibly their first business and I help them, you know, figure out if franchise ownership is the right fit or just a traditional startup. By the way, pros and cons to both at the end of the day, it’s what works best for you. But, you know, recently I’ve been getting calls and I’ve spoken with some other companies regarding, you know, I want, I have a really good business.

I have a restaurant, I have a certain product or service that I am thinking of franchising, you know, and converting it into a franchise. And I’ve been having more and more of these conversations because they’ll ask me, is it worth franchising? You know, what about licensing and things like that? And I always go back to, let’s figure out where you want to be because for you, and maybe franchising, for the next guy, it may be licensing, from my experience, because it all depends on where you are in life, how long you want to be doing it and things like that.

Because, you know, when you franchise a business, your role, obviously, is going to change in the business. You know, if you’re in a restaurant, you may not be cooking more, you’re going to be assisting and training, helping to train franchisees. Can you talk a little bit about that because one of the most important pieces is getting your documents in order, that Franchise Disclosure Document, the FTD? Can you just talk a little bit more about, you know, what to prepare for us? Maybe some questions, things to think about for that person looking to maybe convert their business into a franchise or a license?

Strategic Planning, Core Foundations and Disclosure Documents

Andrew: Sure. You’ve opened up a Pandora’s box, it could take a couple hours to answer it. So I’m going to try to chunk it out a little bit. Yeah. So to chunk it into kind of three categories, if that’s okay. Category one, more of a strategic planning, category two core foundations of the franchise, and category three is the disclosure docs. So let me hit all three buckets kind of quickly. From a strategic planning perspective, you’re right. I mean, what you’re trying to figure out is you’ve got a successful prototype business, it’s going well, it’s working for you. Is it something that can be replicated?

Is it something that can be disseminated? Is it something that’s overly dependent on your physical presence or that particular location? Or is it something that really could, you know, another person could operate as well, if not better than you. You know, that is the big decision that so many people are making. It’s also an issue of business risk. You know, you may have leveraged your home to open up that first business. And now you’re leveraging again to open up the second location and there’s no more leverage left for you.

So to get a third, fourth, fifth or hundred location, you need other people to jump in and assume that risk with you and you’re growing by leveraging other people’s capital and knowledge of the marketplace. And again, there’s a lot more I could say there, but let me get to the other two buckets. Second bucket is what’s called building the foundation for franchise. And I talk about this in my franchising licensing book. It’s out there on Amazon, it’s in its fourth edition, it first came out in 1990.

It’s one of the big thick books that for 28 bucks, you can get a lot of information about franchising on. And in that book, there’s a chapter called The Foundation of Franchising. And, you know, elements of that foundation are things like, you know, your brand. Is your brand protected? Can it be licensed under the Lanham Act? Have you system, documented the systems and protocols and best practices and know-how and show-how the business adequately for franchisees to learn?

Have you developed a training program? All of the things that is expected of you both legally and morally and ethically, if you’re going to franchise your business to third parties, particularly many of your listeners who are a critical decision, you know, inflection points in their lives, about what to do next, and how to feed their families and how to spend 12 to 18 hours of their day. And they don’t want to buy into a franchise that is irresponsibly built or has a weak or shaky foundation. And then the third thing you asked about in that very big question, which I’m trying to answer, is the legal aspect.

So I am a lawyer by training and I practiced law for a long time and many of our clients are startup or growing franchisors. So in that world, we need to create the Franchise Disclosure Document and franchise agreement, which is a culmination of literally hundreds of business decisions that need to be made about franchise fees and territory and pre opening obligations and all of those kinds of things and supply chain issues and quality control issues.

And then we document those business decisions in both the disclosure document and the franchise agreement. Sometimes there’s an area development agreement for multi-unit franchisees. And franchising, as you know, is regulated at the federal level and by 14 or 15 states in terms of upfront registration and disclosure. So our next task as the lawyers to these companies is to get them registered where they want to make an offer sale.

And then really the most enjoyable part of our work is the ongoing compliance and problem solving and, you know, involvement in the growth and international expansion. So, you know, those are a big part of what we do all day is prepare these FDDs, counsel the clients on an ongoing basis, you know, all of those types of things to make sure that the system is being built right. And the last point I’ll make before breathing, is you’re right. This is a much more collaborative process than it used to be. You know, in the 1970s, the average franchisor was kind of the big kahuna company.

And the average franchisee was a high school gym teacher making $35,000 a year and hoping to make $50,000 a year if they bought a franchise and they built that franchise and they worked 18 hours a day, and maybe they made it to 50 and maybe they didn’t. Today’s franchisee is much more sophisticated. They may have had Wall Street experience, they may have gone to Harvard Business School, they might have a net worth in the nine figures. There’s a lot more collaboration and parity in the relationship.

And if you’re listening as a prospective franchisor, you should be ready for the fact that the franchisees, yes, they’re obligated legally to follow your systems and your quality controls but don’t be surprised when they have ideas about improving the system. Even back in the day, the Big Mac was invented by a Pittsburgh area franchisee of McDonald’s and got very, very wealthy as a result. So you know, there’s definitely a new type of franchise relationship that’s emerging and it’s much more collaborative and there’s much more of a team attitude. And I think it’s very positive for the future of franchising, frankly,

Giuseppe: Yeah. No, you nailed it. And that’s why I love franchising is that you have so many other, it’s kind of like we, you know, the masterminds, you hear that all the time. And it’s almost like a mastermind in that you’re working with, you know, and talking to franchisees all over the country, maybe with the, you know, just say it’s with Subway, just to give an example, but they’re all over the country, sharing ideas, giving feedback to the franchisor.

Whether, you know, whether to take it or not is another story, but it’s nice to share ideas and just, you know, kind of experiences, how did you do your first year, and this is all some really good advice. We call it validation, that I have every person looking at a franchise, and I said, it’s all great, you have all the info, you have this big Franchise Disclosure Document, you know, let’s now dive in and start talking to the franchisees and get the information directly from the owners to see how they’ve done.

So yeah, really good advice. So, you know, you had mentioned, so I guess, you know, you went from owning a business and then you looked into franchising. What was the major reason for that? You know, maybe if you can tell us a little bit why, you know, you pick franchising over licensing or other avenues. Why was franchising kind of the avenue you went?

The Gray Area of Licencing vs Franchising

Andrew: Well, let me just clarify one thing. I don’t want to sound too technical, but you’ve been making distinctions between franchising and licensing. Licensing, franchising is licensing. Franchising. Licensing is an umbrella. Think of it as licensing of anything licensing of a brand licensing of software licensing of technology. Franchising is the licensing of a business format. And it just happens to be a regulated form of licensing. I would want your listeners to be careful not to think that they can license a business format and it’s somehow not a franchise.

I mean, you could call it anything you want, but if it meets the statutory test of a franchise, it’s a franchise in the eyes of the law. So when we think about licensing, we should think about, there’s all kinds of things I can license. I can license my handsome face to somebody who wants to make Andrew Sherman t-shirts. Probably don’t want to hold my breath too long for that opportunity. I can license a likeness, you know, the Michael Jordan Air Jordan logo is a type of license.

But when a business owner packages up their trademark and their systems and they charge an initial franchise fee in excess of $500 and they do quality control and support. The law, at least in the United States, views that as a franchise no matter what you call it. So just be careful to, on the distinction, there are opportunities that are retail and restaurant level, you know, that you could do what’s called a naked license. So you’re licensing your brand, and maybe a few of your processes and protocols, and maybe fall short of the definition of a franchise.

But it’s a gray area that I would be careful in going too far because what happens sometimes is it starts out as what we call a naked license, but it grows itself and evolves into an inadvertent franchise or, you know, a franchise that grows, relationship that grows over time into a franchise. So I don’t want to get too nuanced in the podcast but the distinction is important because licensing is a broad-based term that any number of licensed transactions can apply to but business format, franchising comes under that umbrella as the licensing of brands and systems and everything all bundled together.

Giuseppe: I’m glad you clarified. And I learn a lot on these shows. And I appreciate that. And that’s a, it’s kind of the evolving thing. You know, always learning new things and I appreciate that and I’m sure we’ll we can continue that conversation. And we can talk about a lot of this stuff. You know, we try to fit a lot in this show, but two more questions. I know you have a meeting coming up here soon and I want to be respectful of your time. So the question we ask everyone is career transition, career pivoting, things like that.

You know, that’s big right now. People are on, you know, don’t know what direction they’ve been furloughed, they’ve lost their jobs, maybe they don’t want to go back to their jobs. I know friends that work in New York City and they just don’t want to be on a train or bus and commuting to the city and working in tight quarters. So, you know, that’s, we’ll see what the future brings.

What, you know, what advice would you give, you’ve been around awhile, for that person looking at that career transition and looking at potentially, we’ll just keep it as entrepreneurship, owning a business. You know, what advice would you give that person that’s never owned a business, that’s thinking about it, whether they’re being forced to make that decision a little bit quicker because they’re furloughed, or they’re just miserable at their job, you know, what advice would you give that person?

Advice for Stepping Into Business Ownership

Andrew: I’m gonna go with a very important word here, and that’s passion. You know, if you’re going to own your own business, you’re going to be spending 10, 12, sometimes 14 hours a day, living, breathing, you know, that business. It’s going to become your life, your livelihood, your family’s focus. Make sure you pick something not just because it’s profitable, but also because you love it. You know, I see so many people, they’ll call me and they’ll say, Oh, I’m thinking about buying a franchise. Which one should I buy?

Which one is most profitable? You know, and I’ll say, look, it’s not about that. I mean, all businesses can be run profitably if the business model is built right and if you’re willing to work hard enough. You know, if you hate kids, you know, don’t buy a children’s shoe store, just because you’re, you know, you heard it was profitable and you’re going to be dealing with screaming kids all day fitting in shoes they don’t want So, you know, it’s really around how do you want to spend the rest of your life? What skill sets have you learned along the way?

What skill sets can translate into being a successful franchise? The other thing I’ll say, if you’re looking at the franchise route, is make sure you’re kind of philosophically aligned. More and more franchise companies are beginning to integrate their beliefs and values into the franchise system. You know, I mean, look at Chick Fil A. You know, Chick Fil A, in full disclosure, is a client of the firm. They’re closed on Sundays.

You know, if you believe that Sunday is a day of prayer and a day of observation and the business shouldn’t be open on Sundays, you’ll do great and that franchise system. You know, but if Sunday in your mall location is your busiest day and you resent being closed, because of all the lost revenue, I would look at a different alternative chicken franchise like Popeyes or Bojangles. So, you know, it’s becoming more and more important that you are aligned from a vision perspective.

You know, that franchisor might have a particular CSR, a charitable activity that’s very important to them. Does that align with your own beliefs on charitable giving? And so I think that there’s a lot of great opportunities out there. There’s a lot of upside, the economy is rebounding and will continue to rebound, in my opinion, it’s a good time to be looking at franchise opportunities. But, you know, don’t let your wallet muscle do all the work. Let your brain and your heart play a role too.

Giuseppe: Yeah, absolutely. I give the exact same advice. There’s plenty of options out there. Over 4000 I think I saw on one of the websites as far as stats on franchising. Every industry every investment level. So yes, start out with what the business looks like because if you start looking at brands individually, you’re gonna drive yourself crazy. And that’s the advice I give. You gotta check the territories, but one big thing

Andrew: Yeah. I agree completely. There’s almost nothing, there’s almost no industry vertical from healthcare to financial services to retail to home services to business services, you know, to personal services and health and beauty and fitness. There’s no category that’s not franchised, so there’s gonna be opportunities for you no matter what your passion is, but start with that passion and then build from there.

Giuseppe: Yep, absolutely. And, you know, and one thing or homework I give to everyone is, especially after a first call, is just, you know, you have a blank canvas, start from a blank canvas and paint that with, let’s paint the picture together. But ultimately, what do you want your role to be in the business? Because your role, you know, I want to run this business while keeping my job, so that’s semi-absentee.

Many franchise companies don’t support that. They will not accept you, as a franchise owner. Let’s be honest, this is not, you know, to sugarcoat things, they won’t accept you, won’t work and they’ll tell you upfront, if you’re not willing to be 40 hours a week, it won’t work. And others will, you know, they, all, or most franchise owners own, you know, three to five different units, you know, territories or locations.

They have full-time jobs, they’re treating it as an investment and a general manager runs it. So, you know, that is another big thing where, you know, you really have to speak directly with the franchisor, someone like myself as a franchise coach and consultant to really break it down for you. But the role is key, because semi-absentee will rule out many franchise brands because of that.

Andrew: That’s a very important point. I mean, you know, a lot of people would like to have their cake and eat it too, not give up their day job and still be able to buy a franchise to augment their income. But some of these businesses do require, you know, full time hands-on. And so I actually encourage, you know, passive investment.

But if you’re going to, if the franchisor is okay with you being more of a passive owner-operator, they’re going to be that much more interested in who’s going to actually be managing the business and you’ll need to produce that resume, that bio for them. And sometimes they’ll even prove it. You know, so that’s another variable to factor into your decision making. If it’s not going to be you, who will run the day to day?

Giuseppe: Yes, very good point. And I’ll even, and we’ll get on to the last question here, but some franchisors will actually assist you in finding that person and actually interview that person on your behalf as an additional, you know, additional person interviewing. So not all franchise companies do that, but I was shocked to hear that someone will take it. Because ultimately, they’re going to be the face of the brand, they’re going to be running it. So every franchisee is an extension of the brand and, you know, they want to make sure that they, that you hire the right person for that role.

So, Andrew, so last question, you know, is basically, people listening in, they have some interest in speaking with you. You’ve written 26 books. I just finished book number one, and I, you know, I don’t know when book number two will be out. So that’s a pretty impressive number. So a question is, if someone has questions for you, what is the best route? Should they buy a particular book and where can they find the book? Should they contact you directly? Email, phone number, website, if you can give all that information.

Andrew: Yeah, so thank you for asking that question. The best couple of ways to find me are probably twofold. On my Amazon author page are all of my books listed including some books on franchising and entrepreneurship and business growth that I hope your listening community will find helpful. And on the Seyfarth website, www.seyfarth.com is all my contact information. If you’re listening to Giuseppe’s podcast, feel free to reach out to me by email. My contact information is on my individual page and the law firm’s website. And I’d be happy to help you in any way I can. A friend of Giuseppe is a friend of mine. So more than happy to be helpful.

Giuseppe: And as far as, you know, who should be contacting you, you know, you cover quite a bit. So if they’re uncertain, I’m sure they can give you a call. But as far as your ideal client,

Andrew’s Ideal Client Profile

Andrew: Yeah. The ideal would be either a company that’s thinking about growing through franchising or other means. We certainly can help there. And if you’re thinking about buying a franchise, as long as we don’t have any conflicts, we could help review the Franchise Disclosure Documents, or if you’re more of a multi-unit developer putting together a syndicate of people to buy existing businesses, one of the hot trends right now that we didn’t have time to talk about, but maybe next time, is what’s called re-franchising.

So existing franchisors that might have 50% company-owned units and 50% franchises, some of them are changing their ratios a bit. And so if I’m a franchisor that has 300 units, 150 of which are company-owned and now I want to drop down to maybe only 30 company-owned, that means I have 120 of my company on yours that are now for sale. So now I’m selling the business and the franchise to a third party. And some of those transactions are quite complicated legally, and we’re happy to provide legal support on those transactions.

Giuseppe: Awesome. So we will include all that information on the Amazon site. It’s Andrew J. Sherman, you know, for the author page. And we’ll include as I mentioned, all the website information, contact information in the show notes via social media and through the email. So, Andrew, I had a great time. We definitely could have been talking for another hour here with some of the questions I’ve been asking you.

Andrew: I’m game to appear again as long as I get that welcome kit again.,

Giuseppe: Okay. All right. Yeah, we could definitely arrange that.

Andrew: I’m a hard negotiator. What can I say?

Giuseppe: Yeah. So full disclosure, if you’re on the show, I have to buy my guest. So I send them out a little gift, as I jokingly say, But yeah, this is great. And by the way, congratulations on podcast number one. I remember my first one and you nailed it. So great job. I hope everyone listening in took some notes has some questions and you can contact Andrew direct. Andrew, appreciate it, once again. This has been awesome and hope to talk to you soon.

Andrew: Great. Wishing everybody a great rest of 2020 and wishing all of us a much better 2021.

Giuseppe: Yes, absolutely. Thanks again.