Let’s Help Build a Franchise Company: 5 Things Attorneys Should Consider

February 22, 2018Articles The Legal Intelligencer

How can we help our clients build a chain of locations? Can our emerging clients ever compete with the big companies, the private equity companies, the multinationals with structured finance? The answer is a resounding yes, and we as lawyers can help by setting the legal foundation. Many companies and consultants exist to help franchise a business, but I believe that the lawyer has the most important role in brand expansion. Failure to set the legal foundation has ruined many companies, even those run by the most experienced and successful CEOs. Not every lawyer, law firm or accountant knows everything to cost effectively help the client at each stage of growth. Lawyers practicing in the channel of commerce understand the importance of working collaboratively with referring counsel and protecting that relationship.

  • How every lawyer can help their client with brand expansion.

Just like restaurants and other chain businesses, lawyers know branding. For lawyers, their reputation among the jurists, clients, opposing counsel and referral sources often has some relationship to financial reward. Branding is the process involved in creating a unique name and image for a product in the consumer mind, mainly through advertising campaigns with a consistent theme. Branding seeks to create a unique and differentiated presence in the market that creates loyal customers. Loyal customers translates directly into good will. The value of the brand is sometimes referred to as brand equity, and may be detached from the actual performance of the operating business for purposes of valuation.

Lawyers provide services and under our ethical rules, must provide these services under their name or an approved law firm name. Other businesses trademark their brands to preserve and reinforce their uniqueness. The ability to register and police the trademark is the foundation of building the brand. Consultants may suggest branding ideas to the client or the client may want to proceed in a way where the brand can be usurped, left subject to attack, and otherwise cannot be used to build upon. Good counsel has the obligation to recognize trademark infirmities and counsel against using and investing in a new mark, regardless of what the consulting experts say.

In addition to trademarks, every lawyer knows something about corporate formalities and the need to coordinate the formation with client goals. Although formation of the parent entity is most flexible as a limited liability company, that may not be the best idea if the client is seeking to retain “founders stock” control over the company or have a public offering soon. Founders stock is a euphemism for having the founders of the company retain control of an otherwise public or private placement of stock, enabling the founders to have super voting, dividend, or board appointment rights. Think of the founders of Silicon Valley companies who do not wish to give up control but want a semblance of corporate democracy. All lawyers can screen for the client goals. Just make sure you understand what resources you may need to get the client to the goal, including the specialized tax and accounting resources which may be necessary. The incremental expense of getting the right advice is well worth it.

  • How every lawyer can help the chain brand client avoid liability.

Litigators are well aware of the application of vicarious liability and joint employment to hold brand owners liable for the acts of their employees, agents and counterparties to contracts. Any brand needs a lawyer to screen such relationships and contracts to insure that best practices are exercised. That would include review of insurance coverage and requirements of counterparties to the client. Specialized services would be suggested in businesses where data privacy and children need to be protected, such as in schools and other educational operations. At a minimum, the lawyers should be familiar with the regulations pertaining to such operations, and it may be necessary to consult with other experts to implement systems to protect the information. Human resource professions should work with lawyers to minimize opportunities for blunders.

  • Defining your role.

Ideally, the lawyer wants to be the trusted adviser on not only legal matters, but would like to have the opportunity to screen some of the more important business initiatives. While the lawyer’s opinion on business matters might be seen as invalid against the business people with advanced business degrees, lawyers hopefully have the common sense to sound an alarm on ideas that you know just will not work. Your duty is to the company, and in the long run, saying no to a bad idea may be unpopular, but will be in the long view best for the company. All too often, the persons in power ignore the lawyer and impose their changes by will, without considering all of the organs and functioning of the company, its shareholders, vendors, banks and other constituencies. The lawyer has the role of expressing an independent voice which should be used to enable full disclosure and consideration of the changes. The lawyer’s legal authority is usually enough to have controversial business deals reviewed just one more time.

  • Growing with the client.

Emerging companies need different skill sets that that of mature brands, and different expertise. The lawyer and the law firm may not have all of the skill sets or focus needed for every client at every stage of development. Larger brands have many law firms for this purpose, in addition to their in-house legal departments. Emerging brands of course often cannot afford multiple legal experts and consultants, which is why the firm must be flexible enough to cater to these smaller companies, or should assign discrete tasks to consultants, accountants and other lawyers to assemble the proper legal team. Virtually all franchise companies started as emerging companies with few outlets, and are built into regional or national concepts often within a decade. The difference in the companies that flourish is complicated to extract, but clearly assembling the proper team is essential. The trusted lawyer has the best opportunity to quarterback this team. Help develop that playbook with the owners and selecting and it will be easier to select the team.

  • Knowing when to bring on new team members.

The trusted adviser needs to know the contours of their depths of knowledge. If the expansion is by licensing or franchising, make sure you know the difference. Franchising like securities law compliance is not for dabblers and the wrong decision can hamper expansion for decades. Learn what the best choices are and either become proficient with the regulations or engage someone who can guide you.

Few things are rewarding as helping an entrepreneur to grow an idea into a business and then into a household name. The untold secret is that lawyers do it every day by building the right teams that give the right advice almost every time.

Reprinted with permission from the February 22 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.