Has Your Franchise, Hotel/Brand, and Business Had It's Mid-Year Checkup?
There is a tendency of franchisors, brands (hotels), franchisees, management companies and business, in general, to spend significant time drafting, negotiating and implementing various material agreements; but do they take the time to really review those integral documents that are the foundation of their system/business on an ongoing basis? The answer is that they generally assume that the documents they have been using for years are adequate…until!
Typically, in the franchise and hotel industry, once the Franchise Disclosure Document (FDD) and ancillary agreements (such as the Franchise Agreement) are drafted, and the roughly 200-plus page FDD has been completed, it will then be "good" for a significant period of time. In general, most of what is in an FDD can be relevant for a number of years, as it should be reviewed each year for the annual renewals. However, from experience, most franchisor/hotel brands do not review their FDD in its entirety and merely address those issues that need changes based on something that occurred during the prior year, and that process continues from year to year.
The same is true for franchisees regarding certain requirements, such as timelines for renewals, dispute issues, lease options, entity resolutions, etc. Failure to meet a deadline could cause a franchisor to deem the Franchise Agreement expired and not have to renew the Franchise Agreement (putting aside any state relationship laws that may override such). In turn, the franchisee would then be out of the franchised business and have no business value or anything to sell or transfer to a prospective or existing franchisee.
Landlords and tenants and other business relationships run into similar situations.
So, when was the last time you really reviewed your FDD, Franchise Agreement, Lease, Shareholders’ Agreement, Operating Agreement, Bylaws, Management Agreement, Supply and Vendor Agreements and other documents many consider standard operating agreements, as they are continuously used over and over within your business operations?
When franchisors and hotel brands have engaged our Firm’s services to review its existing FDD, they have been surprised that a fresh set of eyes can provide valuable comments on the FDD and provide new insight they otherwise wouldn't have noticed. The Firm did not draft or modify the ongoing FDD, but simply provided the service of an independent review mechanism, given that the franchisor/hotel brand has used the same drafter (whether that be in-house or outside counsel) for a significant number of years and has simply allowed (and relied upon) the same format to remain in place (say, ten years ago) and not necessarily review in its entirety the FDD, under the mantras of “if it ain’t broke, don’t fix it.” What franchisors and hotel brands have found is that many items within the FDD should have been modified or revised from the time it was first drafted.
The following is a list of items that one should consider for an annual, or at least, bi-annual review:
- FDD – when was the last time it was reviewed internally or externally by a fresh set of eyes for verbiage, issue-spotting, current trends, etc.?
- Operations Manuals – when was the last time the Operations Manuals were fully reviewed, rather than simply updated in a piecemeal fashion? In particular, Operation Manuals should be reviewed, and most likely updated, in connection with the joint-employer concept, as well as employment issues in general. The joint-employer concept has been looked at from a federal level, but the myriad of laws, rules, and regulations concerning the employee-employer relationship have also been addressed on a state and local level basis, too.
- Franchise Agreement docketing – as a franchisor, are your docketing system Master Franchise Agreement effective dates, termination dates, renewal dates current and complete?
When Was The Last Time You...
- Reviewed your FDD in its entirety? Are you sure the draft from five years ago does not need a review? Have you only looked at the areas of known concern?
- Reviewed your Operations Manuals in their entirety (new joint-employer disclaimers, employment issues, etc.)?
- Reviewed your Franchise Agreement for timelines, renewals, options, disputes, notices, etc.?
- Reviewed your Area Development Agreement for site selection dates, openings, notices, etc.?
- Looked at the Policies and Procedures – Are they up-to-date? Still in use? Should they be amended, withdrawn, etc.?
- Checked if your PIP template has been updated with appropriate language for the requirements to be met, as per Brand standards?
- Reviewed your Hotel Management Agreement for reporting requirements, expiration, notice dates to take into account, new matters within the hotel industry, etc.?
- Addressed the “panic button” issue? Don’t wait for legislation.
- Reviewed your Shareholders’ Agreement, Operating Agreement and Limited Partnership Agreement for valuation terms? Is it sufficient for new “partners”? Is it time to change from the old form book template?
- Updated your Corporate Minutes Book to comply with corporate formalities and to help protect from a piercing the corporate veil claim, an IRS claim, an audit claim, and in general?
- Reviewed the Employee Handbook? Does it address recent Federal or State law changes? Is it appropriate for the current workplace? Are you sure, by the way it is written, that it’s not a contract?
- Looked at your Confidentiality and Non-Compete Agreements? Are they current? Are they still enforceable? Do they comply with current legal standards? Have you reviewed how they are implemented?
- Checked whether or not your standard/customary forms are up to date (i.e., Invoices, Purchase Orders, Vendor Contracts)? Do they provide for attorneys’ fees, disputes to be brought in certain venues, proper interest terms, proper warranty language, etc.?
- Reviewed your Leases (i.e., renewal notices, expiration, CAM accounting)? Is it consistent with your Franchise Agreement terms?
- When was the last time you had your Insurance Policies reviewed? Are they up-to-date, too little, too much, not covering all that might be necessary, such as privacy, date and cyber issues? Are your agreements that require others to carry certain insurance up-to-date with current requirements/standards?
- Are you ready for a possible sale, merger or acquisition? Don’t wait until it happens. Good planning years in advance will pay dividends when and if the time should come. Have you had your “corporate” structure reviewed to make sure it is correct and up-to-date?
- Life and Death – Unfortunately, it is inevitable. If you have a personal estate plan in place, do the same for your business (i.e., create and implement a business succession plan). Don’t let state business laws dictate how your business unwinds after you are gone.
- Retirement/Disability – A business succession plan is not just for death, but possibly more importantly, for retirement or disability. Are your business ownership agreements in line with your Wills and Powers of Attorney and your true intentions for succession planning?
These are only some of the items that tend to be routinely overlooked, but should be given periodic review, even if tedious, so as to prevent issues that could have been avoided with simple reviews and updates. Just like an annual physical, do not wait until something happens to address the issue that could have been done years prior. Let Reger Rizzo & Darnall help you with your “check-ups.” Please feel free to call upon our Franchise & Hotel Practice Group Chair, Harris J. Chernow, or any one of the Firm’s team members for a consultation.