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Fran X | Don't Get Sued: Laws, Rules & Regulations of Working with Franchise Brokers

You need to build and fortify your legal foundation along with your franchise growth strategy.

By Nick Powills1851 Franchise Publisher
Updated 3:15PM 10/29/21

The Next McDonald's (Big Idea)

Build Stories Around Existing Franchise Owners at Key Milestones

Oftentimes franchisors get excited about the new shiny object. And, they are not wrong to.

Leads and deals are exciting. They indicate growth and success. Yet, they don’t represent the highest value to the system: Existing franchisees.

We see posts on LinkedIn, ALL. DAY. LONG., about new signings and openings -- but why not celebrate Joe Schmo who celebrated his 5th year in the system (adding in that broker X place him); or Sally Smith who broke a sales record; or Thomas The Train (running out of names) who sold his business, successfully -- showcasing another huge value of franchising?

We don’t because old seems old and not as shiny. But if you look at the net value of those people to the system it is a LOT OF FREAKIN’ MONEY both in royalty and valuation -- oh and then in multiples at sale.

Perhaps it’s time to celebrate the old shiny objects too. Perhaps by doing so you can excite them to continue growing in your brand.

News You Can (Actually) Use

Killer Brands

Fish & Things - This California based Poke Bar has been pandemic tested and its business model is THRIVING. Take-out focused, small square footage and a strong Item with year over year (2019 / 2020) sales growth exceeding 40% with compelling numbers.

Franchisees Kicking Ass: The Franchisee Is King

The Great Franchisee: Cynthia Maxwell, Drybar, San Antonio

A true self-made entrepreneur, Cynthia Maxwell began her career selling purses out of the back of her car. Now, she’s one of the newest franchisees with the fast-growing salon franchise.

Serial entrepreneur Cynthia Maxwell has launched a range of successful business ventures in industries as diverse as real estate, fashion, communications, construction, fitness and staffing. Now, the jack-of-all-trades businesswoman is also one of the newest franchise owners with Drybar®, the 140-plus-unit blow-out salon franchise.

Growing up, Maxwell says she always knew she wanted to be an entrepreneur. Maxwell came from humble beginnings, starting her entrepreneurial journey as a 22-year-old single mother of two selling purses and jewelry out of the trunk of her car. By 27, she had built a diverse real estate investment portfolio with a net worth of over 10 million.

Yo Broker, Sell My Franchise

Broker, Meet a Zor: Brandon Cerrito, Founder and CEO of The Carpet Chemist

Cerrito shares his experience developing a comprehensive-service franchise model and how his brand has sustained its innovative approach.

Brandon Cerrito is the founder and CEO of The Carpet Chemist, a comprehensive carpet treatment franchise in the ever-expanding cleaning industry. Cerrito’s franchise operation began in early 2018 providing service to the Louisville, Kentucky area. His extensive experience in the franchising industry has made him equipped to handle the changing landscape of his field with a growing scale of business.

Cerrito spoke with 1851 Franchise on his start in the franchising industry and how he was motivated to satisfy a business need that nobody else had answered.

“I got into franchising because I discovered an empty space within the franchising industry,” he said.

Cerrito highlighted the importance of a strong behind-the-scenes system for franchisees to become dependable, how he has modernized a traditional business approach and the importance of a mentor to help guide a franchise owner toward effective business principles. “I think what separates the most successful franchisors in the industry is the level of systems they have in place behind the scenes,” he said.

The Bottom Thoughts

Imagine...a few years from’re involved in due diligence, about to take-on a strategic capital infusion or sell your system at an xx multiple and…legal red flags arise...the deal comes to a halt...and your deal value is about to be impaired.

You need to build and fortify your legal foundation along with your franchise growth strategy.

First up on building your legal foundation, understanding the role of a “franchise seller” and your legal relationship with franchise brokers:

  • The Guide - Visit for a complete guide on franchisor/broker legal relationships. (Always be sure to verify and review with your lawyer).
  • Who is a Franchise Seller? - If you’re a franchisor it’s you, your management team (See FDD Item 2), your agents, and representatives, including franchise brokers. A franchise seller is anyone that “...offers for sale, sells, or arranges for the sales of a franchise…”
  • You Need to Disclose Your Franchise Sellers - In addition to your Item 2 disclosures, within your FDD receipt page, you need to disclose involved franchise sellers. This includes brokers and members of a franchise sales organization that you may be working with.
  • Avoid Unauthorized Financial Performance Representations - You must limit any and all financial performance representations to the information disclosed in Item 19 of your FDD. When working with franchise brokers, broker organizations, and franchise sellers, you must avoid backdoor unauthorized financial performance representations. You cannot avoid liability or accountability through indirect disclosures through others, including directed and coordinated communications from a select franchisee. If you are a franchise broker, you need to understand that as a franchise seller that you have an affirmative obligation to advice a franchisee candidate if you believe that a financial performance representation is unauthorized, inaccurate, or outdated.

All of this is manageable ... but be cautious. Little one-time mistakes have a way of multiplying and forming patterns and practices that will be easy to spot 5 years from now and detrimental to your deal value.