Multi-Unit Franchisee Magazine Issue II, 2013 | Page 63

Protect Your Assets!

“I do a lot of estate planning,
and really, asset protection is part of estate
planning, and part of estate planning
is asset protection.”
—Jerry Marks
days that he has personally guaranteed.
“As I grow, I am more and more
cognizant of not jeopardizing what I
have already gained, and I become more
risk-averse in my growth strategies. For
example, I would not be willing to crosscollateralize or guarantee a new business
with all of my other entities or personally,” he says.

Jerry Marks

The franchise agreement

Perhaps the most deal-killing clauses in
any franchise agreement are those requiring the franchisee to be responsible
for lost future or accelerated royalties.
At one point, Simon was considering
adding a restaurant, but it had one of
those clauses in it. “It was a stopper for
me,” he says. “It can be very damaging,
if enforced.”
“We review contracts that we enter into pretty well, we spend the extra
time,” says Robins. “I read all the small
print—even if the back has 37 paragraphs
in small print. This is another way we
protect our business interests and assets.”
For instance, he says, the franchisor may look at an onerous clause and
say they never execute on it. “We can’t
take that risk,” says Robins. Even if you
love reading the small print to weed out
potentially dangerous clauses, “It’s very
challenging to do in some of your larger
contracts, like franchise agreements and
leases,” he says.
“You look at those and try to limit
your exposure in case things don’t go
well. You try to l imit your exposure to
the actual costs incurred by that unit,
not by all of your units. One example:
many franchise agreements say that if a
franchisee defaults at one unit, they’re
in default at all their units with that
brand, and the franchisor can accelerate
royalties on their units. “When we look
at contracts, we try to limit cross-unit
default,” says Robins.

Negotiating each clause and what
happens in different cases is important to
limiting your liability, says Simon. “You
can lose your business through no fault
of your own, then still be responsible.”
Leases

After the franchise agreement, the biggest
liability you will have as a franchisee is
signing leases, says Simon. You’re usually looking at a minimum 5-year commitment, and landlords look for some
guarantee if things go south.
“If I am signing a lease and it is a new
entity, I may offer the landlord an additional guarantee with one of my other
entities, or in some cases a very limited
personal guarantee,” says Simon. “If the
entity signing the lease has already established itself as a successful company,
then I will require that the guarantee of

that entity stand on its own. Each entity
is protected by a corporate structure
that protects my other assets, and that
amount of protection is controlled by
what I am willing to risk.”
At renewal, he says, landlords will
insist on a personal guarantee. “I try to
get them dropped,” he says. But if it’s a
good location, he’s willing to put up with
it. For his new T-Mobile business, the
landlord wanted a full personal guarantee.
“I settled on a limited guarantee. I will
guarantee, but limit my risk.”
Experience with contracts and a good
track record can be a negotiating asset.
“What’s helped me is I know most of
the landlords from my previous businesses, so I have credibility as a tenant
even though it’s a new business. So I’m
usually able to negotiate something,”
says Simon. “From an entrepreneurial
standpoint, you’re always thinking about
limiting your liability.”
Options include writing in a maximum dollar amount or number of years
to pay. That way, you’re not liable for
the entire lease period. “Landlords will
give that sometimes, other times not,”
he says. “Sometimes I’ll give a full guarantee for the first 2 years, especially if
they’re giving a TI allowance up front.”
However, he says, although the personal
guarantee may go away after 2 years, the
corporation signs the lease and is still
responsible.
“It’s very important to use a good real
estate attorney,” adds Simon. “I probably know as much as anybody about
leases, clauses, and risk, but I still use an
attorney,” he says. It also doesn’t make
you the bad guy to the landlord in lease
negotiations.
If you can’t completely negotiate
personal guarantees out of a contract or
lease, “Try to limit personal guarantees
as much as you can,” says Robins. “I try
to limit it to, ‘You can’t accelerate it, but

Multi-Unit Franchisee Is s u e II, 2013



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