Explosive Franchise Growth Poses Challenges

by John D. Dadakis, Esq.
the firm of Rogers & Wells

Family business issues are permeating the business headlines, frequently because of costly and destructive litigation that had its origins in flawed legal advice rendered to a family business.The fight over the one share control issue in the battle for American Maize Products exemplifies how a distribution from an estate can have lasting effects.The Haft family’s public battle over the Dart Group can only conclude a nightmare for its public shareholders.

The problems that arise are the same, whether the family business is defined as a closely-held, owner-managed, or family-owned business, and in fact pertain to publicly-traded companies with an important presence of family in stock ownership, as well as to strictly private family enterprises.

To offer the best legal advice available, attorneys working with family business clients must be a part of a practice, or have the resources, knowledge base, and interdisciplinary skills to address all the issues affecting the client (the owners, the family, and the business).Most important is an understanding of the legal implications within the family business life cycle. which includes:

  • Corporate structure
  • Tax issues
  • Family-ownership issues

For instance, a typical problem arises in a franchise purchase, when the life cycle is not fully recognized.An individual goes into a business, purchases a franchise, and becomes successful, finally owning several franchises with the same company.Difficulties can arise when passing the business along to the younger family members, because the terms of the agreement may require that the original franchisee remain involved.

These issues are compounded in the fastest growing area within the franchise arena–roll-ups–where small and mid-sized companies, such as automobile dealerships, are being acquired by larger companies.For example, Waste Management Inc. was started by purchasing many small refuse haulers in Florida.Auto dealers, established as family-owned franchises, are now being acquired through a similar roll-up process into mega-franchises.

An understanding of the life cycle of a family business, with its tax implications, corporate structure, and ownership issues, and the integration of this knowledge with the long-term implications of a franchise agreement, are critical to the strategic legal decisions being made today.

In the article, “Competition from Outside the Profession,” (ABA Journal, April 1995), Jay Jaffee states that, “During the 1980’s lawyers became more specialized, and got away from that role as a counselor…Because many law firms don’t do this strategically, they don’t do it right.”Therefore, the gap in comprehensive, integrated legal services to family firms is being fulfilled by consulting firms.RDA Communique editor Robert Denny says that, “Most of the (legal) profession has not yet recognized that competition is coming from outside the profession.”

An attorney who serves the interests of a family business client must recapture this traditional role of counselor, because the issues of family business require comprehensive and integrated legal advice.The models for achieving this type of practice are as varied as the businesses they serve.

afhe is designed as a forum to share resources and knowledge of the family business legal practice, and I’m happy to be a part of this process as one of the co-founders.The involvement of our members will keep us attuned to our paramount role, serving as the family business legal counselor.