BlogFranchiseesQ&A with Amy Cheng, Founding Partner at Cheng Cohen

Q&A with Amy Cheng, Founding Partner at Cheng Cohen

What franchisees and franchisors can expect in 2024

We recently had the opportunity to speak with Amy Cheng, Founding Partner at Cheng Cohen, and an expert in franchise law as she shared her wealth of experience and expertise, providing a comprehensive overview of the legal landscape that franchisors and franchisees can expect in 2024.

Tell us your story, Amy.

Well, I’ve had an interesting journey.  I was actually born in Taiwan, and I was a first generation immigrant with my family. When I was 8 years old, we moved to Tulsa, Oklahoma. That was obviously a huge change for me as an 8 year old — going from Taiwan to Tulsa. And that’s where I lived for the next 10 years. And then from there I have lived in many different cities. I went to school in Michigan, went to law school in DC, spent a little bit of time learning and teaching English in Japan and ended up in Chicago about 26 or 27 years ago. So this is now home, and has been my home for a long time. And this is where I have been practicing franchise law.

What inspired you to get into franchise law?

Well, this is not a sexy answer, but school loans are what inspired me to get into franchising. I graduated from law school, knowing that I wanted to be a transactional lawyer and wanted to be working with business people. I enjoy the business aspects of the law, and so I knew that I did not want to be a litigator and I really didn’t have any desire to be in court. So I was seeking a position where I could practice commercial transactions, and I happened to kind of stumble upon an interview with Lewis Rudnick, one of the fathers of franchising. 

I had a conversation with many members of his team and loved learning about franchising for the first time in my life. There I was, in my late twenties, and I had no idea what franchising was. I walked out of that interview, thinking, well, this is really interesting. So that’s how I began. I kind of stumbled upon it, and ever since the first day I started practicing law, I have been doing franchising. It’s been 27 years now, and I always tell people I’ve kind of grown up in the franchise industry as a lawyer.

Who are your customers?  

You know what I love about franchising is that when people ask me who my clients are, they range from restaurants to fitness to hotels to home services to pet services. You really get to learn about so many different types of businesses. And along this journey I have learned about how I grew up in the restaurant industry. My parents own restaurants. So I’m familiar with it.

And luckily for me, back in the nineties, a large percentage of franchise concepts were still restaurants, right? That has changed. It has evolved. Franchising is a method of growth. People are realizing this is a really good way to grow a concept right? And so people have latched onto franchising as a way to grow in many different industries over the last 20-30 years. So that has enabled us to really learn about those industries.

What advice would you give to someone who is operating a successful business and considering franchising it? 

I look at two things when I talk to people who are wondering, “Should I franchise? Should I not franchise?” I think the first is: is your concept replicable? You could have a great concept, and you could be a great operator. But if that concept is not easily replicated, then I don’t think franchising works. You could have the best food in the world, but if your product takes too long to make and your menu consists of 80 different complicated recipes from your grandma, then that’s really not a great franchise concept. How are people gonna be able to replicate this? So that’s number one.

And for operators, I think the second thing is, are you ready to get into the relationship business? Because at the end of the day, franchising is a very different business, whether you’re operating a hotel, a restaurant, or a fitness concept. 

As an operator, you’re dealing with servicing consumers. But as a franchisor, your consumers are really your franchisees. You are now in the relationship business. And that is a hard switch to flip for a lot of operators. You either have to be prepared to make that change, or you have to have people on your team who are going to be able to do that for you right. There are successful franchisors who remain operators, and they know that that’s their passion, but they’re able to bring on a team of people who can help them grow the brand.

What does Franchise Law entail? 

Franchise law starts with the FTC rule which most of you in franchising have heard of. It is the federal law that governs franchising, and it is pursuant to the FTC rule that we draft the franchise disclosure document. So every franchisor should have a franchise disclosure document, and a lot of our business involves looking at the franchise disclosure document. In the US there are states that also have franchise laws. So when we help the franchise, or we’re our franchise program to the extent, they’re going to every single state or any of these states, we would have to comply and have the franchise or be registered to sell franchises in each one of these states.

And not only is there a one time initial process, but unfortunately, the franchise laws require you to continue to update the franchise disclosure, document the FDD. When there are any material changes to the franchise or the franchise system, you need to make these updates at least once a year. Typically within 90 to 120 days after the fiscal year end, depending on where the franchise or selling franchises are, we would need to update the FDD.

How often would a large multi-unit operator refer to a franchise agreement?

I always say the most successful franchisors and franchisees sign that franchise agreement. They put it in the drawer, and they never look at it again. So while the franchise agreement is kind of the foundation of the relationship, you need it because that is the contract that creates the relationship between the franchise or one franchisee right? It grants the right for the franchisee to be able to use the mark in the system, the right to operate and the obligation to the franchisor to pay royalties and comply with the system standards. However, once you have reviewed it once you have signed it, the relationship should be hopefully based on trust. And a relationship that doesn’t require the parties to continue to go back to the franchise agreement. 

Is it a good idea to have a co-terminus date for your lease agreement and your franchise agreement, so the end date for each is the same? 

That’s a really good question. The reality, I can say, is that most franchise agreements and leases are not coterminous, and the reason being that people typically sign a franchise agreement when they’re ready to go. Let’s say, if it’s a restaurant, they’re ready to go and look for a location. They’re ready to sign a lease right? Well, as a franchisor, you’re probably not going to spend a whole lot of time helping the franchisee look for a site.

From a process and timing perspective, I would say most franchisees are signing the franchise agreement before they sign the lease. The exception probably is, if you’re a multi-unit developer and you assign a developer agreement to operate 20 locations and you have a certain territory. Maybe you already have a binding kind of development agreement. Under those circumstances, maybe it will be easier for the agreement and the least to be coterminous. After 5 years you would have an option to renew the agreement again.

Some think the best lease is the one you don’t have to look at for 10 years. There may not be an issue, but you need to have knowledge.

Exactly. And even if there’s not an issue, you still need those documents, which is why it’s so important to know what’s in the documents, and to be able to know when the important dates are, and to be able to access the information. When you’re ready to either sell the system or buy a system right, the information needs to be there. The last thing you want is to have to spend 6 months trying to figure it out and pay somebody like us to try to figure out when all the leases expire, when the franchise agreements expire, etc. So, having a system in place is extremely helpful.

Let’s move into M&A and due diligence. Whether it’s acquisitions or selling, what advice can you provide?

Have the documents in place. Have the systems in place. And document retention. People have different expectations now than they had 20 years ago. They just do. They expect you to have the information at your fingertips? We will provide a due diligence list that requires a franchisor to upload a significant amount of information. And you need to be able to do that. And once assigned, the question is “how are you storing that?”. I still have clients, very large sophisticated clients that have signed agreements, and they send it to somebody via email. And it’s lost somewhere 6 years later.

Making sure that every one of your franchisees has up to date insurance, and they have named the franchisor as an additional insured, that will significantly reduce the risk of potential liability for a franchisor to make sure that if something happens at the franchise location and the franchisor gets sued, that the Franchisees insurance will cover the franchise, or as an additional insured. So making sure that franchisees are submitting those certificates and reviewing those certificates is so important.

Because you never know. I mean, you could have a personal guarantee from a former operator, you know, that was 5 years ago, and they don’t know that they’re still a guarantor on that lease. We’ve seen so many different executive teams change through the year. The current teams really have no idea what the process looked like 10 years ago and how they communicated with franchisees. So how do you document all that to show consistency? And if there is an issue, how do you know what happened?

You’ve got to have a system where there is quick access to important things. 

Yeah. And that’s particularly true in this day and age, when there’s so much change that goes on and ownership changes. There are also changes in franchisee ownership, too. We’ve been talking about franchise or system changes. Think about the number of transfers that take place within the franchise system. The documentation you’re talking about is also extremely important to know that when you’ve got a multi-unit franchisee selling 10 units.

It provides incredible value to the franchise because there is a system of record with where these documents live, where do these dates live, what’s the tracking, etc.

Those dates are buried in really complex legal stuff that you’re such an expert at. Yeah, while most people think it is not a legal issue at the end of the day. I think it is just like the issues I’m talking about in terms of what makes a franchise system more valuable? You wouldn’t think that legal has anything to do with it. You wouldn’t think that dates would have anything to do with it, but they do. 

Every attorney that we’ve worked with always has some negotiating strategies or tips. What would you offer?

I think the first negotiation tip is to know what you’ve already agreed to. You would be amazed at the number of people who will sign a franchise agreement and have never read it. The same can be said for people who have signed leases or guarantee leases without having read it. There have been so many times where people come to me asking for something in an agreement, and it’s already in there. One of the biggest complaints I get from franchisees is about negotiating leases. And they’re basically at the finish line. They’ve been negotiating this  50 page lease for the last 2 months, right?

And the day before signing, they realize the franchisor requires that I have to get the landlord to sign. Landlords are not particularly happy to negotiate leases to begin with, but when they have spent the last couple of months negotiating a lease with you, and at the very last minute you pull out this lease that’s required by the franchisor, they’re not going to be happy. So in terms of negotiating leases, I would encourage franchisees to make sure that they understand what their obligations are to the franchise, or with respect to the lease, and get that lease rider in front of the landlord to get that signed so that they’re not holding up that process.

It’s like there’s no such thing as over communicating.

 No, there’s not. I think it’s also the fault of many franchisors, because they’re not effectively communicating the importance of these leases. They’re not communicating the requirements under the franchise agreement. Again, my hope is that people sign the franchise agreement and then never read it right. Well, my other hope is that people actually read it and don’t have to look it up because they know what’s required.

Let’s move on to trends. What’s going on in the world in 2024?

I don’t think I could leave a session that talks about legal trends in 2024 without at least mentioning joint employee liability. It is a topic that everyone is super sensitive to right now.  People have actually call me and say, “should I shut down my franchise business”, or “should I not even consider franchising anymore?” For those of you listening, do I think franchising is gonna go away because of joint employee liability? I certainly hope not. I think it all starts right now to make sure that the franchisor is educating everyone regarding joint employee liability, because unfortunately, franchise lawyers understand and are sensitive to the issue as well. So I do see more and more franchisors being named in lawsuits relating to employees of franchisees. This potential exposure is out there. But I think the best way to minimize it is to educate everyone as to how to minimize it. 

How do you stay up to date with all of these changes?

I really think the LFA it’s a great resource. We have been members of the LFA ever since we started Cheng Cohen, and I’ve been very involved. Part of my giving back is to make sure that I’m supporting new suppliers, new franchisors, and new franchisees right through the LFA and doing educational sessions through the LFA. The LFA has just a lot of resources on their website, and I don’t think there’s a day that I don’t come in and check my email and there’s some email with some update regarding changes in the law. I think the second is continuing to participate in webinars like this. The American Bar Association for franchising is also a great legal resource. 

Let’s talk about another really big change, which is AI. Has AI impacted your business in any way?

I would say, not significantly yet, but it definitely is starting to. I don’t think anybody can operate a business at this point without understanding the impact that AI has on franchising. And so it is important to stay up to date.

What advice would you give to franchisees or franchisors? 

If I have any advice to give people is to remember that you can’t treat every franchise the same. You can’t. Every system is different. A lot of how we deal with our clients is understanding the culture of their system. Understanding the “what”. What are the important points? Whether we give legal advice or business advice, we’re helping a franchisor and franchise sort out the relationship. We’re helping a franchisor roll out a system. A lot of it will come down to the culture of the system. We start there.

What’s the best advice  you’ve ever heard or received?

The best advice I think I have received is through watching my parents leading by example. There’s a way my parents always just ran a business, and that’s how I like to run our business. I think the most successful franchisors do the same. You can’t ask somebody to do something that you’re not willing to do yourself. And if we’re talking about franchising, I think that is extremely important. I always ask my client “is this something that you would do?”. So when I’m making changes whether it’s in my business or helping a client make changes to their business, that’s the question I always ask.

To learn more about Leasecake’s platform and how we can help you grow your business, manage multiple locations, save money by understanding exactly what’s in your documents, and minimize the risk of overpaying or missing a lease renewal, schedule a demo.

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