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Douglas D. Smith

16300 SW Langer Drive #1034

Sherwood, Oregon 97140-1034

Phone: (503) 840-0000

 

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Bradley D. Smith

FranchiseSmith Utah, LLC

5508 West Kensington Circle

Highland, Utah 84003

Phone: (801) 615-1564

 

Douglas D. Smith

Franchise Smith, LLC

6517 W. Muirfield Road

Highland, Utah 84003-5533

Phone: (503) 840-0000

 

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Paycheck Protection Program Details; SBA Grants and Loans; Disclosure of COVID-19 Impact in Audited Statements and FDD Item 19; State Franchise Renewals

April 1, 2020

Paycheck Protection Program Details

The application process must be handled through an approved SBA lender and starts April 3, 2020 for small businesses and sole proprietorships and April 10 for independent contractors and self-employed. The loan term is two years with a six month payment deferral. The interest rate a set flat rate of 0.5%, which applies to loan proceeds that are not forgiven.

 

A Paycheck Protection Program information fact sheet is now available on the US treasury website:

https://home.treasury.gov/system/files/136/PPP%20Borrower%20Information%20Fact%20Sheet.pdf

There is a sample application that shows what sort of information and documentation you will likely need to apply: https://www.sba.gov/sites/default/files/2020-03/Borrower%20Paycheck%20Protection%20Program%20Application_0.pdf

 

Small Business Owner’s Guide to the CARES Act and Summary of Helpful Links

Here are a number of helpful links with information and templates that may prove helpful as you and your franchisees work through relief options and strategies with employees, landlords, lenders, and others. (some of which I have shared with your earlier):

 

SBA Disaster Assistance

https://scalingup.com/wp-content/uploads/2020/03/The-Small-Business-Owner%E2%80%99s-Guide-to-the-CARES-Act.pdf

https://www.sba.gov/funding-programs/disaster-assistance

https://www.sba.gov/disaster-assistance/coronavirus-covid-19

 

Employees

https://www.dol.gov/agencies/whd/pandemic/ffcra-employee-paid-leave

https://www.dol.gov/agencies/whd/pandemic/ffcra-questions

https://www.dol.gov/agencies/whd/flsa/pandemic

https://www.dol.gov/agencies/whd/fmla/pandemic

https://www.dol.gov/agencies/whd/field-assistance-bulletins/2020-1

https://home.treasury.gov/news/press-releases/sm952

 

https://news.bloomberglaw.com/product-liability-and-toxics-law/wilson-sonsini-tech-subsidiary-offers-free-covid-19-policy-tools and https://www.sixfifty.com/solutions/hr/covid/

(Free automated system to help employees report if they’ve been diagnosed with COVID-19, if they’ve had close contact with others at work, and to indicate when it is safe to return to the workplace. Also provides a tool to quickly draft policies related to extended sick leave, telecommuting, travel, reimbursements, etc.)

 

Real Estate

https://app.hubspot.com/documents/4231103/view/70928469?accessId=efa0b7

https://www.ccim.com/cire-magazine/articles/landlord-strategies-handling-rent-relief-requests/?gmSsoPc=1

 

Impact of COVID-19 on 2020 Audited Financial Statements and Financial Performance Projections in Item 19 of the Franchise Disclosure Document

 

A new KPMG report states,

 

“The COVID-19 outbreak is having a significant impact on global markets driven by supply chain and production disruptions, workforce restrictions, travel restrictions, reduced consumer spending and sentiment, amongst other factors, which are negatively affecting companies’ financial performance, liquidity and cash flow projections. Financial statement users expect, and US GAAP requires, adequate disclosure of the current and potential effects of COVID-19 in the financial statements. This includes disclosures about subsequent events..”

 

You will want to carefully review these issues with your auditor if your financial statements are being prepared now or will be prepared in the next few months.

 

I have had several clients ask whether and how their Item 19 Financial Performance Representations (“FPR”) should be made if their franchise system has been significantly impacted (even shut down) by COVID-19 and related governmental mandates. The franchise laws allow a FPR based on historical information and also allow a FPR as a projection of future results. Given the current uncertainties, can there be any “reasonable basis” for a projection? Is the historical data still relevant? On the other hand, certain historical information could be helpful to a prospective franchisee, especially when business returns to normal – with due regard to any residual effects. 

 

Remember that the Federal Trade Commission Franchise Rule and most state franchise and business opportunity laws require you to reflect material changes to your Franchise Disclosure Document on a quarterly basis. This includes updates to any FPRs in Item 19: 

 

Material Changes Relating to Financial Performance Representations

The amended Rule requires that, at the time of furnishing a disclosure document, any franchise seller (including any broker) must notify a prospective franchisee if the seller knows of any material changes relating to a financial performance representation. This obligation arises even if a disclosure document is furnished at a time that falls between quarterly updates. For example, a franchisor may prepare an annual update to its disclosure document that contains an Item 19 financial performance representation. A franchise broker may then furnish that disclosure document to a prospective franchisee on June 1, 2008. If the broker knows of a material change in information underlying the Item 19 representation – such as new survey results that cast doubt on the accuracy of the Item 19 financial performance representation – the broker must notify the prospective franchisee of that fact when furnishing the disclosure document. The term "notify" does not mean furnishing an updated disclosure document all over again. A seller may inform the prospective franchisee of the material change underlying the Item 19 in any reasonable manner, such as by letter, telephone call, or email. Of course, the franchise seller has the burden of proving that such notification was made. Franchise Rule Compliance Guide (FTC May 2008, p. 129).

 

Among the FDD updates you may have to consider in the near future:

 

Item 1  - How does your business and system evolve to handle “post-Covid-19 world” and to obey new “post Covid-19 requirements?

Item 7 – Are there new operational and infrastructure requirements that need to be disclosed?

Item 8 – What changes have occurred to the supply chain and its costs? 

Item 11 and Operations Manual – What new processes and standards will need to be created and added to your franchise system and your manuals? 

 

All of this raises several questions.

 

First, how wise is it to continue to sale franchises in the midst of the pandemic? What cautions and precautions should a wise franchisor follow in this regard, given that no one knows how what Covid-19 restrictions or impacts will occur in the future? If you are subject to Covid-19 containment measures, should you pursue current (versus future) franchise sales at all?

 

Second, current Covid-19 legal restrictions and business recommendations may become post Covid-19 requirements. For a simple example, will social distancing and customer separation impact tables and seats and therefore sales in restaurants?

 

Third, what customer demand curve will your system experience during the recovery? Some businesses will see little difference; others a lot.

 

How must these addressed in your FDD - especially Items 1, 7, 8, 11, and 19?

 

State Filing Concessions in Response to COVID-19 Pandemic; Move Forward Now to Take Advantage of the Future

Certain state franchise regulators have extended franchise filing deadlines or provide other leniency and concessions related to renewal filings. Although most states will still require an updated FDD, certain states are granting a temporary extension of the filing deadline (Hawaii, Maryland, New York, and Virginia for now) and may allow you to continue to *offer*, but not sell, prior to receiving state approval. California will temporarily waive the additional filing fee if you miss the renewal deadline. Certain states are relaxing certain application procedures, such as notary requirements and allowing online filing or submission of digital FDD copies. There may be additional updates, so please contact me directly to discuss further.

 

As I mentioned in an earlier message:

 

You should to move forward with customary year-end FDD updates, including completing audited financial statements, and state franchise filings. The cost to do so now is much less than the cost to revive them later. You will want to successfully position your system to respond quickly, effectively and profitably and continue to expand and develop your system when the pandemic and uncertainty subside. This is also a great time to update, adapt, and re-energize your systems, manuals, sources, plans, and business strategies.

 

As in past periods of recession and economic uncertainty and recovery, I anticipate that interest in franchising will not only continue, but increase, when the time comes. There will likely be a number of individuals who have lost jobs or trades that have access to capital (savings, family resources, funding, 401Ks, severance packages, etc.) and that have a strong desire to move on to the greener pastures of business ownership opportunities.

 

Be an Entrepreneur – Think Outside the Box

Some of our restaurant and food services franchise system clients are starting to offer produce, other appropriate food and beverage items, and durable products (such as virus related stuff - sanitizers, masks, detergents, soaps, TP, etc. - and consumer related items available from their usual suppliers such as utensils, spices, and paper products). The customer can obtain the items (sometimes without advance ordering) by drive-through or curbside, thus avoiding the Petri dish of Costco.  I was pleasantly surprised to learn that Sysco actually has developed a program to fit.

 

Many franchise systems are resorting to telephone and video conferencing during this “stay safe, stay home” period. There are a number of online options such as Zoom, Microsoft Teams, Free Conference Call, many of which cost effective or even free. However, be careful if you want to record any part of such online or other meetings. Relevant laws apply in each state where each participant resides or is at the moment.  Under some laws it is a misdemeanor (or even a felony) to record someone's voice without their documented permission.  In some states, recordings cannot be used in court. As an illustration, relevant Washington rules have worldwide reach if there is an connection to Washington State. When you schedule, and plan to record, an online meeting, identify laws that might would apply and how to comply with them.

 

Think outside the box. What can you and your franchisees do to use your resources to advantage today?

 

Be Safe, Be Happy, Take Advantage of this Time Given You

I pray for continued health, safety, and success for you, your family, your business associates, and your organization. Please let me know how I can help. I continue to work from my home office and I am readily available by phone and email. I can also arrange to meet via webcast or similar technology if that helps.

 

I look forward to hearing about your experiences and viewpoint. I am excited to share current experiences, analysis, and understandings.



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