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2016 Issue 2 | GearedUp
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Franchisee Agreement Continued from page 25
development obligations). We said that was unacceptable and pushed back. After some back and forth, PFHQ agreed that a developer would only need to develop one club every two years in order to avoid being defaulted. In addition, PFHQ agreed that a developer could use a“ grace period” if they did not develop within that two-year period. Overall, while we would have liked this to never have been included, we pushed back and made it significantly better than initially proposed.
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Initial Franchise Fee – FA
In 2015, the ADA fee was $ 10,000 per club to be developed and the initial franchise fee was $ 10,000 per club. PFHQ initially wanted to go to $ 20,000 for each( i. e., a developer would have to pay $ 20,000 per club when signing the ADA and then $ 20,000 each time he or she signed an FA). We were able to push PFHQ back to only $ 10,000 per club for the ADA fee, but PFHQ was unwilling, despite numerous attempts on our part, to lower the $ 20,000 initial franchise fee back to $ 10,000. As a result, in 2016 the ADA fees will be $ 10,000 per club to be developed and the initial franchise fee will be $ 20,000 per club. Keep in mind, however, that if you have an existing ADA that fixes the initial franchise fee( e. g., an ADA that
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calls for no initial franchise fee or only $ 10,000 per club), the ADA might control and permit you to continue paying a lower initial franchise fee.
Pre-Sale / Grand Opening Marketing – FA
In the 2015 FA, the pre-sale marketing was fixed at $ 20,000 per 30 days, and there was no cap on the amount PFHQ could force a franchisee to spend during the presale period( which could have been 45 days or longer prior to opening the club and up to 180 days thereafter, with a total spend of $ 150,000 or more). PFHQ initially proposed a substantial increase( i. e., more than double) to the amount of pre-sale marketing spend. We pushed back, and PFHQ ultimately agreed to set the monthly spend at no less than $ 20,000, and no more than $ 30,000, per 30 days and agreed to cap the fees at $ 120,000. In addition, PFHQ agreed to consult with the franchisee prior to setting the monthly spending requirement, which gives the franchisee some ability to provide input into the process. As compared to the 2015 version, the franchisee might be required to spend a bit more in a particular month($ 30,000 per 30 days vs. $ 20,000 per 30 days), but there is a cap on the total spend at $ 120,000.
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Matching Franchise Agreement and Lease Expiration Dates – FA
In the 2015 FA, the FA expired 10 years from the date PFHQ signed it, irrespective of when the franchisee’ s lease might expire( which often caused franchisees to have leases that expired before or after their FAs, leading to problems with both PFHQ and landlords). As a result of input received from franchisees, we requested, and PFHQ agreed, that PFHQ grant franchisees the ability to request that the FA term be extended, by up to 12 months, to match the date of their lease expiration. The franchisee simply has to fill out a form attached to the new FA and make the request within three months from the date the new gym opens. As a result, the franchisee should now be able to avoid the situation where the lease and
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the FA do not match up. Overall, this is a good“ win” for the franchisees and should alleviate a number of difficulties that franchisees have been facing over this issue.
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Caps on Transfer Fees
Currently, a franchisee transferring his or her agreement( except for certain transfers where no fee is required) is required to pay PFHQ the greater of $ 25,000 or $ 10,000 per club, plus any outof-pocket expenses PFHQ incurs related to outside legal fees. We had pushed PFHQ to insert a“ cap” on transfer fees, e. g., transfers of 10 clubs or less would be capped at $ 75,000. Unfortunately, despite significant back and forth on the issue, PFHQ ultimately said it was not, at that time, ready to insert a cap on transfer fees directly in the FA. PFHQ did, however, agree to work with the PFIFA to create a transfer policy that would provide for some savings to franchisees transferring their clubs. Rather than just cap fees based upon the number of clubs being transferred, however, PFHQ said it was willing to consider capping fees( or providing discounts) based upon:( 1) increased royalty rates upon transfer( e. g., if someone with a sliding scale royalty transfers and the transferee will pay a 5A royalty);( 2) transfers involving low EFT clubs;( 3) transfers involving existing franchisees( as PFHQ has less due diligence and training to do if the buyer is already a franchisee); and( 4) possibly looking at the number of clubs involved in the transfer. In addition, PFHQ said it might be able to include a cap on outside counsel fees, which would likely be based upon the number of clubs being transferred. In short, while there are no changes to the transfer fees in the 2016 FA, we are hopeful PFHQ will ultimately agree to something that will benefit all franchisees. G
J. Mark Dady is a partner at Dady & Gardner, P. A. His practice is focused on the representation of franchisees, dealers and distributors located throughout the United States. For more information on Mark and Dady & Gardner, P. A., visit www. dadygardner. com; call him at 612-359-5488; or send an email to mdady @ dadygardner. com.
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