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attached as Appendix B-1 to the franchise agreement. There is, however, a way to avoid signing the personal guaranty attached as Appendix B-1. More specifically, Section 1.4 of the franchise agreement says that: Notwithstanding the foregoing, if this Agreement includes the Current Economic Terms, and if( a) an affiliate entity that we approve in our sole discretion, maintains a majority interest in at least five( 5) PLANET FITNESS businesses which are open and operating; or( b) an affiliate entity that we approve in our sole discretion has a majority interest in PLANET FITNESS businesses which collectively have maintained annual EFT revenues for at least two( 2) consecutive years of at least Five Hundred Thousand U. S. Dollars($ 500,000); such approved affiliate entity may sign Appendix B-2 to this Agreement( Affiliate Guaranty of Franchisee’ s Obligations) in lieu of your Owners signing the Owners’ Personal Guaranty of Franchisee’ s Obligations. As a result of the above, if you want to avoid signing a personal guaranty when executing a new franchise agreement and instead have one of the franchisee’ s affiliates sign a guaranty, you need to establish three things:
First, the franchise agreement you are signing must be on the Current Economic Terms, which generally means that the franchise agreement calls for, among other things, a 5 percent royalty on monthly and annual fees( i. e., franchise agreements with a sliding scale royalty and franchise agreements that do not require a royalty on annual fees are not on the Current Economic Terms).
Second, you need to identify an“ affiliate” of the franchisee. Section 1.4 of the franchise agreement defines“ affiliate” as an entity that directly or indirectly owns or controls the franchise or an entity that is under common control with the franchisee.
Third, you need to make sure that the affiliate you select either:( a) owns a majority interest in at least five Planet Fitness franchises; or( b) owns a majority interest in Planet Fitness franchises having had annual EFT revenues of at least $ 500,000 for each of the past two years.
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In the Planet Fitness context, a personal guaranty means that an individual( the owner( s) of the franchisee) is required to guarantee the franchisee’ s performance. |
To give you some examples of how this might play out for you, consider the following hypothetical scenario. Max is an individual who owns five Planet Fitness franchises. Max has his franchises set up so that each franchise is owned by a different limited liability company, Club Level, LLC. Each Club Level, LLC is 100 percent owned by a holding company, and Max owns 100 percent of the holding company. Club Level, LLCs 1, 2 and 3 have each had $ 400,000 in annual EFT each of the past two years. Club Level LLC, 4 has had $ 200,000 in annual EFT each of the past two years, and Club Level LLC, 5 has had $ 600,000 in annual EFT each of the past two years.
Given this scenario, and assuming Max’ s new franchise agreement is on the Current Economic Terms, Max could avoid signing a personal guaranty by having:( 1) the holding company sign the affiliate guaranty because the holding company has a majority interest in at least five Planet Fitness franchises;( 2) both Club Level, LLCs 1 and 4 sign the affiliate guaranty because those two Club Level, LLCs collectively have over $ 500,000 in annual EFT over the past two years( i. e., $ 400,000 + $ 200,000); or( 3) only Club Level, LLC 5 sign the affiliate guaranty because Club Level, LLC 5 by itself has over $ 500,000 in annual EFT over the past two years.
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Hopefully that example gives you better insight into how the affiliate guaranty works in theory, but how does it actually work in reality? My two main recommendations for all of you would be:( 1) when you ask PFHQ for a new franchise agreement, tell PFHQ what affiliate or affiliates you want to have sign the affiliate guaranty, and( 2) when you go to actually sign the affiliate guaranty, make sure the proper entity or entities are listed, and if they are, only sign the affiliate guaranty( Appendix B-2) and do not sign the personal guaranty( Appendix B-1). In my experience, the second point has not always been made clear so keep this in mind, and make sure you only sign what you need to.
While I suspect it would be a good idea for most of you to swap out the personal guaranty with an affiliate guaranty, I do want to remind all of you that you should likely discuss this choice, and the selection of a particular entity to sign the affiliate guaranty, with an accountant or other trusted advisor, as signing an affiliate guaranty is still a guaranty and it can have consequences if things do not turn out as planned. Additionally, your banker or other lender may want to know that you are considering having an affiliate sign a guaranty, as this may impact certain loan covenants and requirements.
As the opportunity to swap out a personal guaranty with an affiliate guaranty is not an option in every franchise system, hopefully this serves as yet another example of the good work the PFIFA is continuing to do on your behalf and the entire group of Planet Fitness franchisees and why it is important to be a PFIFA member, because, without PFIFA’ s efforts, there would be no opportunity to sign an affiliate guaranty. 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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GearedUp | 2016 Issue 3 |
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