Start With A Win - Franchise Talk and Employee Engagement Insight with Attorney/Author Andrew Sherman

Episode Date: May 3, 2023

Have you ever wondered exactly what a Franchise is?  We dig deep in to the difference between a license agreement in a business and a franchise in this episode with our guest, Andrew Sherman.  We also talk about employee engagement and disengagement.  Great episode FULL of business information.Andrew J. Sherman of Brown Rudnick is a partner in the Firm’s Corporate Practice Group and co-practice group leader of the Emerging Growth Companies & Venture Capital Group. A recognized authority on the legal and strategic aspects of business growth, Andrew’s practice is concentrated on domestic and international franchising, mergers and acquisitions, and corporate counseling.Andrew has written nearly 30 books on the legal and strategic aspects of business growth, franchising, capital formation, and the leveraging of intellectual property, most of which can be found on Amazon. He also has published many articles on similar topics and is a frequent keynote speaker at business conferences, seminars, and webinars.  Main Topics: 02:13 What is a UFOC, now a FDD?03:52 If you have these 3 legs of the stool, you have a franchisee! 06:20 Are you licensing a concept or franchising a concept?09:26 Where does a business cross the line into Franchising?16:23 The biggest challenges & what can we do better19:09 Percentage of Employee Engagement by a Gallop study23:11 What Leaders of Franchisors need to actively include in their strategic planning meetings!25:05 What is the foundation of the disengagement & what do people need?28:00 Tolerate is a very dangerous word29:55 What was the goal of today? Connect Andrew J. Shermanhttps://brownrudnick.com/https://www.amazon.com/stores/Andrew-J.-Sherman/author/B001JP9TUC?ref=ap_rdr&store_ref=ap_rdr&isDramIntegrated=true&shoppingPortalEnabled=true Connect with Adam:https://www.startwithawin.com/https://www.facebook.com/AdamContosCEOhttps://twitter.com/AdamContosCEOhttps://www.instagram.com/adamcontosceo/  

Welcome to Start With A Win, where we talk franchising, leadership, and business growth. Let's go. And coming to you from Start With A Win headquarters here at Area 15 Ventures, it's Adam Kantos with Start With A Win. Have an amazing guest and a great friend on today. Andrew Sherman is a corporate and transactional attorney and an author of an amazing book we're going to dig into, Crisis of Disengagement. Andrew is a senior partner at Brown Rudnick out of Washington, D.C., and has an extensive

amount of business information locked up in that head that he's going to help us unpack today, as well as a lot of knowledge on franchising. In fact, Andrew has an extensive history on franchising. That's how we met is through the franchising space. Andrew, welcome to Start With A Win. Oh, it's great to be on. And I say you start with a win, finish with a win. Let's get wins all the way across. There you go. I love it, buddy. Hey, why don't you tell the audience a little bit about yourself? Dig in a little deeper than I did and kind of give us a flyover of your business history.

Kind of what Andrew Sherman is all about. Sure. I'm kind of the lawyer embodiment of Rocky I. Grew up in West Philadelphia, moved down to the Baltimore area at 16, started a franchise company at 17. And as a college dropout, went back to college after three years of running the franchise company, went on to law school and decided that I would devote my career to representing franchisors and entrepreneurs as opposed to being one and have been doing it ever since. As you mentioned, Richard wrote a bunch of books on franchising, entrepreneurship, business growth. And when I'm not lawyering, I'm teaching either at University of Maryland or at Georgetown

Law. Oh, right on. A fellow professor there. So it's interesting because you and I were in DC together talking and Dave Linegar, the co-founder of Remax was there and you're like, I worked on your first UFOC. But, and for those of you that don't know what a UFOC, it's Uniform Franchise Offering Circular. Now it's called an FDD or Franchise Disclosure Document. It's the Federal Trade Commission regulated document that we as a franchise or must give all potential franchisees and file with the government every year. Tell us about that. I mean, you you came across the first client. It was unbelievable. I was so happy to see Dave, you know, 1986. I get out of law school

and I'm working with a gentleman named Scott Smith. And Scott had a long history with Dave and REMAX. And, you know, the chance to catch up with Dave after all those years, we worked on the New York filing when the New York regulators didn't even understand the commission schedule and passed it over to the real estate people and, you know, got to know a bunch of the sub franchisors, real estate of New York, real estate of, sorry, Remax of New York, Remax of Quebec. I mean, really got to know the system very well. Those were my early days of being a franchise practitioner. So it was an honor and a pleasure to see Dave and just thank him for not only all that he contributed to my career, but all that he's contributed to franchising.

Cool. And for those listeners of ours, we have a lot of listeners who are franchisees, a lot that are in franchises. We know there are probably 800,000 franchise units around the U.S. at this point. And 900,000 listeners. There you go. Yeah. You look around and there's franchises everywhere.

It's great. Can you give us the short attorney definition? Because I know, you know, there are really three things that if you have these three things, you have a franchise. So can you explain to us briefly what is a franchise and how do those three things play into this? Sure. So the way that the federal and the state laws work is no matter what you call yourselves, you can call yourself almost anything. But in the eyes of the regulators, if they find three elements of the transaction present, then you need to comply with federal and state franchising laws. And think of them as three legs of a stool. The first one is that there is the licensing of a brand, typically a federally registered brand, and all that goes with that. It could be slogans, it could be colors, it could be trade dress, but that the identity of the business is going to be licensed from the franchisor to the franchisee. The second one is that there's initial payment of $500 or more within the first six months of the relationship. And it doesn't have to be called an initial franchise fee. The fee element could be satisfied if there's an embedded relationship,

if there's an irregular markup on equipment or inventory that the franchisee has to buy. So don't think that just because there's no franchise fee that you haven't satisfied that leg of the stool. The third one is the most elusive because it has to do with a subjective test of significant control or assistance. So if the franchise or the license or, depending on what conclusion we reach is exercising quality control over the franchisees day-to-day operations and there's training programs and operations manuals but where this third element gets a little bit confusing is remember that the Lanham Act which is federal trademark law requires not, not makes optional, but requires

a licensor of a brand to exercise a certain amount of quality control over their licensees. So it's a bit nuanced. If you're exercising only what's called Lanham Act controls under Section 43, you may not meet the third leg of the stool from a franchise law perspective. But if you think about McDonald's, I mean, you know, every last detail of everything that happens inside of McDonald's short of joint employer risk is dictated by the franchisor and they would clearly satisfy that third leg of the stool. So let's break down the difference between licensing a concept and franchising a concept. Where do you see most people being legal in licensing a concept versus franchising the concept?

Well, think of licensing as an umbrella. And under that umbrella is merchandise licenses, brand licenses, university licensing, tech transfer licensing, software. You know, every time you open up a piece of software, they call it shrink wrap because the old days before we downloaded software, we'd go to the store and buy it. And the minute we opened up the plastic wrap, we were a licensee of that company's software. Business format franchising is a subcategory of licensing. It just happens to be a regulated form of licensing because you are offering a business opportunity to a franchisee and that franchisee deserves to make an informed decision. So think of franchising as a subcategory of licensing

that has that additional twist. And it's really, I like to say, franchising is like a kid's sister to the securities laws. The securities laws are designed to create an informed investor. And when franchise laws first started being passed in the 70s and 80s, the same principle applied. We want to create an informed franchisee. We want someone to decide to become a REMAX franchisee or whatever system on an informed basis. And there's two approaches. There's the approaches around the globe that don't have franchise laws that says, hey, we're going to rely on people to ask all the right questions. And then there's the U.S. approach, which is followed by a few other countries that says, no, rather than rely on them to ask the right questions,

we'll just put all the answers in items one through 23 of the FDD. So, you know, we we tend to have a society where we look after people that may or may not be able to look out for themselves. You know, there's there's good points and bad points to that, I guess. You see a lot of, I guess you could call them illegal franchises out there. We like to say inadvertent. Yeah. Inadvertent is, yeah, I mean, they are, in fact, illegal if they continue without making disclosure. But the interesting legal point that you're raising is when a relationship starts out

as basic and then it gets more complicated, many of those relationships back their way in. That's why we like to say inadvertently into the definition. They may start out as an ordinary licensor or licensee or a manufacturer wholesaler or wholesaler retailer. But as things get added to the relationship to make them more complex, you can inadvertently back your way into the definition. Okay. So let's take, for instance, a situation where, let's say you're selling socks here. I want to give you a scenario because I want you to unpack kind of where we cross this line. I see, I do see a lot of businesses cross the line into franchising and they, as you said, they're,

you know, inadvertent, but let's unpack this briefly. Let's say that you have, um, you get a deal with, uh, Joe's socks and Joe makes the best sports socks out there and you start selling them at your garage sale, you're fine. You're just a reseller at that point. Okay. You're just a, maybe even I, I add some sock expertise and I'm a value added reseller, but, but I'm definitely just a reseller at that point. Okay. And then the second part would be, let's say Joe has a branding requirement where you have to have Joe's kiosk at your garage sale, but you're just, you're selling his socks at your garage sale under your control, but it's within Joe's end cap at your garage sale. Would that be more of a licensing agreement then where you're licensed

to sell them there? Yeah, you're still probably I'm not I'm not following any business system or marketing system. I'm not wearing a Joe Sox mandatory uniform or greeting people with a mandatory Joe Sox greeting or saying thank you in a Joe Sox kind of way. There's no business system being licensed. It's when Joe's or I'll let you take it to the next level in your hypothetical. All right. So now you decide, OK, I'm going to go work with all of the junior sports teams around here. So I'm going to get with Joe's and he's going to tell me how he wants me to operate a pop up at each of these sports events. So I'm going to follow the guidelines that Joe's set forth. He says,

okay, if you're going to do a pop-up, it needs to be, and I'm going to pay him the ability to do this because he's going to help me market my location by putting it on his social media and things like that. You know, get Joe socks at the junior soccer game out here. Our representative will be there. I show up. I have Joe's branding, which is all his branding. It's not mine. I'm not calling it Adam's socks or anything like that. I show up. I set up the pop-up. I work based upon the rules that he says I have to work under at this location, such as scheduling people on 15-minute sock fittings or what have you. Did we cross a line here or where are we at now? We probably did. And let's just to make it more interesting,

Joe's is now providing some training and some field support. Joe's may have expanded into boxer shorts and T-shirts. You know, we've got the whole line of underclothing going. Joe's is becoming a more recognized brand. So there's collaboration with other franchisees in the area, which might include a local marketing fund of some sort. I mean, we're beginning to layer on the elements that we would typically find in a franchise relationship. And to go back to your previous question we're adding the elements that a regulator would look for in determining whether a relationship was a franchise or not okay so

andrew now the um steve who happens to be a uh works for the attorney general's office or as a um you know some sort of a ftc employee or something like that. She comes to the soccer game with their kid and they're like, wow, Joe's socks. That's pretty cool. And has their kid try on the socks and says, hey, are you a franchise? The person goes, no, I just licensed this brand from Joe's. What happens and how does that company end up being approached by the Federal Trade Commission or, you know, approach for inadvertently operating a franchise? What happened? Right. So let's make our soccer game in Baltimore, Maryland. And you know why I chose that city. Maryland's a registration state. And what Steve,

whether he works for the FTC or for the Maryland Franchise Regulatory Agency, he would ask me, oh, did you, when you considered this business opportunity, were you given an FDD? Did you have a chance to ask questions? Did you get a copy of Joe's financial statements? And I say, no, I didn't get any of those things. In fact, I don't even think Joe's is registered to sell franchises in the state of Maryland. That's where your regulatory issues begin, because you've essentially offered what a regulator will consider to be the equivalent of a franchise, but you haven't complied at the FTC or state level with the laws. And no, the consequences may vary based on, you know, whether it appears you intentionally were trying to circumvent the laws or whether you sold one off in the state and you're now willing to comply. So the penalties and the consequences of the noncompliance may vary. At the very least, Joe's is probably going to have to give me a rescission

offer where I'll have the ability to unwind the relationship if I want to. But to your point, if this kiosk that's set up at the soccer games is selling socks off the shelf, I probably won't want to rescind. I'll want to be properly disclosed, but the relationship is of economic value to me at that point. Gotcha. This is really important because a lot of people look at, okay, I'm just going to license my company. I'm successful. I've got a friend who wants to start doing it, so I'm going to license. I'm using air quotes here, people, for those of you not on video. I want to license that company and allow my friends to do it. But ultimately, I mean, it sounds to me like there's really not a lot of room between just doing something yourself and a franchise. This whole licensing

space seems to be really obscure and fraught with kind of legal peril, if you will, where you need to talk to an attorney if you're starting a business and you're involving more than yourself. Definitely. And if you are a distributor or a dealer or a licensee and you're listening today and you're wondering, hmm, am I in a franchise relationship? That's another point where you could go look at the elements of your relationship against the three legs of the stool that we talked about. And if it looks like all three elements are there, you may want to consult counsel as to how to approach the licensor or manufacturer that's taking the position that they're not a franchise. There's a lot of communication going on here in order to figure this stuff out. You know, you and I have both been in franchising for decades. I mean, I've

got a couple of decades, you've got four decades in. So let's call it we're together. Scary just to say that. Don't get me wrong. We've got a little bit of time behind the wheel here. So it's fascinating. What are the biggest challenges you see in franchising occur on a regular basis? Is there a commonality or is it just kind of all across the board? I think franchising is at an important inflection point. I think that the impact of technology, AI and chat GPT, the state of franchising relative to DEI and ESG is under scrutiny. The state of franchising relative to some very disturbing disengagement. And not all the systems I think are going to make it. Some are too embedded in their old ways. And some of the newer concepts may be too dependent on

technology. You know, at the end of the day, it's a relationship business. It always has been and always will be. And it's a relationship of trust. Many franchisees have said other than their spouse, you know, there's no relationship they have that's more trusted than the relationship between the franchisor and franchisee. And I think that trust has taken a bit of a beating over the last couple of years. And, you know, we do have to examine the relationship and examine the value proposition of the relationship and make some improvements. You know, we could do better in diversity and inclusion in franchising. We could do better in how we are meeting ESG standards. And I think you're going to see a lot of transformation,

not including the advent of technology. I totally agree. You mentioned a word in there, and I want to unpack this word because you actually have a book that has this word in it. You have a book called The Crisis of Disengagement. And you mentioned the word disengagement. And when you're describing some of the evolving challenges in franchising or the, you know, not, I guess you could say not evolving. They're there. There's a great deal of disengagement that happens a lot in the space. First of all, tell us about your book, The Crisis of Disengagement. Why did you write it and what is it about? Well, it's about the state of disengagement in this country on a pre-COVID basis. The book came

out just prior to the pandemic. I would argue the pandemic exasperated the problem, not made it better. But I wrote it as the third leg of a different triangle. I had written a book a few years ago called Harvesting Intangible Assets, and I speak and write and did a TED Talk about innovation. I also did a book called Essays on Governance, which was about governance and leadership. And I realized that, OK, I've got the innovation topic covered. I've got leadership and governance covered. But if you don't have a culture of engagement, you can talk all day about innovation and

business growth and productivity and entrepreneurship and intrapreneurship. But if people are disengaged, none of it matters. And then I stumbled on the Gallup study and about fell out of my chair. Let me just quickly summarize for your listeners. Out of for every hundred workers, now this varies a little bit from company to company, but as a general rule, and they interviewed high tech, low tech, older employees, younger employees. Four percent out of 100, four out of 100 are considered by themselves to be highly engaged. Another 20 percent after that consider themselves to be somewhat engaged. So 24 percent are either somewhat engaged or highly engaged.

Fifty six percent describe themselves as disengaged. And nearly 20% of our workforce, one out of every five employees, describe themselves as highly disengaged, aka toxic, toxic for themselves and toxic for others around them. So we're at this point where, you know, if I'm a franchisor and I'm trying to recruit franchisees, are we really saying that only 4% out of every 100 candidates is going to be highly engaged? Are we saying that only 4% of the franchisees' employees will be highly engaged? What impact does that have on brand, on customer service? You know, are we saying that only 4% of the supply chain and the ecosystem

are going to be highly engaged? I mean, what are the franchisors doing to ensure that there's a higher level of engagement in the franchise system? And I did write a little bit about that in the book that this is not just an employer-employee issue. It's a franchisor-franchisee issue. I would submit that this is a public issue, that this is a everybody issue. Because, Andrew, we have to hold up the mirror every day and look at ourselves before we walk out the door and say, am I going to go in and give it everything I've got? And if only 4% of the people out there are saying, I'm going to go give it everything I've got, and then we get better today too, which, you know, you can call that actively engaged or highly engaged. And then you've got engaged, who are the people who do a

good job. They, I mean, they work hard. They have a great attitude, things like that. But you know, what scares the heck out of me is this three quarters of society who are either disengaged or actively disengaged. Right. I mean, not to play off your podcast, but it's almost if they're waking up in the morning and saying, let's start with a lose. Let's start with a loss. You know, my day's going to suck. And so I'm just going to have that attitude from the minute I get out of bed till the minute I go to sleep. And there's one other point. This is an international competitiveness issue. If we are going to continue to allow for political and racial and social divisiveness, and we're getting even more inwardly focused and caring about only ourselves, you know, our level of disengagement is going to continue to go up. And then we can't compete as a country.

You know, what's made this country great for 200 plus years is the fact that no matter what our differences are, we choose to work together. We choose to be Americans first. And the last five years, I don't know that I can say that. You know, it seems like, you know, we go out of our way to point out the disagreements that we have with one another, you know, based on our gender, our political beliefs, our religious beliefs. You know, the amount of workplace and school shootings. I mean, we could go on and on and really depress people. But, you know, it doesn't appear to be getting better. And for the portion of your listeners that are in the franchise community, we cannot be ostriches with our head in the sand.

We have to, you know, leaders of franchisors need to actively be including issues of engagement in their strategic planning meetings, in their growth assumptions, in their customer service policies. Because you're right, how do you keep a customer of the franchisee happy if 76% of the people that they hire really don't care? So you ask yourself, what's the first thing you notice when you walk into a commercial establishment? Call it either a restaurant or a hair salon or the grocery store or whatever. It's the attitude of the employees. 100%. That's the front line.

That's the front line. And most of them are on their phones. They're apathetic. You know, apathy is a plague running through our country right now. I mean, you and I are smiling. We're having a great time doing this podcast together. We're hopefully motivating others. But I wish I saw more of that. This is the first time in my life, I'll be 62 years old this fall. It's the first time in my

life I run into more people that are unhappy than happy in my day-to-day, you know, and that's got to change. And it's as fundamental as that. That's got to change because it's spilling over into the ways that we interact each other. It's not, you know, all of this uptick in violence and shootings and things is a reflection on how unhappy people are with themselves and how unhappy people are with each other. You know, otherwise, who wakes up in the morning and says, I'm going to a school or a workplace or a movie theater or, you know, for God's sakes, over the weekend is a sweet 16 dance at a dance studio. I mean, come on. If we can't send our kids to a sweet 16 dance and safety, where are we going as a country? So Andrew, let me ask you this. When it comes to this disengagement and active disengagement, what is the foundation for that? Is it the leadership

in the business? I mean, that's what I think it is, is, okay, we have mirror neurons and we do what we see others do. And if your boss has just a killer, great attitude and is exhibiting that with who they're talking to every day. I mean, do you think that's the beginning of this? It's a start. We need more empathy. Empathy is talked about in the book. You know, we need more ways to recognize and appreciate people.

And one thing I learned in my research for the book, it's not just quantitative. It's very much qualitative. Employee recognition, it's got to be real and genuine and authentic. When it's fake, it has the reverse effect. And one other point, not to sound like Nancy Negative here, but the issue is beyond just good customer service. Studies have found that poor engagement leads to more workplace safety incidents, more workplace theft and, you know, and violence and harassment. You know, I mean, bad things happen when we don't respect each other. Bad things happen when we're unhappy and we bring that unhappiness to the workplace.

And it's happening in our communities as well. But, you know, the first thing that needs to happen is leadership needs to recognize it's a problem and then really chip away at what will it take to get people happy. And the reason the pandemic exasperated it is it was a little easier to deal with this at the water cooler or in the conference room. But when nobody was coming to work, you know, the level of disengagement fell even further because even though people said that they like to work from home in their pajamas, you know, that just made them even more inwardly focused over time. So we've got some work to do there. I'm very surprised that business leaders, political leaders, educational leaders are not talking about it more. It seems to be, I call it booger syndrome. You've got a booger hanging out your nose, but nobody will tell you. And you walk around all day now with that booger. So disengagement is definitely the booger

that we're all walking around with, but nobody wants to confront. Do you think people just don't notice that they're actively disengaged or disengaged or do they just lost their ability to care about it? I think it's more of the latter. I think everybody notices how disengaged people are with themselves, with their families, with each other. But nobody

seems to know when or how to attack it. It's like having a family member that's always a jerk at family dinners and holidays, but nobody ever says anything. We just kind of tolerate it. Tolerate is a very dangerous word if you think about it. Tolerate means, you know, we are consciously putting up with a bad situation and doing nothing about it. And there's a fair bit at the root of the disengagement problem is a high level of unacceptable tolerance for, you know, the guy in the office that makes inappropriate comments, but then nobody takes action. You know, the family member that is always a jerk at Thanksgiving dinner, but nobody stops inviting them. You know, I think we've got a fair bit of that at a very high level. Can we end on a more positive note? Yeah, right. I'm sorry. I'm a generally glass-passed full person, but I think

the reason disengagement hits me so hard is I really, I don't want to lose the edge that our country has as being innovative and creative and collaborative and team oriented. And I'm seeing it, you know, slip away. And it worries me as a citizen. You know, I'm not an expert on HR. I'm not even an expert on disengagement, but I am a citizen that spends most of my time in the areas of innovation and entrepreneurship and business growth. And I don't think we can accomplish those things with the state of the culture that many of our companies are in right now. Totally agree. Totally agree. Thank you. And thank you for shining a light on this situation. I encourage everybody to check out Andrew's book, Crisis of Disengagement. You can find it on

Amazon. Andrew, are there any other places we can find you? You can usually find me slogging away at my desk. I'm on the Brown Rudnick website. Check out, if you have time, my Amazon author page. It's got all my titles there. And, you know, it was just such a pleasure being on the show. I hope that we have many more opportunities to appear together and talk about the problems of the day. Remember, folks, if you're listening, the goal today was not to depress you. The goal was to activate you. You know, you can be a champion of engagement. You can be a champion of innovation and teamwork and collaboration. I really don't think it's too late.

You know, if we assume that the 20% highly disengaged are incurable, there's hope in the 56%. You know, you and I, Adam, are both professors. Imagine you had 56% of your students getting C's and you could move them up to B students. That movement of the needle would make a very significant difference in our society. Totally agree. And a great point. Let's take a look at the opportunity we have to lift each other up and create more engagement in our employees and the people that we just interact with every day. Andrew, some amazing points. I do have a question for you that I ask every one of our amazing guests on Start With A Win, and that's, how do you start your day with a win? My day starts with a fair bit of coffee, which I've been drinking since I was 11

years old. Right here, baby. And yeah, exactly. And then I'm a list maker. You know, I think that many successful people have a system of some sort. I know some of the old school folks are list makers. So I'll make a list of the 10, 12, 15 things that I need to get done that day. And I used to think that if I didn't get to all of them, the day was a loss. As I've gotten a little older and wiser, I realized that if I could get to 60, 70% of that list, then the day has been a win. And I'll just have to roll the last couple over to the next day. So whatever your system is, I think list making is good. All of us have a list of things to accomplish throughout the day. And we feel a sense of satisfaction when we accomplish them and put some things on the list that are non-typical.

Like how many people did I make smile today? How many people did I make laugh? How many people did I compliment the work that they did to help me? You know, it's not just like running errands or doing work projects. It should also include some of the softer emotional intelligence type skills. Awesome. Andrew Sherman, corporate and transactional attorney with Brown Rudnick in Washington, D.C., a franchising expert, a great friend, author of Crisis of Disengagement. Andrew, it's great to see you again, my friend. I look forward to the

next time. And until then, thank you for starting with a win. Thanks for joining us on Start With a Win. Be sure to like and subscribe to this episode and share it with your friends. Also, be sure to check out Adam on YouTube at Adam Canto CEO, as well as on all the social media platforms. And don't forget, start with a win.