Episode #595: Legal Advice for HALO Entrepreneurs-Pitfalls, Intellectual Property, and Franchise Exits with Matt Fornaro

0:01 This is Pete Moron, Halo Talks nyc. I have the pleasure of bringing straight from South Florida to our podcast, Matt Fernaro. We're going to talk about legal issues. We're going to talk about lawyering up at the appropriate times, intellectual property, maybe some commercial leases and why she moved to Florida, I guess. So good to have you on the show. Thank you. Thanks for having me. So you started off at two big law firms back in the day. You know, give us a little background on why you left to start your own firm and you know, what that's allowed you to do and the clients you've been able to help. Sure. So, you know, I've been practicing law for more than 20 years. I used to work at two large AmLaw 200 law firms doing mostly commercial litigation, representing big businesses, banks, insurance companies. So I had the opportunity about 11 years ago now to actually go to one of the 10 largest law firms in the US to kind of continue what I was doing.

1:03 And I was all ready and set to go and, you know, had one foot in the door and I was thinking to myself, well, what am I going to do? Am I just going to keep going like, you know, to bigger law firm, even though I don't think I can go any bigger than that and just, you know, be pigeonholed into what I'm doing and, you know, be a cog in the wheel working for the man. So I decided, you know, that was probably my last best chance, at least anytime soon in my professional life to go out and start my own law firm. So that's what I did. And I wanted to focus on helping like small businesses, entrepreneurs and startups, predominantly because I felt that they were underserved by big law and by, you know, local attorneys out in the suburbs. So that's how I moved to my current niche and that's what I've been working on the last 11 years. Gotcha.

1:59 And how do you calibrate clients you're going to take on when maybe they're kind of bootstrapping and trying to find some seed capital to take equity in some of the companies or maybe start off small and say, look, I'll be your lawyer for the early days and also for the times when this is a nice cash flowing business? Yeah, I don't want to get involved in having any equity or part of a client's business due to various problems that that creates. So I just get paid either depending on what I'm doing, either on a flat fee or an hourly fee basis and then, you know, depending on what the client's needs are and the client's budget is. We just go from there and do, you know, like the, you know, to use a different industry term, with the medically necessary stuff to survive and then go from there. When they have more money or they have more of a budget or more of a time budget to go do more things is there. They're like incubators or venture capital groups down in Florida that you've kind of tethered yourself to. Yeah, there's a lot of incubators and venture capitalists and founder groups and startups, and there's a lot of that down here run by a lot of.

3:24 Well, I should say a lot of it's, you know, run by government entities down here in all different counties, cities, different chambers of commerce, schools. So there's a lot of incubator activity and startup activity down here. Nice, Nice. So what are some of the things when an entrepreneur comes to you and, you know, says, I've got this. This product, should I patent it and go down that path or, you know, the power of a brand, how do you kind of calibrate the cost of intellectual property protection versus, you know, the fact that you have to obviously protect that as well, litigate it. Sure. So, you know, obviously when you're starting a business, I understand, you know, know your budget's tight or whatever, but at the same time, your most important things could be your intellectual property, particularly if you're developing a brand or a product. So I always encourage my clients that if they're developing a brand or a product, they need to protect it as soon as possible because otherwise you put it out there, someone's going to take it and someone's going to appropriate it. So you always have to put into the budgetary process of, you know, intellectual property protection, whether you're inventing something and you need a patent or you're coming up with an idea, a logo, a name, a website, and you need to trademark it. So it's always built in as part of my overview and my advice to the startup or the founder or the new

4:56 entrepreneur. Got it. You know, can you explain to us when someone says, I've got a provisional patent or I filed my papers, but, you know, it could be years till they actually get protection. Sure. So, you know, the patent process generally takes, you know, a longer time than other legal processes because there's a lot of research, a lot of back and forth that goes into it. So, you know, you have your patent attorney who, you know, generally I refer out the Actual patent prosecution, which is the application to get a, to get a patent. So they put together the patent, they do the application, they send it in, and then the uspto, the Patented Trademark Office, goes back and forth and says, this already exists. Change this or this isn't new, change this or do whatever. And then you get to the point where it's provisionally approved, but it's not officially, you know, a done deal yet, where you're able to go around and provisionally use it until it gets fully final approval. And the final approval process generally takes longer, but you can start using it when you have the provisional approval.

6:10 The final approval is just everything is in order, everything's ready to go, and then you get your patent issued for your 20 year period. Yeah. So Matt, we've been invested probably about 10 early stage companies and sometimes the operating agreements or the shareholder agreements are something that people kind of put together, you know, on, on a templated basis, but don't really actually know what, you know, the, the what it says when you have to pull it out and read it. What are some of the things that you've seen that you know, you warn entrepreneurs about or against? I've just had a situation where we had a co CEO role that I, you know, was adamantly against when we originally invested in the company. And that lasted, you know, longer than average. But you know, co founders sometimes are best friends, but, you know, running a business. So what are some of the things you've seen that like, you, like if you, if I was here earlier, I could have helped you avoid this?

7:14 Well, you know, one of the things, one of the easiest things, that they don't actually have a written agreement. That's always a nice touch. Or the written agreement they have is just something they pulled off the Internet that doesn't maybe apply to their particular business situation or their jurisdiction. So that's another issue. And then some people pull off ones that are, you know, just very generic and very basic that don't really, you know, say the who, what, when, where, why and how that's required in a proper agreement. So, you know, my advice or my thing is, look, this is a real business.

7:55 You're taking this seriously. You know, I understand you have a budget, I understand you have a time frame, I understand money's tight. But at the same time, you have to budget for having professionals help you do things, particularly at such important periods in the foundation and the starting of a business. So you have to have a business law attorney help you. You have to have a accountant help you. You have to have a commercial banker help you. And so one of the things when you're putting together a shareholder agreement or, you know, whatever else you want to put together is that you should have an attorney drafted who's familiar with the jurisdiction where you're actually in. And that's what their focus is. And they just don't dabble in business law or something because you want to make sure that your document has all the things necessary to protect all the parties, to say what the relationship among the parties is, to say who does when, where, why, what and how. And if there's a problem, how it gets resolved. And it's got a, you know, it doesn't have to be a massive document. It can be a short document as long as it has all the requirements in it. It needs to be in there. But it's something that's must be done. You can't cut corners. I mean, you can cut corners on certain things, but that's one of the things you don't want to cut corners on. Because if your business is successful or if your business is unsuccessful, that document is coming back into play for whatever reason.

9:26 And if it's not good, your results in your resolution of whatever situation you run into is going to be not good as well. This is Pete Moore. I want to let you in on a little secret. There's this company called Promotion Vault. And what they do is they give out rewards from retailers that allow you to incentivize your members without having to do 0 down and 1 month free or giving away shakes or giving away t shirts. What you want to do is build a rewards program that lasts, that people value and that doesn't discount your own products and services. So here's the deal. There's something called Rewards Vault. The Rewards Vault is going to allow a member to set up their own profile. They are going to answer questions, you are going to get those answers, you're going to be able to target those members and you're going to reward them inside your club, inside your spa and outside of the club and outside of the spa to get them to become loyal, to get them to pay their monthly dues and to be rewarded properly for the actions. A lot of companies are cutting back on rewards. You shouldn't be Promotion Vault, your answer, trust me, this is real.

10:41 So how has clients uploading documents or legal issues into chat GBT and then calling you up and either saying, hey, what do you think of this? Or what's your interpretation of that? Do you feel like you Guys are leveraging the use of those tools, and it's good that clients could go and search, but it's not really going to impact, you know, people that have to think and actually negotiate documents. Well, you know, I love AI and I use AI in my practice of law, and I use AI in running my business. But I use AI responsibly and ethically, where I'm the ultimate yes or no on what the AI does. And I review everything and make sure I fact check and check all the stuff that the AI puts out. So, you know, when I deal with clients, I welcome them to give me whatever documents you want, send me whatever information you want. I'm glad to review it, glad to give you my input.

11:40 You know, I'm not going to say no to anything you send me or whatever. However, at the same time, when you're just sending me crap that you get from AI, it may somewhat be right and it may be wrong. And you have to understand that you can't just be like, well, the AI said it, so it's good. I still have to review it and make sure it's right or wrong. So, you know, obviously over the last three years, and probably the last year in particular, you know, clients send me because I can just tell the way it's formatted and everything, whether it's in an email on the document they send me, stuff that AI generates. And like I said, sometimes it's right, sometimes it's wrong. But I'm the ultimate, as the attorney, I'm the judge of that. You know, I'm, you know, you're not, respectfully, as the business person, you know, the entrepreneur, the startup, when ultimately the client, you're not familiar with what the law is, what the application of the law is and everything. The AI may be in a general sense, but it doesn't know the specifics of your deal, it doesn't know the specifics of your jurisdiction or whatever. So I mean, you know, it's helpful sometimes it gets people's ideas put down on paper and helps them communicate what they want to do. But they have to understand that that's not the final word. And they have to understand that, you know, they have to take it with a grain of salt. And I've seen a lot of, you know, clients, you know, do that and they understand, yeah, all right, the AI, you know, did whatever we need the attorney to do, whatever. Or,

13:10 you know, I'll draft something or I'll put something together and I'll send it to them and then they run What? I send them through the AI and they're like this, what about this? I'm like, it doesn't apply. We're in Florida. It doesn't apply. It's a partnership. Imply. It's an llc. It doesn't apply. It's a corporation. And you know, I mean, glad to look at it. I'm not going to say no to you giving me ideas or information at the same time, you know, I got to go through it with a fine tooth comb and I got to tell you what's right and what's wrong. Yeah, I, I, I appreciate them doing the research, but not when they copy and paste the entire segment that says, do you want me to put this in a table? Would you like me to put this in a Word document PDF? It's like, at least edit some of that. So it looks like it's some of your primary thoughts jumping around here. What are your thoughts on safe notes with early stage companies and setting up pre money valuation?

14:11 I'm not really comfortable with those. I feel like I could try to value the company today versus kind of kicking the can forward on valuation. What's been your experience with that? I mean, the thing with valuation is totally speculative. No matter how much, you know, formulas or experts you get put into it or whatever. I mean, the value of the company, I understand what the projections and the tables say and what it's going to be, but at the same time, you got to understand that that's only, you know, fair market projection or whatever, and it could turn out to be a total bust or could turn out to be 10 times the amount. So when you have early projections or early evaluations at the startup phase, I mean, you have to be very careful or very, you know, suspect of those numbers because, yeah, they could be great or they could be terrible. So that's why when you're basing your, you know, your whole business around those valuations, whatever, you have to be very careful because as much as you want them to not be speculative, ultimately they are speculative, no matter how good the projections or numbers are.

15:20 And what are some of the, you know, either health and fitness companies that you've been working with, or you said you've done some commercial leases. We deal with assignment clauses that entrepreneurs tend to not really focus on when they're signing a lease. And then we've got issues down the road when we're trying to sell the business and get the landlord to not unreasonably withhold or just to, you know, give them notice. What are some of the things that, you know, have stuck out to you of like, hey, if you, if you handle this up front, the exit could be a lot smoother. Yeah. You know, if you're in the, you know, the fitness space, and particularly if you're a franchisee, I mean, you gotta make sure that your documents provide you an exit and a realistic exit, not just a conceptual exit or a succession plan or whatever. So, I mean, a lot of these, you know, first, before we get to the, the commercial lease, let's talk about like, the franchise contract.

16:23 A lot of these things where, you know, I've represented, you know, a couple different fitness franchises. I'm not going to say which ones, but some of them are very like, business forward. And understand that it's like a com, you know, not a commodity, but a business that's meant to be used, sold, and as an asset. And then some of them are more of a, you know, like a, like a meant, like a exercise of labor where it's like you're tied to the business and you want to make sure that if you're using it as an investment or, you know, like a fluid tool, you want to make sure that the. There's provisions in there for you not to easily exit, but like a framework for you to be able to sell it or assign it or do something. And then when it comes to the, the commercial lease, that's a whole nother thing because that's dealing with the landlord, not just the franchisor. And you want to make sure that, you know, the landlord has a realistic assignment built into the lease or realistic, you know, chain of succession or something. Because, you know, the. One of the hardest things to deal with is getting a landlord to assume a new tenant. You know, whether it's a new franchisee or you're selling the business or whatever. Because landlords have, you know, you and you personally on the hook and they're not going to let you out unless you give them more money and give them someone else to personally put on the hook. So you want to make sure

17:57 you always check those assignment provisions because most of the time landlords, you know, aren't going to let you out of the lease, even if it says they'll let you, they'll let you out, but they'll still make you have your personal guarantee even though you have nothing to do with the business anymore. So one of the easiest ways out of that is that they make you pay like a fee and get it assigned to the new owner and get a personal guarantee from the new owner. So make sure that there's a framework in there for you to at least do that. Otherwise you may sell the business, but you're still stuck with the lease. Yeah, I mean, we just dealt with a situation in New York where we had a private equity backed buyer who had a pretty strong balance sheet.

18:40 And the landlord, who's 83 years old, said, look, I don't know these guys. I don't care what their balance sheet is. I know you. And you're not getting off the lease. So if you want to sell it, you know, you're staying on. And you know, they should have thought about that up front when they signed the lease to try and get out of the guarantee at the exit, which they obviously didn't at the time because they didn't think about the succession plan or, you know, what comes next up front. So that was an issue that we've been dealing with. Quick question on the, on dealing with franchisors, whether it's in the fitness space or restaurant or what have you, how successful have you been with, you know, either removing or, you know, negotiating like a right of first refusal or, you know, something that gives you more latitude with either bringing on investors or selling the business? Because most franchisors have been pretty steadfast in trying to, you know, maintain, you know, authoritative control over exits. Yeah, you know, that's true for the most part.

19:46 I mean, you know, the franchisor is the one holding all the cards because, you know, you've got the contract with them, you owe them the money, everything you have is their intellectual property, property, and you're just, you know, licensing it and you know, you're basically there at their pleasure. So, you know, it depends really on the franchisor and the industry and different, you know, all kinds of different factors dealing with the franchisor. Like what's the economy, like, what's the market, like, what's whatever like. I've had a situation where, you know, I represented a franchisee who was in the, you know, food industry and had like four restaurants and wanted to sell them. And, you know, he's a pretty good franchisee. He always paid his bills, did everything.

20:39 And this franchisor, you know, has not just a national, you know, home office, but they have regional offices that handle all their franchising. And so they were very, you know, they were very ready to wheel and deal as long as the numbers were there and everything was right and the, you know, the real estate component was done correct. They were easy to let the franchisee out and get rid of his four franchises. But, you know, I've had other things where, you know, other franchisors stick to their guns and they're like, you know, you're not getting out unless you pay us a premium or, you know, we get, you know, very good financials from whoever it is you're signing or selling your thing to.

21:22 So it totally depends on who franchise or is and what the circumstances are. This is Pete Moore. Here's the last tip for you of the podcast. We are partnered up with a company called higher dose higherdose.com they are the leader in workout recovery products, infrared technology, LED light masks, neck enhancers, and other products such as PEMF mats and sauna blankets. If you have not gotten on the workout recovery train yet, your time and your stop is now. You got to get these products in there before these workout recovery and spas end up saturating your market.

22:06 Having your members walk out of the club and going into one of their locations for 200 bucks per month where they're paying 39 to you. Let's become an expert in workout recovery. If we are already an authority in workouts, Higher Dose, check it out. There's a wholesale code and we look forward to helping you augment your products and services to meet the demands of your members. And hey, let's get people happy, healthy and sweating. And the recovery should be just as good as the workout. So in closing here, any other, you know, words of wisdom or piece of advice for entrepreneurs starting out now, given, you know, everything you've seen over the last, you know, 20 plus years? Yeah, just make sure before you start out you have a written business plan. Make sure that you have professionals like an accountant, a business law attorney, and a banker on your side.

23:04 Make sure you pick the right business organization, you have your governing documents and make sure that you have all your contracts in place. And you review your contracts and make sure that they apply to what your specific venue, jurisdiction and subject matter are and have an attorney review them if at all possible and always have a contract when you have a relationship with another person or entity. Awesome. Well, thanks for making the switch out of the big law firms to help entrepreneurs like us do the right thing and stay on track. And we will put all your information up here in the show notes, Dave.

23:46 And got plenty of clients down in South Florida, so we'll make sure they, they get a listen here. So thanks for coming on. All right, thank you. Thank you, Dave. Appreciate it. Appreciate it. Awesome. This is Pete Moore on Halo Talks. Your captain speaking. I am the Founder and Manager Partner at Integrity Square. We've been around now for 15 and 1/2 years. We have been helping people like yourselves get capital, do mergers and acquisitions, consulting, strategic advice in the health, active lifestyle and outdoor halo sector, trying to help as many entrepreneurs as possible get to the next level, take that inflection point and be the force behind your growth.

24:34 We are helping companies that have at least $3 million of EBITDA, around $10 million of revenue, and we are positioned to help you get institutional growth capital or to negotiate deals with strategic partners. If you go to integritysq.com isq you can see our capabilities. Deck Happy to set up a consultation at any time that is free of charge and we look forward to helping solve a obesity, loneliness and diabetes. Go Halo.