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

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This is Pete Moron, Halo Talks nyc. I have the pleasure of

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bringing straight from South Florida to our podcast,

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Matt Fernaro. We're going to talk about legal issues. We're going to talk

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about lawyering up at the appropriate times, intellectual

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property, maybe some commercial leases and why

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she moved to Florida, I guess. So good to have you on the show. Thank

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you. Thanks for having me. So you started off at two big

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law firms back in the day. You know, give us a little

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background on why you left to start your own firm and you know,

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what that's allowed you to do and the clients you've been able to help.

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Sure. So, you know, I've been practicing law for more than 20

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years. I used to work at two large AmLaw 200 law firms

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doing mostly commercial litigation, representing big businesses,

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banks, insurance companies. So I had the opportunity

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about 11 years ago now to actually go to one of the 10 largest law

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firms in the US to kind of continue what I was doing.

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And I was all ready and set to go and, you know, had one foot

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in the door and I was thinking to myself, well, what am I going to

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do? Am I just going to keep going like, you know, to bigger law

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firm, even though I don't think I can go any bigger than that and just,

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you know, be pigeonholed into what I'm doing and, you know, be a cog in

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the wheel working for the man. So I decided, you know, that

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was probably my last best chance, at least anytime soon

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in my professional life to go out and start my own law firm.

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So that's what I did. And I wanted to

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focus on helping like small businesses,

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entrepreneurs and startups, predominantly because

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I felt that they were underserved by big law and by,

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you know, local attorneys out in the suburbs. So that's how

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I moved to my current niche and

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that's what I've been working on the last 11 years. Gotcha.

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And how do you calibrate clients you're

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going to take on when maybe they're kind of bootstrapping and trying to find

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some seed capital to take equity in some of

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the companies or maybe start off

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small and say, look, I'll be your lawyer for

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the early days and also for the times when this is a

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nice cash flowing business? Yeah,

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I don't want to get involved in having any

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equity or part of a client's business due to various

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problems that that creates. So I just get

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paid either depending on what I'm doing, either on a flat fee or an

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hourly fee basis and then, you know, depending on what the

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client's needs are and the client's budget is. We just go from there and do,

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you know, like the, you know, to use a different industry

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term, with the medically necessary stuff to survive and then

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go from there. When they have more money or they have more of a budget

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or more of a time budget to go do more things

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is there. They're like incubators or venture

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capital groups down in Florida that you've kind of tethered yourself

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to. Yeah, there's a lot of incubators and venture

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capitalists and founder groups and startups, and there's a lot

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of that down here run by a lot of.

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Well, I should say a lot of it's, you know, run

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by government entities down here in all different

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counties, cities, different chambers of commerce,

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schools. So there's a lot of incubator activity and

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startup activity down here. Nice, Nice. So what are some of the

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things when an entrepreneur comes to you and, you know, says, I've got

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this. This product, should I patent it and go down that path or,

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you know, the power of a brand, how do you kind of calibrate the cost

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of intellectual property protection

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versus, you know, the fact that you have to obviously protect that as well,

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litigate it. Sure. So, you know, obviously when

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you're starting a business, I understand, you know, know your budget's tight or

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whatever, but at the same time, your most important things could

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be your intellectual property, particularly if you're developing a

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brand or a product. So I always encourage my clients

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that if they're developing a brand or

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a product, they need to protect it as soon as possible

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because otherwise you put it out there, someone's going

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to take it and someone's going to appropriate it. So you always have to put

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into the budgetary process of, you know, intellectual

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property protection, whether you're inventing something and you need a patent or

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you're coming up with an idea, a logo, a name, a

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website, and you need to trademark it. So it's always

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built in as part of my overview and my

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advice to the startup or the founder or the new

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entrepreneur. Got it. You know, can you explain to us

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when someone says, I've got a provisional patent or

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I filed my papers, but, you know, it could be years till

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they actually get protection. Sure. So,

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you know, the patent process generally takes, you know, a longer time

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than other legal processes because there's a lot

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of research, a lot of back and forth that goes into it. So,

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you know, you have your patent attorney

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who, you know, generally I refer out the Actual patent prosecution,

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which is the application to get a,

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to get a patent. So they put together the patent, they

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do the application, they send it in, and then the uspto, the

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Patented Trademark Office, goes back and forth and says, this already

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exists. Change this or this isn't new, change this or

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do whatever. And then you get to the point where it's provisionally

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approved, but it's not officially, you know, a done deal yet,

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where you're able to go around and provisionally use it until it gets

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fully final approval. And the final approval process generally takes

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longer, but you can start using it when you have the provisional approval.

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The final approval is just everything is in order, everything's

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ready to go, and then you get your patent issued for your

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20 year period. Yeah. So Matt, we've

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been invested probably about 10 early stage companies

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and sometimes the operating agreements or the shareholder agreements

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are something that people kind of put together, you know,

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on, on a templated basis, but don't really actually know what, you

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know, the, the what it says when you have to pull it out and read

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it. What are some of the things that you've seen that

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you know, you warn entrepreneurs about or

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against? I've just had a situation where we had a co CEO

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role that I, you know, was adamantly against when we

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originally invested in the company. And that lasted,

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you know, longer than average. But you know, co

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founders sometimes are best friends, but, you know, running a business. So

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what are some of the things you've seen that like, you, like if you, if

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I was here earlier, I could have helped you avoid this?

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Well, you know, one of the things, one of the easiest things,

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that they don't actually have a written agreement. That's always a nice

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touch. Or the written agreement they have

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is just something they pulled off the Internet that doesn't maybe apply

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to their particular business situation or their jurisdiction.

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So that's another issue. And then some people pull off

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ones that are, you know, just very generic and very basic

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that don't really, you know, say

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the who, what, when, where, why and how that's required in a proper

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agreement. So, you know, my advice

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or my thing is, look, this is a real business.

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You're taking this seriously. You know, I understand

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you have a budget, I understand you have a time frame, I understand money's tight.

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But at the same time, you have to budget for

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having professionals help you do things, particularly at such

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important periods in the foundation and the starting of a business.

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So you have to have a business law attorney help you. You have to have

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a accountant help you. You have to have a commercial banker help

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you. And so one of the things when you're putting together

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a shareholder agreement or, you know,

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whatever else you want to put together is that you should have an

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attorney drafted who's familiar with

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the jurisdiction where you're actually in. And

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that's what their focus is. And they just don't dabble in business law or

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something because you want to make sure that your document has

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all the things necessary to protect all the parties,

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to say what the relationship among the parties is, to say

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who does when, where, why, what and how. And if there's a problem,

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how it gets resolved. And it's got a, you know, it doesn't have to be

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a massive document. It can be a short document as long as it has all

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the requirements in it. It needs to be in there. But it's something that's must

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be done. You can't cut corners. I mean, you can cut corners on certain things,

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but that's one of the things you don't want to cut corners on. Because

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if your business is successful or if your business is unsuccessful, that

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document is coming back into play for whatever reason.

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And if it's not good, your results in your

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resolution of whatever situation you run into is going to be not good as well.

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This is Pete Moore. I want to let you in on a little secret. There's

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this company called Promotion Vault. And what they do is they give out rewards

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from retailers that allow you to incentivize your members

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without having to do 0 down and 1 month free or

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giving away shakes or giving away t shirts. What you want to do is

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build a rewards program that lasts, that people value

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and that doesn't discount your own products and services. So here's the

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deal. There's something called Rewards Vault. The Rewards Vault is going

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to allow a member to set up their own profile. They are going

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to answer questions, you are going to get those answers, you're going to be able

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to target those members and you're going to reward them inside your club,

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inside your spa and outside of the club and outside of the

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spa to get them to become loyal, to get them to pay their

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monthly dues and to be rewarded properly for the

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actions. A lot of companies are cutting back on rewards. You shouldn't be

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Promotion Vault, your answer, trust me, this is real.

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So how has clients uploading

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documents or legal issues into chat GBT and then calling

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you up and either saying, hey, what do you think of this?

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Or what's your interpretation of that? Do you feel like you Guys

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are leveraging the use of those tools,

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and it's good that clients could go and search, but it's not really

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going to impact, you know, people that have to think and actually negotiate

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documents. Well, you know, I love

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AI and I use AI in my practice of law,

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and I use AI in running my business. But I use AI

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responsibly and ethically, where I'm the ultimate

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yes or no on what the AI does. And I review everything

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and make sure I fact check and check all the stuff that the

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AI puts out. So, you know, when I deal with clients,

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I welcome them to give me whatever documents you want, send me

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whatever information you want. I'm glad to review it, glad to give you my input.

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You know, I'm not going to say no to anything you send me or whatever.

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However, at the same time, when you're just sending me crap

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that you get from AI, it may somewhat

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be right and it may be wrong. And you have to understand

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that you can't just be like, well, the AI said it, so it's good. I

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still have to review it and make sure it's right or wrong. So, you know,

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obviously over the last three years, and probably the last year in particular,

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you know, clients send me because I can just tell

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the way it's formatted and everything, whether it's in an email on the document

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they send me, stuff that AI generates. And like

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I said, sometimes it's right, sometimes it's wrong. But I'm the ultimate, as

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the attorney, I'm the judge of that. You know, I'm, you know,

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you're not, respectfully, as the business person,

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you know, the entrepreneur, the startup, when ultimately the client,

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you're not familiar with what the law is, what the application of the law is

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and everything. The AI may be in a general sense, but it

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doesn't know the specifics of your deal, it doesn't know the specifics of your

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jurisdiction or whatever. So I mean, you know, it's

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helpful sometimes it gets people's ideas put down on paper and helps them

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communicate what they want to do. But they have to understand that that's not the

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final word. And they have to understand that, you know, they

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have to take it with a grain of salt. And I've seen a lot of,

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you know, clients, you know, do that and they understand, yeah, all

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right, the AI, you know, did whatever we need the attorney to do, whatever. Or,

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you know, I'll draft something or I'll put something together and I'll send it

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to them and then they run What? I send them through the AI and

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they're like this, what about this? I'm like, it doesn't apply. We're in Florida. It

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doesn't apply. It's a partnership. Imply. It's an llc. It doesn't apply. It's

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a corporation. And you know, I mean, glad

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to look at it. I'm not going to say no to you giving me ideas

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or information at the same time, you know, I got to go through

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it with a fine tooth comb and I got to tell you what's right and

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what's wrong. Yeah, I, I, I appreciate

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them doing the research, but not when they copy and paste the entire

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segment that says, do you want me to put this in a table? Would you

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like me to put this in a Word document PDF? It's like, at least

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edit some of that. So it looks like it's some of your primary thoughts

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jumping around here. What are your thoughts on safe

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notes with early stage companies

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and setting up pre money valuation?

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I'm not really comfortable with those. I feel like I could try to value the

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company today versus kind of kicking the can forward on

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valuation. What's been your experience with that? I mean, the

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thing with valuation is totally speculative. No matter how much,

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you know, formulas or experts you get put into it or

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whatever. I mean, the value of the company, I understand what the projections

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and the tables say and what it's going to be, but at the same time,

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you got to understand that that's only, you know, fair market

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projection or whatever, and it could turn out to be a total bust or

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could turn out to be 10 times the amount. So when you

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have early projections or early evaluations at the startup

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phase, I mean, you have to be very careful

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or very, you know,

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suspect of those numbers because, yeah, they could be great or they could be

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terrible. So that's why when you're basing your,

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you know, your whole business around those valuations, whatever, you have to be very careful

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because as much as you want them to not be speculative, ultimately they

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are speculative, no matter how good the projections or numbers are.

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And what are some of the, you know, either

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health and fitness companies that you've been working with, or you said you've done

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some commercial leases. We deal

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with assignment clauses that

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entrepreneurs tend to not really focus on when they're signing a

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lease. And then we've got issues down the road when we're trying to

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sell the business and get the landlord to not

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unreasonably withhold or just to, you know, give them notice.

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What are some of the things that, you know, have stuck out to you of

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like, hey, if you, if you handle this up front, the exit could be a

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lot smoother. Yeah. You know, if you're

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in the, you know, the fitness space, and particularly if you're a

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franchisee, I mean, you gotta make sure that your documents

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provide you an exit and a realistic

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exit, not just a conceptual exit or a succession plan or

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whatever. So, I mean, a lot of these, you know, first, before we

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get to the, the commercial lease, let's talk about like, the franchise contract.

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A lot of these things where, you know, I've represented, you

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know, a couple different fitness franchises. I'm not going to say which ones, but

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some of them are very like, business forward. And understand

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that it's like a com, you know, not a commodity, but a business that's meant

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to be used, sold, and as an asset. And then some of

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them are more of a, you know, like a,

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like a meant, like a exercise of labor where it's like

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you're tied to the business and you want to make sure that if you're using

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it as an investment or, you know, like a

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fluid tool, you want to make sure that the. There's provisions

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in there for you not to easily exit, but like a framework for you to

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be able to sell it or assign it or do something. And then when it

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comes to the, the commercial lease, that's a whole nother thing because that's dealing

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with the landlord, not just the franchisor. And

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you want to make sure that, you know, the landlord has

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a realistic assignment

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built into the lease or realistic, you know, chain of succession

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or something. Because, you know, the. One of the hardest

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things to deal with is getting a landlord to assume

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a new tenant. You know, whether it's a

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new franchisee or you're selling the business or whatever. Because

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landlords have, you know, you and you

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personally on the hook and they're not going to let you out unless

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you give them more money and give them someone else

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to personally put on the hook. So you want to make sure

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you always check those assignment provisions because most of the

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time landlords, you know, aren't going to let you out of the lease, even if

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it says they'll let you, they'll let you out, but they'll still make you have

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your personal guarantee even though you have nothing to do with the business anymore.

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So one of the easiest ways out of that is that they make

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you pay like a fee and get it

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assigned to the new owner and get a personal guarantee from the new

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owner. So make sure that there's a framework in there for

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you to at least do that. Otherwise you may sell the business, but you're still

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stuck with the lease. Yeah, I mean, we just dealt with a

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situation in New York where we had a private equity backed

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buyer who had a pretty strong balance sheet.

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And the landlord, who's 83 years old, said, look, I don't know these

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guys. I don't care what their balance sheet is. I know you. And

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you're not getting off the lease. So if you want to sell it, you know,

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you're staying on. And you know, they should have thought

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about that up front when they signed the lease to try and get out of

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the guarantee at the exit, which they obviously didn't at the time because

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they didn't think about the succession plan or,

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you know, what comes next up front. So that was an

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issue that we've been dealing with. Quick question on the, on

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dealing with franchisors, whether it's in the fitness space or

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restaurant or what have you, how successful have you been with,

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you know, either removing or, you know, negotiating like

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a right of first refusal or, you

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know, something that gives you more latitude with

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either bringing on investors or selling the business? Because most

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franchisors have been pretty steadfast in trying to,

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you know, maintain, you know, authoritative control over

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exits. Yeah, you know, that's true for the most part.

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I mean, you know, the franchisor is the one

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holding all the cards because, you know, you've got the contract with them,

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you owe them the money, everything you have is their

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intellectual property, property, and you're just, you know, licensing it

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and you know, you're basically there at their

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pleasure. So, you know, it depends really

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on the franchisor and the industry

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and different, you know, all kinds of different factors dealing with the franchisor. Like

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what's the economy, like, what's the market, like, what's whatever like. I've

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had a situation where, you know, I

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represented a franchisee who was in

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the, you know, food industry and had like four

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restaurants and wanted to sell them. And, you know,

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he's a pretty good franchisee. He always paid his bills, did everything.

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And this franchisor, you know, has not just a national,

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you know, home office, but they have regional offices that handle all their

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franchising. And so they were very, you know,

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they were very ready to wheel and deal as long as the numbers were there

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and everything was right and the, you know, the real estate component was done correct.

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They were easy to let the franchisee out and get rid

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of his four franchises. But, you know, I've had other things

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where, you know, other franchisors stick

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to their guns and they're like, you know, you're not getting out unless you pay

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us a premium or, you know, we get, you know, very

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good financials from whoever it is you're signing or selling your thing to.

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So it totally depends on who franchise or is and what the

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circumstances are.

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This is Pete Moore. Here's the last tip for you of the podcast.

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We are partnered up with a company called higher dose

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higherdose.com they are the leader in

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workout recovery products, infrared technology,

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LED light masks, neck enhancers, and

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00:21:48,680 --> 00:21:52,370
other products such as PEMF mats and sauna

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00:21:52,370 --> 00:21:55,650
blankets. If you have not gotten on the workout

348
00:21:55,650 --> 00:21:59,010
recovery train yet, your time and your stop

349
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is now. You got to get these products in there before these workout

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recovery and spas end up saturating your market.

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Having your members walk out of the club and going into one of their locations

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for 200 bucks per month where they're paying 39 to

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you. Let's become an expert in workout recovery. If we

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are already an authority in workouts, Higher Dose,

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check it out. There's a wholesale code and we look

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to meet the demands of your members. And hey, let's get people

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happy, healthy and sweating. And the recovery should be

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just as good as the workout.

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So in closing here, any other, you know, words of

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wisdom or piece of advice for entrepreneurs starting out now,

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given, you know, everything you've seen over the last, you know, 20 plus

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years? Yeah, just make sure before you start out you have a

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written business plan. Make sure that you have professionals like an

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accountant, a business law attorney, and a banker on your side.

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Make sure you pick the right business organization,

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you have your governing documents and make sure that you

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have all your contracts in place. And you review your contracts and make sure that

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they apply to what your specific

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venue, jurisdiction and subject matter are and have an attorney review

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them if at all possible and always have a contract

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when you have a relationship with another person or entity.

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Awesome. Well, thanks for making the switch out of the big

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law firms to help entrepreneurs

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like us do the right thing and stay on track. And we

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will put all your information up here in the show notes, Dave.

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And got plenty of clients down in South Florida, so we'll make

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sure they, they get a listen here. So thanks for coming on. All right, thank

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00:23:54,200 --> 00:23:57,640
you. Thank you, Dave. Appreciate it. Appreciate it. Awesome.

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This is Pete Moore on Halo Talks. Your captain speaking. I am

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00:24:07,920 --> 00:24:11,550
the Founder and Manager Partner at Integrity Square. We've been around

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00:24:11,550 --> 00:24:15,390
now for 15 and 1/2 years. We have been helping

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people like yourselves get capital, do mergers and

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acquisitions, consulting, strategic advice in the health,

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active lifestyle and outdoor halo sector, trying to help

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as many entrepreneurs as possible get to the next level,

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take that inflection point and be the force behind your growth.

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We are helping companies that have at least $3 million of

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EBITDA, around $10 million of revenue, and

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we are positioned to help you get institutional growth capital

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or to negotiate deals with strategic partners. If

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you go to integritysq.com isq

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you can see our capabilities. Deck Happy to set up a consultation at any

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time that is free of charge and we look forward to

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helping solve a obesity, loneliness and diabetes.

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Go Halo.