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Stephen Candelmo on Why the Franchise Disclosure Document Has Been Killing Deals for Decades
14 Plays24 days ago
In this episode of MustardHub Voices: Behind the Build, Curtis Forbes sits down with Stephen Candelmo, corporate attorney, serial entrepreneur, and founder and CEO of Paralex, to explore what happens when someone who has spent three decades and more than three billion dollars in transactional work across IPOs, mergers and acquisitions, private equity, and venture capital decides to rebuild the legal infrastructure from the inside.
Stephen makes the case that 60% of small businesses never use an attorney not because they don't need one, but because the model is broken: too slow, too expensive, and built entirely around the billable hour. His answer is Paralex, an AI-powered legal platform that keeps the attorney in the loop while letting technology handle the intake, drafting, and revision work that currently eats the clock.
The conversation takes a sharp turn into franchising, where Stephen introduces FDDHub, the franchise industry's first disclosure platform built for engagement. The franchise disclosure document, a legally required 300 to 400 page prospectus that every prospective franchisee must receive, has been killing deals for decades because nobody actually reads it. FDDHub reimagines the disclosure experience as something interactive rather than a PDF dropped into a Dropbox folder, giving franchisors visibility into what prospects are actually reading and what questions they are not asking.
Along the way, Stephen and Curtis dig into where AI genuinely helps in legal work and where it cannot replace thirty years of pattern recognition in a negotiation room, what early warning signs in a franchise disclosure document most buyers completely miss, and why signing the franchise agreement is not the end of the process but the beginning of a ten-year marriage where both sides are betting on each other.
About the Guest
Stephen is a corporate attorney and entrepreneur with nearly three decades of experience and more than three billion dollars in transactional work across IPOs, mergers and acquisitions, private equity, and venture capital. He is a named inventor on several patents and the co-founder of two venture-backed software companies, Fedbid and Synapsify. Today he serves as outside general counsel for private technology companies and for Azafran Capital Partners, a deep-tech venture fund, and he is a frequent industry speaker and published author on the legal and business challenges facing tech companies. A graduate of the University of Maryland, the University of Akron School of Law, and Georgetown University Law Center, Stephen is the Founder and CEO of Paralex, which is reimagining legal services through technology for small businesses and franchises. That includes its newest product, FDDHub, the franchise industry’s first disclosure platform built for engagement.
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Transcript
Introduction to Mustard Hub Voices Behind the Build
00:00:05
Speaker
Welcome back. This is another installment of Mustard Hub Voices Behind the Build. In these episodes, I sit down with the people building, backing, and running better workplaces. I'm your host, Curtis
Meet Stefan Condelmo: Attorney Turned Entrepreneur
00:00:15
Speaker
Forbes. My guest today is Stefan Condelmo.
00:00:19
Speaker
Stefan's a corporate attorney and entrepreneur with nearly three decades of experience and more than $3 billion dollars in transactional work across IPOs, mergers and acquisitions, private equity and venture capital.
00:00:31
Speaker
He is named inventor on several patents and the co-founder of two venture-backed software companies, FedBid, and Synapsify. Today serves as outside general counsel for private technology companies and for, as a friend, Capital Partners, a deep tech venture fund.
Stefan's Journey to Parallax and Legal Tech Innovation
00:00:49
Speaker
He is a frequent industry speaker and published author on the legal and business challenges facing tech companies. Graduate of University of Maryland, University of Akron School of Law, and Georgetown University Law Center. Stephan is the founder and CEO of Parallax.
00:01:04
Speaker
which is reimagining legal services through technology for small businesses and franchises. And that includes its newest product, FDD Hub, the franchise industry's first disclosure platform built for engagement. Welcome to
From Chance Meeting to Collaboration: Stefan's Path to Software Development
00:01:18
Speaker
Behind the Build. Thanks for joining me today, Stephan.
00:01:21
Speaker
Thanks, Curtis. Did I get all of that? Isn't it cool hearing back everything and you're like, wow, yes, I did all of those things. Yeah, yeah. yeah Sometimes you you you question like, oh,
00:01:32
Speaker
what have I actually done? But then the when you actually can sit back and and hear it, it's like, oh, That's pretty good. ah So but but before we dive into anything, you and I, we we owe this kind of whole conversation to to Paul O'Brien, right? The way you two met is kind of a story and in itself in in an airport. And now here we are. Walk me through that briefly. Yeah. Yeah.
00:01:59
Speaker
So i'm I'm in the, ah I live and work in the Austin, Texas area and I was ah scheduled for a flight ah leaving to Pittsburgh to visit my my niece who's graduating law school. But as things have often been ah been occurring, there was delay on the on the tarmac. So we sat on the plane for a while and we decided, actually, we're going back. I'm like, oh, my God, I'm going to probably it's going to be a horrible travel day, right? because all the connecting start falling down vi via dominoes. Right. and So with that said, ah i I had a ah friend that was on the flight as well, who just by coincidence. So we walked off the flight and I saw him ah ah talking to Paul, who I've never met. So I went up and just introduced myself to, Hey, Tim, what's going on? It's great to, great to see you here. Funny coincidence. Yeah.
00:02:55
Speaker
And he just then said, Hey, I'll introduce you to Paul and Paul. That's it. And he goes, what do you do? i go, well this is what I do. Oh, I got someone, you have a card? I go, I actually do have a card. And he goes, I have to introduce you to Curtis. I'm like, yeah.
00:03:12
Speaker
And that's, that's how it happened. Cool. And the rest is, is history. Yeah. So you spent three decades three decades as a corporate attorney, yeah billions of dollars in deals, IPOs, M&As, the works. Yeah. um That's kind of a, first of all, that's a career in and of itself.
00:03:30
Speaker
And i think it's a lot that, you know, most people would just happily ride off into the sunset, but I want to know what pulled you out of that and into building software.
Lessons Learned from Entrepreneurship in Legal Tech
00:03:43
Speaker
Yeah. Um, well that really, that really started in 2000, 2009. Um, well let's take ah let's take a ah beat back. Um, I started off my career in the late nineties, um,
00:04:01
Speaker
really at the the boom of the internet. ah And yeah everybody was taking companies public and
00:04:13
Speaker
e-commerce for pet food and everything else in between. And I had a dear a dear friend who was starting a ah company and he became a client.
00:04:25
Speaker
And at that point he says, why don't you come on and start, be full time. And i was working at my large national law firm for several years and I decided you know, I think, try this. So we went out, there was four of us. And really, we all sat in a room helping to develop this brand new software for, for the federal government.
00:04:48
Speaker
And that really started, ah started it all that really started my entrepreneur bug, and went back to the practice of law after that. Sometimes we learn from things that aren aren't the great successes, but we learned so much from that process, raised venture capital, had 40 plus employees, and we just could not get it to the next stage. We sold it and I went back to the practice. um So that almost gave me the taste of entrepreneurs, entrepreneurship, even though I'm representing entrepreneurs for most of all my career.
00:05:27
Speaker
So once you have that taste, you're always... looking for the next thing. feel it. Right. So several years later, i i started a company called Synapsify that was doing some interesting machine learning around social media, text, high volume customer signal data, raise some venture capital behind that, um try to apply some of lessons that we learned before. and then, know,
00:05:56
Speaker
It's a high risk business um whenever you're starting a new business. It has some some modest success, but it wasn't a home run. Then went back to this went back to the practice. And so once you have that entrepreneur spirit, and then it was primarily in software,
00:06:16
Speaker
that has always stayed with me. yeah and And hence, yeah we'll discuss later in terms of
AI's Role and Limitations in Legal Services
00:06:23
Speaker
Parallax and FDD Hub. but So it's always been this reoccurring theme that has been in my in my my journey right as as an attorney and entrepreneur.
00:06:36
Speaker
i feel like you know a lot of founders have those those moments where it's that thing that kind of makes them say, um you know, someone someone has to fix this. And I think that like once once you get that taste of it and you're like, I i can be the one to fix that.
00:06:50
Speaker
Wait a minute, I can do this. um yeah Every time you sort of see that, right? ah every Every problem you identify all the all of a sudden becomes like an opportunity you're vetting, right? In the in the back of your in the back of your mind. So let's talk about Parallax, right? So for somebody hearing that name for the first time, what is it, what problems are you you know setting out to to solve?
00:07:11
Speaker
Yeah. So um as a result of my last startup, i I almost promised myself if I ever had a chance, I would probably do something in the legal space because that's what I know, really. yeah um And I really saw an opportunity giving the advancements of AI to how could we solve the problem that 60% of all small businesses never use an attorney.
00:07:34
Speaker
And you could probably guess why, right? We're just too darn expensive and we're too slow and so forth. So what if we could apply AI into that workflow where there's still an attorney in the loop, but they are at the end where the AI is doing the intake, the AI is doing the drafting, ai is doing the revisions, everything that we take for granted. But this was a couple of years back when chat gpt just released um and i just started developing this platform to really address that that gap in the market um and as a result of being able to drive these efficiencies in the workflow the legal hourly rate somewhat fades away and you could charge on a fixed fee basis and still make hopefully a healthy margin so
00:08:25
Speaker
Parallax really yeah really arose out out of that thesis. um How can we develop a platform to solve this inherent problem in delivering legal services you know, somewhat in a more efficient manner and potentially at at scale, because there's only, know, a solo attorney or small firm can only service so many clients. So how can you expand that base? So that's where, that's where it started. And, um and really Parallax has been focused on, developing, know, legal technology solutions that solve real business problems. And that was a real business problem, you know, make it more accessible and more efficient.
00:09:06
Speaker
Yeah, I would probably agree with that. It's kind of it's a crazy statistic, right? 60%. mean, that's, um the reasons are obvious and it's it's surprising that there aren't more people kind of tackling that. You know, AI is obviously solving, you know, a lot of the problems.
00:09:26
Speaker
for better or worse, right? I mean, AI is not perfect, right? And it gets a lot of things wrong. Yeah. But it certainly has, ah I love how when you describe the problem, you also group yourself into that, like, we're too slow, we're too expensive.
00:09:40
Speaker
um But I mean, the reality is, is right, that's that's what the legal that's what the legal world is, um it is and it has grown off the back of the hourly rate and those hourly rates continue to go up higher i know and and in terms of you know my view of where the industry is going and the future of work in the legal industry um I just think that there's some areas of the law that are just going to get compressed ah from a business model perspective because ai is just so much better in terms of driving efficiencies. And ultimately there's a collision in the market, right? The the hourly rate is based on the simple premise. you know
00:10:22
Speaker
The more hours you incur, the more money I make. Right. But then you have a technology that says, well, you can actually achieve that task without spending as much time. So therefore it's less money. Yeah. Just that's probably not going to be, be the case. And, and as a result, the role of an attorney in some practice areas is just going to, it's going to change. That could be something more of more of an orchestrator of agents.
00:10:54
Speaker
an overseer of the actual end product or deliverable because you so you still need accountability. You still need fiduciary obligations, confidentiality, work product, all of these ethical things that will never go away. Correct. And if, and if anyone thinks that the know lawyers are just going to go away and, and be replaced by ai it just It's not going to happen ah to the extent that people are sometimes putting out there. To the extent, yeah, no, for sure. and and if and if
00:11:26
Speaker
And if folks aren't paying attention to all the the legal blunders people are experiencing by relying on AI, you know they should check some of those out so they can rethink rate rethink their AI-only strategy.
00:11:40
Speaker
Yeah, but with the fact that these foundational models are getting so good, you know just think about the advancements that has made since November of 22, what they can do.
00:11:50
Speaker
um you know I think I've come to the realization that that 60% number doesn't really effectively get reduced by ah by ai Why?
00:12:07
Speaker
Because that very, very thing, that very tool that can drive those efficiencies that can get you to good enough is in the hands of these, of these clients or these, you these small business owners.
00:12:24
Speaker
yeah And I think that's the one aha moment that I've thought about as to, by just simply reducing price does not get you more customers, especially when the capability is in the hands yeah of the ultimate customer to have a contract reviewed or highlight issues and so forth. Right. So, well, I think that for the longest time, right, or really for forever in in history, you know, the the two things that that ultimately
00:12:59
Speaker
governed, um, or or I should say um almost even an enabled these kinds of of, you know, hourly, you know, salaries or or whatnot was knowledge, the the exclusivity of of of, you know, knowledge, right? And and the um barrier to entry, right? Right there. and then And then capital or or access to to capital, right? Those are the two things. And yeah AI is essentially infinite knowledge, right? For for zero cost.
00:13:38
Speaker
um So, you know, what you've done is essentially eliminate that barrier um entirely. And so I think, you know, what you're talking about, I think makes a lot of a lot of sense to me. and And one question I think that I would have is that you've spent three decades on the inside doing this big, you know, complex legal work.
00:14:01
Speaker
Yeah. I'm curious what you saw from that vantage that kind of convinced you, and and and let's be clear, right? I mean, in this field, especially in the in the in legal field, get comfortable for how services get delivered, right? It's always been done this way. It's very comfortable, right? So what did you see from that vantage that convinced you that technology could actually change how the services get delivered, not even just make them a little faster?
00:14:33
Speaker
um a Well, despite... The um despite in my area practice, and I'm only give my opinion regarding corporate law, right?
00:14:48
Speaker
There is, you think that there's a complexity of all the different types of issues and variability and everything, or if you're buying and selling a business, it's, you it's highly complex. It's highly dependent on all of these things that have to come together in order to successfully close the deal.
00:15:10
Speaker
But if you actually, if you're in the space long enough, there's just a lot of standardization. Like good quality contracts generally look the same, except maybe 10% of them. um A merger agreement for a $10 million dollar deal looks generally the same as a merger agreement for a hundred million dollar deal.
00:15:39
Speaker
and all the paperwork that has to get done is generally the same. Now the details within that could be different. There could be some particular things that are applicable to industry, regulatory issues and so forth.
00:15:51
Speaker
um But the mid-market stuff, the mid-markets of where i'm where I'm operating from, um they are there is an inherent acknowledgement of if anything is somewhat standard, that means that you can apply a system to it and thereby apply a system that can somewhat handle those parts that are not standard, ah which is a but rather relative small percentage. So even though it's complex in terms of, you
00:16:33
Speaker
dollar value, the stakes, the consequences, and so forth, there's a certain heuristic of, from a corporate law documentation standpoint, that anything that's relying on documentation that doesn't really change much. So if that's if that's the case, well, why can't we just apply a system to eradicate some of the friction that's involved in just working as an attorney. And if you can remove that friction, you're removing time.
00:17:05
Speaker
If you're removing time, you're reducing costs. If you're reducing costs and time, you then can possibly narrow down the window of estimated time equal to estimated value.
00:17:22
Speaker
and hopefully be able to price where the service can still be delivered, the judgment can still be shared, but there's still a margin, right?
00:17:33
Speaker
So that's what I saw, know, given my experience of, okay, what are we really dealing here with? yeah i'm um Whenever there's shuffling of paper and the paper's generally the same, yeah there's some things that you can drive some efficiencies to.
00:17:51
Speaker
i um I want to get into FDD Hub, but but but before we do, i kind of ah want to I want to lead into it, right? Because I know that you know when we talk about AI, when people hear AI and legal, right, they either get super excited, they get super nervous.
00:18:06
Speaker
um yeah Right, about about the hype, right? Lawyers being replaced, all these things. you know And there's someone who's spent maybe their whole career in this profession, I'm curious how you actually think about where AI helps and where, you can see how I'm i'm sort of, I'm bridging this into FDD Hub, right? But I'm curious where you think it actually helps and and maybe where it doesn't.
00:18:34
Speaker
Yeah. um
00:18:39
Speaker
it It clearly, again, it it clearly can help initially be used as a tool to help identify issues, to help suggest, suggest, uh, uh, revised language to be able to somewhat accelerate your, you know, you your time to get through some of the things that are maybe more rudimentary, but the higher complex judgment valued advisory strategic work, um ultimately you're still applying your judgment anyway, right? When you're speaking to a client as to how things work and so forth.
00:19:25
Speaker
I'll give you an example. So, know, using AI to initially redline an agreement, fantastic.
00:19:37
Speaker
Yeah. You can... you can decide whether that you are putting that into the agreement. You may, you can be able to revise it. It just gives you this, this, this path, this ability to do something that would typically take you an hour and you can get it done in 20 minutes and then deliver it, you know, in a quality fashion where it doesn't help is
00:20:04
Speaker
clients still have interactions with other humans and interactions between humans can get messy. Interactions can particularly whenever you are quote, trying to complete a deal, right? Trying to get two people to come together and consensus to either sell their business, buy their business, do a license, something that's of high value.
00:20:34
Speaker
The human in their interaction is is somewhat unpredictable, but, The value of a of someone who's been practicing for 30 years is my own pattern recognition of all of those interactions.
00:20:51
Speaker
Knowing where deals possibly could fall apart, sensing where the other side is, being proactive in trying to address something that could derail the parties from coming together or raising an issue that is more nuanced than black and white answer right ai really doesn't do that you know you know so i was on the phone with a client the other day and there were some issues in connection with this transaction and you could just sense the other side is getting
00:21:31
Speaker
is is getting ah antsy, getting a little anxious, um but at the same time advocating for your client to say, regardless, you know to be fully protected, you need to be yeah standing
Challenges in Franchise Disclosure Documents
00:21:46
Speaker
firm on this issue.
00:21:47
Speaker
And then intermediating between those two points of tension is something that is human-based. there is ai cannot do that There is no AI that's sitting in between these two parties to either ease fears or, uh,
00:22:09
Speaker
to recommend where a bright line needs to be because it's just so experiential. And we as humans are subject to our own mission our own emotions, our own ups and downs.
00:22:22
Speaker
But given that I've experienced that as 30 years of negotiating, 30 years of fostering deals, i don't you can't You can't replace that pattern matching.
00:22:35
Speaker
right So that's ah that's a different thing. I don't think AI ah will will help or knowing when a litigator knows when he or she has gotten the attention of the jury.
00:22:47
Speaker
right right They see it in their eyes. They see it in their posture. They see it's something. It's a different, you know that's that's where I think it doesn't help. Yeah. yeah yeah um That's really interesting. And and you're you're describing everything that really, know, that the technology can't, or at least, you know, at least to this to this point, right? It hasn't built any capability to um interpret human-like signals that are like nonverbal.
00:23:22
Speaker
um essentially kind of what you're, what you're talking about and, and, and that kind of nonverbal communication. Yeah. yeah That's going to, that's going to take a little while.
00:23:33
Speaker
I want I want to get into hub. it's yeah It's brand new. A lot of our audience knows franchising. They may not know what FDD even is. So set the table for us. What's a franchise disclosure document.
00:23:48
Speaker
Why does it matter so much? Yeah. ah So the franchise disclosure document or otherwise known as the FDD is a legally required disclosure document that the franchisor, Zor for short, is required to share with every prospective purchaser of their brand.
00:24:14
Speaker
Consider it a prospectus. you know, they're about to make it a serious investment, one of maybe the largest investments in their life, whether they're going to go buy and open up a Jimmy John's or something like that.
00:24:28
Speaker
And this document has to be delivered to them 14 days before they sign on the dotted line. um In certain states, you have to actually get read, you have to register that document and get it approved by 14 states, the United States, they're called registration states.
00:24:45
Speaker
And It is what you would think a prospectus would be. And that is typically 300, 400 pages long.
00:24:57
Speaker
It's some brands, it can be 700 pages long. It has a standardized ah set of standardized information that a franchisor is required to give to every prospect.
00:25:12
Speaker
And then all the various exhibits in which the franchise prospect would have to sign to become a franchisee. So it is there to protect the potential buyer, right? So everything is laid out, but it's so long and it's so intimidating. Um, it is, has been, it has become somewhat of the, the known secret that upon disclosure of the FDD, that's where prospects and and sales go to die, right?
00:25:47
Speaker
um So the FDD is, but you can't avoid it. ah has to be Has to be disclosed, has to be shared. And depending on your process at ah at a franchise, you have very you have they have a variety of different ways of how they try to address it, right? They may say, hey, let's schedule a meeting.
00:26:08
Speaker
I'm to be sharing with you my FDD. Let me tell you what it is. Let me tell you things you should focus on almost like prepping them. Right. So it just doesn't land with such a thought. yeah like Yeah. What is this? And then they typically have a post review meeting or maybe a webinar to answer any questions, but most people are so, you know, um,
00:26:34
Speaker
deer in the headlights of like, I'm not really sure. um or do I have to hire an attorney to go look at this, but I'm not really sure if I want to buy your brand or not. And And to be honest, i I'm so tailored to watching little TikToks and short videos and everything else. And you're asking me to read a 350 page document. you know i I don't even read anymore. like yeah Yeah, I don't know. yeah Exactly. Right. So it's become um it's so it's a required a piece of disclosure, but often viewed as one of the most burdensome.
00:27:12
Speaker
So. You know, you've described FDD Hub as as the first FDD platform that's um that's built for engagement, right? Which is an interesting phrase to attach to a legal document. um So, you know, what what do you mean by engagement? Why has it been missing until now?
00:27:37
Speaker
Well, i so when i say engagement, we it's really about... the experience the experience of reading this document the experience of more easily understanding this document and for the past several decades um when people receive this document this the fdd it's typically sent to them via a pdf via an attachment of an email, or it's sent through a Dropbox link type of system, like HubSpot. You can attach the link, but you're just generally downloading the PDF, right?
00:28:20
Speaker
And because of that, and the way it's delivered, and the form it's delivered, and because of this significant um impact it has on sales,
00:28:32
Speaker
It explains why from from an industry perspective, ah the i call it the we call it the middle of the funnel, the the part where the prospect is receiving the FDD is is typically one of the largest drop-offs in the sales funnel for for brands, right? It makes sense, right? Because, know, I... am Yeah, i serve you with a 350 page document. I don't think I'm going to hear from you again. like I don't even know where to start.
00:29:01
Speaker
And then ah then, but here's the flip side. For those who are really serious, they don't even read it. And then what does that do? We're not really informed. And then they get through all the entire process and know, like, well, do you have any questions? No, I don't have any questions. And of course the, the, the brand, even though they think that that could be a red flag, they're like, okay, great. Fantastic. ah Here's the, all all the other things of why we're, we're such a great brand you should invest in and okay, let's sign.
00:29:29
Speaker
And here's, and here, where's your franchise fee? $50,000. Great. Then they open it up. They try to open up their franchise. All of a sudden, they're running into all these roadblocks. They're running into these legal obligations. And they're like, wait a minute, where's this coming from? Oh, it's it's there.
00:29:47
Speaker
We disclosed it to you. in that member of that document FDD, which you actually signed a receipt that you acknowledge receiving it, it's all there. So what does that do? That leaves potential disputes, which then leads to litigation, which then leads to terminations, which then leads to people getting washed out of the system.
00:30:11
Speaker
But the interesting thing about that is that when they do wash out of the system, guess what? the brand has to report in their FDD all terminations that happened in the prior year.
00:30:24
Speaker
So then you then start having a track record of your system declining
Innovating Franchise Transparency with FDD Hub
00:30:31
Speaker
versus growing. And then that then imparts your, you know, the perspective of whether you're a good franchisor or a bad franchisor, whether your system's strong, whether it's not. and So it has all of these second and third order effects.
00:30:46
Speaker
So, So as a result of this, and you know if if you could just produce engagement on this document, you were never able to do it. Why?
00:30:57
Speaker
Well, um We lack the technology to be able to fully digitize and put an intelligence layer over this document to enable a digitized experience of it versus just a straight dumb PDF view.
00:31:18
Speaker
And what does that do? Well, that engagement allows us to, yeah with the consent of the recipient of it, we're able to see for the first time You know, ah the things that matter to them, the things that the topics that really need to be addressed, the things that can be proactively addressed. Yeah.
00:31:40
Speaker
Instead of waiting, waiting to talk to a real life person to ask a question that that that sales rep may not be actually.
00:31:51
Speaker
have the background to answer fully. And also you may be getting inconsistent answers. Right. And it's, you know, and if there's ever a litigation, know, the franchisee says, well, when I was being sold my franchise, Sally told me,
00:32:08
Speaker
that i'd be I'd be making all my money back in two years. Right, right. What? Sally, where did she say that? Oh, she said it on a phone call or she said it when we met at Starbucks, um you know, for our coffee meeting.
00:32:22
Speaker
Why? oh you know, sales reps are incentivized by commissions. Right, right, right. So there's all these human dynamics that you, you know, the lack of ability to capture engagement, the traditional way of how,
00:32:39
Speaker
the disclosure occurs that we're just really ripe to build something with this engagement purpose in mind. And I think with technology, we now we now can do it.
00:32:51
Speaker
I find it so fascinating, like where you you're you're you're at this, the very beginning of like their franchisee journey, like before they even become a franchise owner, before they're a leader of anything,
00:33:09
Speaker
Yeah. Right. And it's it's it's, I don't know, I just find it super interesting, right, that the the moment looks very different before they sign this document and then after they sign this document, right, where presumably everything changes, right, because they're responsible for a whole lot more things than they were the moments before they did it.
00:33:29
Speaker
um That's right. I think that I'm interested to know just, and and this, maybe this is just kind of anecdotal, you know, from from your side, but when you have the franchisor and the franchisee or potential, I guess, franchisee, you know, they're, they're on, they're sizing each other up, I guess, right? They're, they're both sides are making a bet on each other.
00:33:54
Speaker
What, I mean, what do you think they tend to sort of underestimate about the other in, in that, in that window of time? Um, I think that there is the classic, um, I think there's ah the classic phrase that we as humans, um, we over, we overestimate our, uh, ability to achieve something and, and underestimate the time that it's going to take. Yeah. Right. Um,
00:34:34
Speaker
Taking it from the prospect, taking it from the view of both sides, right? Clearly, and it all depends on whether the brand is a very successful established brand versus emerging brand and so forth. But you have this tension of one, prospective buyer who maybe has never owned their own business.
00:34:56
Speaker
they are looking for this this exit, this point, this entryway into freedom, entrepreneurial freedom. ah They may have an interesting passion about maybe the concept or maybe maybe not.
00:35:09
Speaker
um And they're looking to the franchisor to say, you're possibly that, you're you're the holder of that because you've established some semblance of success. You've figured out how things work.
00:35:26
Speaker
how to operate your business successfully and so forth. And I'm going to be depending on you, you franchise to help me become successful.
00:35:40
Speaker
But then from the franchisor's perspective, they're saying, I want pick you because I'm looking for certain attributes, you know, the entrepreneurial sense of grit and so forth that there's ups and downs. Um,
00:35:55
Speaker
But the franchisor can never say, ah yeah we've we've created the foolproof system here. We're basically money-making machine. No, they're looking to that operator just to figure it out themselves, yeah to be able to be able to manage people well, to be able to be an effective leader, to be able to deal with crisis, to be able to deal with um you ah anything that comes up in connection with running a ah successful business.
00:36:26
Speaker
And I think going back to that adage, the prospect, the buyer is overestimating how, how, um, jaque in the rock solid rock solid, the, the so-called business in the boxes, and they're underestimating their own need and effort to be able to make it successful.
00:36:55
Speaker
yeah Oh, if I just follow the manual, I'll be successful. No, it's not like that. right And then on the franchisor side, they're doing the same, but it's the actual the actual ah opposite. right right Someone said to this to me the other day, that franchising is not a quick, rich scheme. right you if you're If you think that you're going to be the next Jimmy John's It's a lot of work.
00:37:26
Speaker
It's a lot of growing pains. Figure out how do you best support your your franchisees who've put their money and life livelihoods in your hands you know ah and being able to to nurture that and be able to create this community.
00:37:45
Speaker
on the brand side On the franchisee side, yeah know they're looking to these brands to potentially enable their success, but that, know, owning a unit, one unit is not a rich, is not a get rich scheme, quick rich scheme. Um, but they have that freedom. So I think that, you they're looking to these folks as potential leaders who have never been leaders before. They're almost looking to these brand as well. You're already established leader. I'll just follow you and, and all of the success will follow. No, actually there's a disconnect there. Right. And the,
00:38:24
Speaker
and the issue there is they're doing it imprecisely and sizing each other up. You know, there's a, ah yeah. do you ever see the movie Moneyball?
00:38:36
Speaker
Yeah. Loved it. Okay. Remember Brad, Brad Pitt is basically, you know, he's the general manager of the A's and he's, and he's dealing with the scouts and the scouts are saying, okay,
The Future of AI in Small Business Legal Landscape
00:38:49
Speaker
You know, when they're knowing when they are are meeting with a prospect as like, well, you know, we've got 150 years of of ah of experience and expertise in the in the baseball industry. When we see a player, we know.
00:39:04
Speaker
know when we see it. He's got that intangible. When he walks in the room, everyone looks. He's got he's got the swing. He's got this. He's got all the potential. And Brad Pitt's like saying, you don't know.
00:39:18
Speaker
You really don't know. You know, so what can we, do what can we go on? Probably more data, right? Objective data to get a pinpointing of whether someone's going to be successful or not.
00:39:30
Speaker
It's an interesting, it's it's an interesting mindset where, know, we are somewhat making judgments. It's like whether you're going to be my successful franchisee or not. And some ways i'm we're going on gut.
00:39:45
Speaker
Yeah. And if you're early enough, you're like, oh, You want in? Okay. Right? Yeah. And that's not, so either way, you're you're possibly throwing it, throwing the dart, but you're not really sure where it's going to land. Yeah. you so So, yeah. Does that make, does that?
00:40:06
Speaker
Yeah. so hundred percent. I want to zoom out a little bit on on AI. you're you're You're an attorney, you're a lawyer building AI tools.
00:40:18
Speaker
Five years out, what does the day-to-day legal side of running a small business looks like? What would what should owners be doing now to get ready? right We talked about the 60% who, you know and then we've talked about some AI enablement now, but what does it look like and a dayto day for so for an s andb you know on the on the legal side?
00:40:44
Speaker
for, for the client on the SMB or you're talking about the attorney? No, uh, for, yeah, for the client, what does the business look like? The legal side of running a small business.
00:40:56
Speaker
Yeah, um you know I think it's primarily where they will be somewhat self-service in terms of their own particular AI agents that are analyzing analyzing their contracts, ah being able to provide some sort of general advisory service and and reaching out to the attorney,
00:41:24
Speaker
uh, when one, it's something that AI can't do, whether it's like dispute, dispute resolution or something to that effect. Um, but I think it's less reliance on,
00:41:36
Speaker
ah The traditional so step one through step eight, meaning, Hey, I've got this issue. I've got this contract. Let me email my attorney and get on the phone with him and talk to him or her. And, and hopefully, you know, they'll, they'll get, they'll get back to me in a week with whatever I'm asking for. I think it's going to be compressed. It's going to be, they're going to be able to make the request easily. i think either they're having some sort of AI enablement on their side where these,
00:42:08
Speaker
these These agreements are being drafted, these agreements being revised, it's then being sent off to their attorney if they so choose, it's an option. and The day-to-day interaction from a contract standpoint is going to be diminished.
00:42:25
Speaker
from a regulatory From a regulatory framework side, that's a little different just because regulations are constantly changing. um So you have to be really up on that. Whether they will ah make the investment to do that, they may still choose to be working with an attorney regarding FDA labeling, right? Like labeling for their beverage or whatever their product is. Some things will be untouched, but some things that I've mentioned that are going to be commoditized are somewhat going to be handled on their side.
00:42:59
Speaker
um More so than reaching out to the yeah their local small business attorney to review a contract. I think that's going away. um That's good. you know First of all, for for for for for the one building this, this type of stuff, um I think that that's really kind of good insight. it's it's I think it really kind of speaks to how I envision these changes to happen slowly and incrementally right over the next you know half decade or so. um you know Obviously, things might look even different than that in 10 years or 20 years. But really, over the next five, I think you probably nailed it.
Advice for Entering Franchise Relationships
00:43:39
Speaker
um Yeah. you You've talked a lot about catching you know problems before they leak. you know what's What's an early... you know and and And with franchising specifically, you know i think a a lot of our listeners, our audience, our owners and operators are wearing tin hats. um you know they're Maybe they're franchisees. um Some things get easier. Some things get harder over the next decade, right? There's some areas where they're going to still continue to fly blind.
00:44:08
Speaker
And that's just reality of being an owner and operator or like an HR of one as we like to call them. Yeah. um What's an early warning sign in in a franchise relationship, or I guess i guess really any any business relationship, um that maybe owners miss until it's too late? And this might be a good one for an attorney to to add some commentary on, but I'm just kind of curious. you know Sometimes problems, they percolate, right? And we don't see them until it's too late. I'm kind of curious what you've noticed as early warning signs to whatever these things might be.
00:44:44
Speaker
Well, particularly when buying a franchise, one of the um early warning signs, if you will, even though it's not necessarily, there's there's two things that that stand out in my mind. um one there's a section called item 19 which basically the the franchise has to present the financial representations of the business and by the way they can choose whatever metric they want to choose it's not standardized right so and by the and they don't have to disclose the entire business they could say well if they have a hundred units in their system they could say well our item 19 covers 25 of those those units So it's almost like it could be viewed as cherry picking, right? um
00:45:29
Speaker
So ah being being able to understand you item 19 and also there's a um ah another exhibit in the FDD as to sign but not opened.
00:45:41
Speaker
What does that mean? Yeah, what does that It means that the franchise is is actively selling, but their backlog of not opening up stores ah with their franchisees um has has built up.
00:45:56
Speaker
but is that That's usually an indicator that they're selling too fast to support their existing backlog. And was that that then possibly get you into a place where you have outlaid the cash?
00:46:13
Speaker
You have, and but you're not getting the support from the from the system to actually so to so to actually get you up and running, especially when it's especially when it's a brick and mortar franchises, right? it's different It's different if it's a home business, right? There's no real, usually those exhibits are, but if it's a brick and mortar business and you see a sign but not opened and it's like 120 but only You're like, when am I gonna open? Because you can only start generating revenue once you're open. yeah yeah so So those are some so those are some some early signs, um but particularly, um you know lots of terminations or transfers with out of the system, people are washing out. That means that there's something going on in the system.
00:47:01
Speaker
either they're selecting bad franchisees ah or there's disputes and so forth. So those things, I think if you boil down of when you're considering buying a franchise, those are some of the things that we, that we look at. um But with that said, you know and back to the, our issue of data, know, one of the reasons why we built FDD hub is to be able to assist the prospect to surface those things.
00:47:29
Speaker
And then what does that do? It has the franchise or having to proactively discuss it. And that, is about trust and transparency and that's great for the system overall yeah because if this raises the quality for the entire the entire industry and i think that's uh that's a good public good for what we're working on as well yeah i mean it gets the it gets the folks on both sides engaged um well there you go back to the engagement right it yeah it gets them both engaged uh but on a meaningful level where they're actually discussing you know the the um
00:48:06
Speaker
the actual content right inside of there that, that normally, like you said, I mean, somebody is not even going to spend the time to, to read or digest, you know, 400 pages. So I want to wrap up with this, this, this question, you know, if a small business owner and aspiring franchisee were to come to you then perhaps this has already happened many times.
00:48:27
Speaker
um But, you know, asks you or says, do you know, i i want to build something on, on, on solid ground. I don't just want to get the deal done. um you know, I want to feel, I want to feel supported. I want to feel like I'm doing it the right way and checking all my boxes and crossing my T's and dotting my I's.
00:48:46
Speaker
It's not just about signing, right? Because that's really, that's just the beginning. That's not the end. And I think a lot of people forget that when you're, when you start in franchising, the goal isn't just to sign on the dotted line, right? That's not the end. That's literally the beginning. So what's the single most important piece of advice that you give them.
00:49:08
Speaker
Typically that that it's, it's like a marriage. It's a long-term marriage, right? Yours, your success is somewhat dependent on their success. Yeah. You're trading on their directions, right? You're, you're trading on their brand.
00:49:23
Speaker
They're trading on your operational, you know, your, your operational wherewithal. Um, so, Make sure that you are you have your eyes wide open. Often franchises, especially successful franchises, ah they're not going to change anything in that franchise agreement. And notoriously, it's the one of the most one-sided one-sided agreements in history um ever written.
00:49:47
Speaker
But it's there for there for a reason. um And that's the that is the trade off, you know, in order to to be able to successfully saying, yeah, I know that if I'm operating a ah ah nothing bundt cake, I'm gonna get people right because I'm trading off of that reputation.
00:50:05
Speaker
um So that that in of itself is important. But the I think the most important thing is. Again, and we surface this in FDD hub if they ask for it, you know, ask who is the prospect, who are other existing franchisees in your area or in your state, call them, talk to them, get the skinny in terms of what's what's the real story.
00:50:33
Speaker
Are you happy? Are they supportive? Do they get back to How do they provide guidance? How have they helped you solve problems? Um, Because it's a collaborative relationship.
00:50:46
Speaker
Because it's so it's it's an interdependent relationship, you have to make sure that the value is going to be given on the other side. So that's that's really important. Just don't talk to references that they give you.
00:50:59
Speaker
yeah picks right Go into another state, go into a city that's maybe maybe different than yours. Maybe look at to ah someone who's in a territory that you wouldn't think is doing well um and reach out to them. right And that to me is, if they don't want to talk to you, well, that's a another sign. Yes, exactly. yeah Exactly. yeah You're making one of the biggest investments in your life. So therefore, you know, you should be well informed and educated the best that you can.
00:51:28
Speaker
And it's in the interest of the franchisor for you to be the best educated and informed and quote, engage as you can. so hopefully, as we often say in FDD Hub, you know, we're helping, you know, franchisors identify better candidates.
00:51:48
Speaker
which is turns into better discovery days. Those are the the final, the final ah sales event, which leads to stronger systems. And that's what you want. You want better candidates. You want people who are good at leading, good at being an entrepreneur, good at problem solving. So how can you surface that early on?
Episode Conclusion and Call to Action
00:52:08
Speaker
But it's a two way street. You need to be making sure you do your diligence on the brand that you're going to be marrying for 10 years at least. Yeah. So. I love that. I think that that's sound advice. um Thank you so much for joining me, Stephan. I really enjoyed the conversation. Yeah, appreciate you having um the time with us. and And I want to thank all of you watching and listening to Mustard Hub Voices behind the build. Be sure to subscribe so you don't miss the next episode.
00:52:36
Speaker
Be sure to visit mustardhub.com to learn more about Mustard Hub and our AI predictive foresight and how we power behavioral workforce intelligence for the global workforce. Until next time.