MEMORANDUM
TO: HOME INSTEAD FRANCHISEES
FROM: INDEPENDENT ASSOCIATION OF HOME INSTEAD FRANCHISEES
SUBJECT: LEGAL AND ECONOMIC REVISIONS TO DRAFTS OF AGREEMENTS GOVERNING FULL OPS MODEL/CARE PLATFORM
DATE: FEBRUARY 28, 2022
KNOW YOUR RIGHTS
Honor Technology, Inc. (“Honor”) is seeking to transition Home Instead franchisees onto a consolidated operations model known as the Care Platform or Full Operations Model (the “Care Platform” or “Full Ops Model”). In connection therewith, Honor produced the following documents intended to govern the Full Ops Model: (1) Home Instead Joint Service Agreement (the “Full Ops Service Agreement”), and (2) Confidential ‘Visionary Investment Program’ Addendum to Home Instead Joint Service Agreement (the “Customized Incentive Agreement” and, together with the Full Ops Service Agreement, the “Full Ops Agreements”). The Independent Association of Home Instead Franchisees (the “Association”) published the Full Ops Agreements on its website (www.iaohif.com) on February 14, 2022.
As a preliminary matter, all Home Instead franchisees should know that, based upon the opinion of the Association’s counsel, they have the following rights with respect to the Full Ops Model/Care Platform:
1. The Right to Say No. Notwithstanding anything to the contrary being implied or suggested by representatives of Honor or Home Instead, the Full Ops Model cannot be mandated either now under the existing franchise agreement or in the future under a new franchise agreement at renewal time because, among other things, it constitutes a radical and transformational departure from the disclosed and agreed-to financial model.
2. The Right to Insist Upon Verifiable Proof of Concept. Because you have the right to say no, you also have the right to insist that you are provided with transparent, comprehensive and verifiable information about the performance of the Full Ops Model, just like if you were considering entering into any other new business venture. This would likely include information concerning the performance of both the Honor Care Network agencies that have been operating on the Full Ops Model and that of any Home Instead pilot agencies. The Association is seeking this information and the right to verify/audit it.
3. The Right to Insist Upon a Negotiated Agreement that Protects Your Interests and Provides You with Attractive Compensation. Because you have the right to say no, you also have the right to not sign any agreement with terms that you do not
like. This Memorandum primarily addresses why that should include the Full Ops Agreements as initially and unilaterally drafted by Honor.
OVERVIEW OF THE FULL OPS AGREEMENTS
The Association wants to emphasize how important it is that franchisees not sign contracts relying upon statements of intentions from Honor or Home Instead representatives, postings on the Hub, or anything else that is not written into the actual legal documents.
Anything and everything critical that you are relying upon should be in writing and binding. It may be necessary, but it is not sufficient, that you trust Honor, Home Instead and/or any of their current directors or officers. First, just like Paul and Lori Hogan, those directors and officers are not going to be there forever. Second, and more importantly, the new ownership structure makes having your interests protected in binding legal documents essential and existential like never before. When Paul and Lori owned Home Instead, you could perhaps reasonably trust that they would not do anything too much in their own interest at your expense. But you cannot have that expectation under the new ownership structure. Honor’s directors and officers owe a fiduciary duty to the Honor investors. And Home Instead’s officers and directors owe a fiduciary duty to Honor. None of them owe a fiduciary duty to you. And after Honor goes public, all those directors and officers, and all of their successors, will directly or indirectly owe a fiduciary duty to act in the best interests of Honor and its shareholders. Again, they will not owe a fiduciary duty to you. In fact, it will be their legal duty to take from you if taking from you is legally permitted and is in the best interests of Honor and its shareholders. And taking from you will often be legally permitted under the Full Ops Model if you do not have concrete contractual rights protecting you in the relevant legal documents.
A review of the Full Ops Agreements suggests that they were drafted without input from anyone representing the legal or economic interests of franchisees. Consequently, the Association engaged and worked with legal counsel to revise such documents in a manner protective of the legal and economic interests of franchisees. The blacklined document attached to this Memorandum is the product of that effort.
This Memorandum and the attached document are being provided to you for informational purposes only. You should obtain your own legal advice. And you should reach your own conclusion about the viability of the Full Ops Model before signing any agreement relating thereto.
This Memorandum summarizes some of the major revisions made to the Full Ops Agreements by the Association and its legal counsel and provides the rationale for those changes. The summary is not intended to be exhaustive. Please review the attached documents to see all the revisions.
Capitalized terms used herein and not otherwise defined have the meanings ascribed to them in the Full Ops Service Agreement.
Summary of Revisions
1. The original version of the Full Ops Service Agreement provided franchisees with no protection against Honor obtaining all of a franchisee’s caregivers and then using them to directly staff (or indirectly staff through a competitor agency) clients within franchisee’s Exclusive Area, thereby cutting the franchisee out. The Full Ops Service Agreement has been revised to prohibit Honor from supporting other competitive agencies, except those that are already on the Full Ops Model (“Preexisting Care Platform Agencies”), or directly staffing clients within the franchisee’s Exclusive Area. These revisions are consistent with Honor’s stated goal of growing from 5% to 50% market share with Home Instead franchisees. See Section 3(a).
2. The original Full Ops Service Agreement did away with the Royalty Fee but replaced it with exorbitant Honor Service Rates. In short, the franchisee was expected to take an immediate and substantial hit to its bottom line in transitioning to the Full Ops Model and could only get back to even through substantial growth while, at the same time, Honor would collect an immediate profit, through the Honor Service Rates, many times in excess of that offered by the Royalty Fee. The revisions make clear that the Honor Service Rates may only reflect the actual cost of the Full Ops Model, without being an independent profit center for Honor. The Royalty Fee is restored as the means by which Honor will make more profit, namely through the huge increase in Royalty Fees that will be collected by its subsidiary Home Instead, Inc. if market share does increase from 5% to 50% as suggested by Honor. See Section 4(a)(3)&(4).
3. The original Full Ops Service Agreement provided Honor with unilateral pricing discretion in determining what the Honor Service Rates would be. This would be the equivalent of allowing the franchisor to change the Royalty Fee from 5% to whatever it wanted whenever it wanted. No one should ever enter into an agreement where the other party can charge you whatever it wants. The revisions do away with that and restrict the Honor Service Rates to the actual costs of the Full Ops Model, providing franchisee with the right to audit the calculation of such costs. By restoring the Royalty Fee as the means by which Honor will make more profit, the revisions ensure that both Honor’s and the franchisee’s interests are aligned towards the franchisee’s growth. See Section 4(a)(3)&(4).
4. The original Full Ops Service Agreement provided the franchisee with no protections at renewal time. After obtaining all of the franchisee’s caregivers, at renewal time Honor and Home Instead could simply elect not to renew and use those caregivers to directly staff cases themselves. Alternatively, at renewal time, franchisee’s Exclusive Area could be reduced substantially, thereby allowing Honor to directly staff cases in the removed area or signup additional competitor agencies to operate in the removed area. Accordingly, the revisions provide the franchisee with a renewal right and remove the right of Home Instead to reduce the franchisee’s Exclusive Area at renewal time. See Section 5(a).
5. The original version of the agreement did not require Honor to refer clients referred to Honor from various referral sources to the franchisee even if those clients live in the franchisee’s Exclusive Area, leaving open the possibility for Honor to directly staff such cases or indirectly staff them through a competitor of the franchisee. The revisions require Honor to refer such cases to the franchisee. See Section 3(e)(1).
6. The original Full Ops Service Agreement allowed Honor, without involving the franchisee, to directly sell additional goods and services to clients in the franchisee’s Exclusive Area. The revisions make clear that any goods or services that reasonably compete with or complement home care services must be offered to clients in the franchisee’s Exclusive Area through the franchisee (or a Preexisting Care Platform Agency), providing the franchisee/agency with a reasonable profit. See Section 3(f).
7. Honor Technology, Inc. should be a counterparty, not a yet-to-be-formed Honor subsidiary designed to insulate Honor from liability should anything go wrong with the Full Ops Model in a particular locality. At a minimum, Honor Technology, Inc. should guarantee the obligations of any such subsidiary to the franchisee. The revisions provide that Honor Technology, Inc. is a counterparty. See Preamble.
8. The original version of the Full Ops Service Agreement provided for the franchise owner to personally guarantee the obligations of his or her franchise under the Full Ops Model. The revisions delete this concept. There is no reason why franchise owners should be personally guaranteeing their franchise’s performance on a developing system. Honor investors are not personally guaranteeing Honor’s performance. All parties’ liability should be limited to the amount of their investments, without anyone having to put their personal assets at risk. See Preamble, Section 7(e).
9. It is not always clear whether Honor, Home Instead or both entities should be responsible for certain obligations under the Full Ops Model. Accordingly, the revisions provide that Honor and Home Instead will guarantee each other’s obligations under the Full Ops Service Agreement. See Section 1.
10. The original version of the Full Ops Service Agreement provided that the Operations Manual would be supplemented by the Central Operations Manual. Even though the Central Operations Manual would dictate standards and operating procedures to the franchisee under the Full Ops Model, a copy of the manual was not provided. Moreover, Honor was granted unilateral discretion in altering the manual. The revisions provide for a copy of the current Central Operations Manual to be attached as an exhibit, and the revisions limit the ability of Honor and Home Instead to alter the Central Operations Manual in a manner beneficial to themselves and detrimental to the franchisee. See Section 1, Section 3(c), Section 4(a)(2).
11. The original version of the Full Ops Service Agreement did not provide franchisees with any protection if their Gross Sales or Client Service Hours dipped below minimum amounts required by their franchise agreements. Since the Care Platform is a developing system, and reductions in Gross Sales and Client Service Hours are anticipated in transferring onto the system, the revisions remove any minimum requirements for Gross Sales or Client Service Hours. See Section 1(a).
12. The original version of the Full Ops Service Agreement did not provide any commitment on behalf of Honor that the Care Pros on the Care Platform would be W2 employees and not independent contractors. Thus the revisions provide that all Care Pros or other care providers will be W2 employees. See Section 1(b).
13. Our understanding is that Preexisting Care Platform Agencies are not required to have a physical office. Accordingly, it would be unequal to require such of Home Instead franchises operating on the Care Platform. The revisions therefore provide that Home Instead franchisees will not be required to maintain a physical office. See Section 1(a).
14. The original version of the Full Ops Service Agreement did not provide franchisees with a guarantee that they would be able to continue to differentiate themselves, particularly in cases where they are operating alongside a Preexisting Care Platform Agency. Accordingly, the revisions provide that franchisees will not be forced to use Honor’s trademarks and that Honor and Home Instead will use best efforts to protect the franchisee’s ability to differentiate itself from Preexisting Care Platform Agencies. See Section 1(c).
15. The original version of the Full Ops Service Agreement did not provide a franchisee with any discretionary right to terminate utilizing the Care Platform if it decided it was in its best interests to do so. This lack of a discretionary termination right is particularly unreasonable given the developing nature of the Care Platform. Accordingly, the revisions provide the franchisee with a right to terminate the Full Ops Service Agreement and regain its caregivers and clients. See Section 5(a), (b)(1) and (c)(1).
16. The transfer of caregivers to Honor as contemplated by the Full Ops Service Agreement will provide Honor with virtually all the means to operate without the franchisee, much more so than under the current franchise system. Accordingly, Honor and Home Instead will have much greater economic incentive to seek to terminate franchisee’s franchise than previously. Accordingly, the revisions restrict Honor and Home Instead’s rights to terminate the franchise to only cases where there is good cause to terminate and, even in those cases, Honor and Home Instead must use best efforts to prevent a forfeiture and to minimize loss to the franchisee. See Section 5(b)(2).
17. After converting to the Full Ops Model, franchisees may want to sell their franchises if they find that the new system is not for them. There should be nothing preventing them from doing so. Accordingly, the revisions provide that if Home Instead’s or Honor’s consent is required for a sale of a franchise, such consent shall not be unreasonably withheld. See Section 5(b)(4).
18. The original version of the Full Ops Service Agreement provided no compensation to franchisees who transitioned to the Full Ops Model in locations where there are Preexisting Care Platform Agencies. The caregivers that such a franchisee transfers to the Full Ops Model would be immediately available for use by that franchisee’s competitors on the model. Accordingly, the revisions contemplate a per caregiver payment to such franchisee as compensation. The amount of the payment is left blank, as a reasonable amount will be subject to local facts and circumstances, including the extent to which the franchisee is likely to benefit from the Care Pros already on the Care Platform. See Section 7.
19. The Customized Incentive Agreement has been deleted in its entirety. That agreement was designed to provide customized and confidential “sweetheart deals” to certain franchisees. The secretive and unequal nature of that agreement is not conducive to fostering trust and transparency. In order for franchisees to receive comprehensive and verifiable information about the performance of the Full Ops Model, franchisees have to be able to fully discuss all the economic considerations with each other, and particularly with pilot offices. See Section 8(b)(2).
20. Honor should not be responsible for billing and collections, unless a franchisee so opts. The amount collected from clients should, in all cases, be considered the revenue of the franchisee, not Honor. Honor’s revenue will be the amount of the Honor Service Rates collected from the franchisee. See Section 1(b), Section 4(a)(5).
21. The revisions permit franchisees to retain some caregiver staff to directly staff cases that fall outside of the scope of the Full Ops Model and/or to cover cases or shifts when the Full Ops Model fails to perform or the franchisee in good faith believes the Full Ops Model will not appropriately staff the case. See Section 3(b).
22. The revisions make clear that the franchisee may continue to directly staff cases, such as Medicare, Medicaid, VA and other third-party payor cases, that are not permitted on the Full Ops Model. See Section 3(b), Section 3(e)(2).
Blacklined Full Ops Documents Follow
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