Co-Branding – Is It For You?

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The unique feature of Franchising is the way it evolves with the changing times. What was once traditional is rapidly moving to the non-traditional. Both Franchisors and Franchisees are constantly seeking new avenues to maximize facilities, human resources and competitive positioning. One manner of breaking the traditional mold is through co-branding. This concept is normally thought of as a formal or loose association of more than one brand with one or more owners of the business concepts. Cobranded operations may exist “under oneroof” or cover large geographical areas. Everyone has visited the gas station convenience store which often has several franchises at one location. The possibilities are almost as varied as ones imagination. I recently became acquainted with a Franchisor which licenses its system for making homes and businesses baby safe. When the company began cobranding with the Franchisors of designer baby furniture and day-care franchises, it was able to reach out to an entirely different clientele.

How often have we heard that a Franchisee’s success depends upon “Location, Location, Location.” What better way to get that prime location that was once cost prohibitive than cobranding. Be careful though, if there is no synergy between brands and concepts the co-brand may draw away from your successful franchise. If brands are too similar in nature the second brand may dilute the first. Franchisors must be careful and conduct the proper research before jumping into the co-branding arena. In addition, Franchisors and their counsel face the challenge of ensuring that their brand and system are fully protected before embarking into co-branding. One way of obtaining that desired protection is by using a master agreement between each Franchisor and then, tailoring each concept’s Franchise Agreement for the cobranded operation. In existing operations consider an addendum to the existing Franchise Agreement, modifying the agreement in pertinent areas to accommodate co-branding. Franchise counsel will also want to review the Franchise Disclosure Document (“FDD”) to ensure full disclosure is made about the co-branding relationship. This review should encompass analyzing Items 1, 5, 6, 7, 9, 11, 12, 16, 17 and 22 of the FDD.

CONCLUSION

The concept of co-branding continues to evolve. Before leaping into the arena make sure you have fully researched the co-branded concept and are satisfied the brands have synergy with each other. Take the precautionary steps to make cobranding increase your bottom-line and not become a “black-hole.”

A Paradigm for National Accounts

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Technically a National Account or National Customer is one with two or more locations and structured decision making power within an organization. However, most everyone tends to associate a National Account as that of a client or customer that has locations throughout the country. Irregardless of the true definition, few Franchisees have the resources to negotiate national contracts or the ability to provide and deliver the services and products which the national client demands. Consequently, most National Accounts will not deal with a multiplicity of Franchisees but, instead will only negotiate with a single contracting source, the Franchisor. New Franchisors have had the benefit of watching the market place grow and have reserved the right to deal with National Accounts in their franchise agreements. More established franchise companies, on the other hand, have older contracts which convey “exclusive territories” with no right reserved for Franchisors to deal with the exclusive territory. National Accounts, however, want a single contracting source that can promise uniform service throughout the country and national discount prices. Under our old way of looking at the Franchisor-Franchisee relationship, we would approach the problem and attempt to resolve it by the Franchisor securing the national contract and attempting to retain all of the benefits flowing from the contract. This old way of thinking had its legal impediments and often led to litigation between Franchisor and Franchisee. In today’s marketplace, why not create a new paradigm, with both the Franchisor and Franchisee participating in the revenue stream. Unheard of you say, but what better way to strengthen the franchise system and create a win-win for your company and your Franchisees. Franchisees can significantly increase their revenue because they will have access to National Accounts and as a Franchisor your royalties will increase because your Franchisees sales will increase.

Also, as many businesses expand and buy out smaller vendors what better way to provide an answer to the age old Franchisee question of, “what have you done for me lately.” The answer could now be – look at your bottom line.

CONCLUSION

As the paradigm of traditional franchising changes, Franchisees can win by participating in National Account programs and Franchisors can also win by watching their bottom line grow from the increased royalty revenues generated by their Franchisees participation in the National Account programs.

Qualifying And Selecting Franchisees

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One of the most important decisions you will make when franchising is finding the right Franchisee. To be successful as a Franchisor you must have successful Franchisees. The essential question then becomes how to select good Franchisees.

Step One: Determining criteria for a successful Franchisee.

What leads so many start-up franchising companies to a path of litigation is the mindset that they must sell to the first warm body that calls inquiring about their franchise.

I remember the lesson I learned from one of my first franchise cases. The Franchisor required the Franchisee to be heavily involved in selling and converting leads. When I deposed the dissident Franchisee, he had no previous sales experience, had no experience hiring sales people and hated cold calls or selling face to face. Obviously the franchising company had not done their homework. The chances of the Franchisee ever being successful were slim. Therefore, determine your criteria for a successful Franchisee from the very start.

Step Two: Qualifying prospective Franchisees. Key to successfully qualifying prospective Franchisees is building a chart containing each ingredient that makes up a successful Franchisee.

If you are an entrepreneur who founded the franchise company, you undoubtedly can look back on your experiences of what it took to make your prototype successful. But just as importantly, do you know what traits are needed to succeed as a Franchisee? Is the Franchisee value driven? What was his or her previous business experience? Was the Franchisee successful in that business? What kind of net worth does the prospect have to launch the franchise? Obviously a prospective Franchisee cannot be successful if he or she has to have 100% financing to open the doors to do business. It takes awhile before a Franchisee can net any money out of the business. As a result, it is critical  that  you  determine  a  prospect’s work ethic. No matter how you try to glamorize franchising, it still takes good old fashioned hard work to be successful.

After developing the profile of what you believe the requirements are for a prospect to be successful, work with your key personnel to create protocols in your company for finding the type of prospect you know should be successful. I say “should”, because we all know what can go afoul sometimes does go afoul, no matter what safeguards we put in place.

Once you have established the profile for a prospect, you are ready for the final test. Successful Franchisors I have observed go one step beyond developing the template for an ideal Franchisee.

The Final Step: The interview process. Focus on whether the prospect is the type of person you want representing your company. What are their goals and objectives and perhaps as importantly, will the individual you choose actually follow your franchise system? There are any number of industry tests available to assist you, but you want to make sure the prospect is a team player and not someone who after two or three months in the system will want to do things their way. What a waste of resources when you fail to properly qualify an individual who should never have been in a franchise system to start with. Usually the end result is termination and/or litigation.

CONCLUSION

The criteria you establish should be designed to produce the best possible candidate to represent your company. Don’t ever forget that all your hard work to build the company’s name can go up in smoke with one bad Franchisee, so choose wisely.

Confidentiality Agreements: Do They Work?

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To determine the enforceability of Confidentiality Agreements, Franchising companies must be able to answer three questions affirmatively.

First, does your confidentiality agreement contain information which is outside the public domain or does it contain information compiled or combined in a unique way as the result of your business efforts? In the vast majority of business format franchises, information is one of, if not the most valuable asset of a franchise system and it is the compilation and use of that information which forms the foundation of the franchise system. This is what distinguishes your franchise from any other business.

The second area that must be examined is whether the subject matter deemed to be confidential derives value from its secrecy. If the actual loss caused by the violation of confidentiality provisions results in no damage to the party seeking protection, how can liability be imposed on a wrongdoer? It does not matter whether your entire franchise system uses special recipes or, for that matter, anything your franchise company may deem to be confidential in nature, you must be prepared to show it has value and how your company has been damaged.

The final question of our tripartite equation, is probably the most important, did the party seeking protection take reasonable precautions to maintain the secrecy of the material claimed to be confidential? It is not enough for your franchise company to argue that the parties to whom knowledge of the alleged confidential material is imparted to – should have known better. The burden is on your franchise company to show that reasonable precaution to prevent unauthorized disclosure is in place. The determination of whether  “reasonable  precaution”  was taken ultimately rests in the discretion of the trial court. As a result, you must demonstrate that not only is the information deemed to be of substantial value to your franchise system but that your company took the necessary precautions to preserve the integrity of your information, even when that information may have been voluntarily provided to third parties. So how can a Franchisor show its protection of confidential information? One way that trial courts recognize is to show that there is a process in place to protect the information through use of third party confidentiality agreements. This contractual protection is an affirmative step by your company to set out a third party’s acknowledgement that the information or material being divulged is done so under limited parameters and further, it sets out the consequences for misappropriation. Additionally, contractual protections should be supplemental by a proactive strategy to monitor franchisee compliance.

Beyond securing secrecy for your company, there is an indirect benefit of a psychological impact on your franchise system by demonstrating your company’s regard for the confidential information and its commercial sensitivity.

CONCLUSION

Your confidential information is a valuable asset in your franchise tool box for the success of the franchise system. By taking steps to proactively protect and prevent trade secret leaks, you will create positive dollars to your company’s bottom line.

Saving Dollars By Using Intranets

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Does your staff spend a significant amount of time mailing or faxing new manual updates, newsletters, reports or a variety of other information to your franchise system? Are you apprehensive about sending confidential information over the Internet? If your answer to either question is yes, you should consider implementing a plan to establish an Intranet site. If you think your company is too small for its own Intranet site, then this article is definitely for you.

An Intranet site, as opposed to internet is a company internal site with limited access. By using encryption technology and limiting access to persons with passwords, the site is not available for public view like normal internet sites. With a secure Intranet site a franchise company can feel comfortable in sending franchisees information, such as:

  1. Training documents, manuals, reports and other information normally copied or printed and sent through the mail;
  2. Software upgrades for immediate use;
  3. Newsletters;
  4. Continued updating of approved vendor lists;
  5. Changes in personnel directories, with the latest areas of responsibility;
  6. Last minute vendor close outs;
  7. And the list goes on and on.

It shouldn’t take too long to see that the above list just touches the surface of potential uses for an Intranet. In fact, not only can a Franchisor disseminate information over an Intranet site, but franchisees in the system can share ideas and experiences with other franchisees by using an Intranet bulletin board. Some Franchisors use their Intranet for franchisee reporting. By compiling the reported franchisee information over a period of time, Franchisors can analyze the reports and help franchisees strategically plan for the future or help them correct existing problems.

If a Franchisor’s Intranet site is set up to allow vendors limited access, franchisees can order supplies over the site from approved vendors with password access and guess what – your franchise company now has a new means to monitor franchisee orders and an additional tool to discover under reporting (See Franchisor Alert February 2016 “Do You Have Under Reporting Franchisees?” for other under reporting tools).

The potential uses for an Intranet site are unlimited and as a client with less than forty franchisees told me: “By eliminating many of our costly and inefficient methods of doing business, our site will pay for itself, but more importantly, our relationship with franchisees is at an all-time high. If I was starting my company again, I would have an Intranet site before I sold my first franchise.”

CONCLUSION

In Franchising it is important to never be satisfied with mediocrity. Intranets have proven to be successful in Franchising and can help provide value to your bottom-line.

Trade Dress: Is Your Franchise System In Vogue?

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As a growing Franchisor, you constantly endeavor to make your company distinguishable from its competition. From the very beginning when you had the idea to launch your business, you no doubt struggled to find just the right name. Then after the name, you went through the legal process to register and protect that name and associated logo. In conjunction with finding the right name, you worked hard and spent many long hours to develop those secret recipes or methodology of operations and processes which formed the core of your trade secrets that set you apart from your competition. Unfortunately, many Franchisors fail to spend the same amount of time and effort in developing or protecting their company’s trade dress

Your trade dress is the overall appearance of the business. The items that make the business or product distinguishable and recognizable to the customer. When you drive down the street and see the golden arches at a fast food restaurant, is there any doubt about the name of the Franchisor? The golden arches symbolize the entire franchise system. Ask any kid.  They know what the arches mean when they are hungry. The golden arches constitute a major part of the Franchisor’s trade dress and are a very valuable asset. A company’s trade dress builds reputation and goodwill which in turn, becomes synonymous with the Franchisor’s name. But as you become successful in building greater market share through your trade dress, your competitors will seek to copy you and capitalize on that good will and reputation.

Fortunately, there is good news for Franchisors seeking to protect their trade dress. By employing Section 43(a) of the Lanham Act, a Franchisor carries a “big stick” to beat back its competitors. Under the Lanham Act, not only can a Franchisor obtain damages against the infringer, but the Franchisor can also obtain an injunction and destruction of the “copy-cat” materials. Additionally, the Act also enables a Franchisor to obtain attorney fees against the offender. And a Franchisor has the option of initiating the case in either federal or state court.

The most notable trade dress case decided under the Lanham Act was Taco Cabana v. Two Pesos. In this case, the U.S. Supreme Court upheld the Circuit Court’s finding that the defendant had appropriated the Plaintiff’s general appearance by copying the exterior of the restaurant, the identifying signage, interior kitchen floor plan, décor, servers’ uniforms and several other features of the restaurant. The court found that the above items created a “total image”. The total image constituted the Plaintiff’s trade dress and distinguished its products and services from competitors. 

CONCLUSION

Once your trade dress is developed, make sure it is used consistently by all franchisees. When used on a consistent basis, trade dress becomes a major asset of your franchise company and merits no less protection than that of your trademark and trade secrets.