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franchisees Archives - Duell | Law

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.

Exit Strategies for Franchisees Before You Terminate

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There are times when it is more prudent to have an exit strategy in place than to employ the financial and manpower resources of your franchise company necessary for a franchisee termination. This is true from an economical standpoint as well as a legal one. Not only do many states have specific statutes dealing with termination spelling out what can and cannot be done but, believe it or not, some states require a franchisor to compensate the franchisee upon termination.

Considering the legal and economical consequences which flow from termination, it seems only logical to develop exit strategies to wean out the dissident franchisees and make room for those franchisees that are helping you build a successful franchise system.

So what should franchisors look for when determining potentially dissident franchisees? Without question the first clue is whether a franchisee is communicating with you. If a franchisee is not communicating with you, it doesn’t matter what kind of wonderful programs you have in place. Your franchise system will not work unilaterally.

There are several ways to keep the lines of communication open with franchisees. One method is to make sure your field personnel are aware of potential problems and have them meet face-to-face with the franchisee to discuss the problem(s). Only when you know what the problem is can you attempt to effect a practical solution through your exit strategies for franchisees.

If your field personnel cannot open the lines of communication, it may be prudent to have an executive pick up the phone and make contact. If you perceive a serious problem you may want to invite the franchisee for a visit. You may have to buy a plane ticket but it’s certainly less expensive than spending valuable executive time and money defending a lawsuit.

Occasionally a franchisor and franchisee need a third party to open the line of communication. Mediation sometimes works to get a franchisor and franchisee together and vent whatever animosity there may be while at the same time causing each side to get back to the problem.

A sometimes better method of encouraging communication is by using your franchise counsel. Recently, a franchise client forwarded a rather threatening letter from a franchisee’s counsel. Based upon the attorney’s letter, I realized he could not have reviewed his client’s franchise agreement. After picking up the phone and going over several key provisions of the franchise agreement, franchisee’s counsel realized his client’s vulnerable position and the expense his client would incur. Based upon our phone conversation, the line of communication opened and we were able to work out an exit strategy for the franchisee. But before an exit strategy could even be discussed, we had to communicate.

There are many great exit strategies for franchisees that work extremely well once you have found the root of a franchisee’s problem. Next month we will continue to build our arsenal of additional exit strategies for franchisees before termination.

Franchise Associations: The Good, The Bad and The Ugly

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In determining whether franchise associations will benefit or undermine a franchise system one must first determine the manner in which the association is to be organized and secondly, the purpose behind the proposed formation. Generally, franchisee associations are either formed by franchisees themselves, primarily for their own interest, or they are formed by the franchisor, primarily for the franchisor’s interest first and secondarily that of the franchisees.

The Good

If a franchise association is being formed by the franchisor rather than franchisees, the association is customarily denoted a Franchise Advisory Council (“FAC”). As the name connotes, FAC’s are purely advisory. Organizational, communication, travel and other expenses are normally paid by the franchisor. Franchisors considering whether to form a FAC usually look for the best and most loyal franchisees to be on one or more committees to advise the franchisor on topics such as marketing, new product development, reporting and operations. FAC’s are a good mechanism for franchisors to obtain valuable input from prime franchisees. Because franchisees feel that they are a team member and their contribution is meaningful (which it should be), the FAC members normally give the franchisor their endorsement which in turn draws the support of the entire franchise system.

The Bad

When an association is formed by franchisees rather than the franchisor, the franchisee association usually involves a conflicting economic interest with that of the franchisor. Franchisees sometimes find that by pooling together their resources they jointly have a much louder and stronger voice. As a result, a franchisor is much more apt to listen and address complaints of franchisees. Unfortunately, for many franchise systems, franchisee associations formed to address a single issue common to the system expands to include a wide range of issues, including issues that might have otherwise been addressed by a FAC. An example of this change of direction occurs in the franchise system discussed in an article appearing in the magazine, Franchise Times. The story is about a franchisee association initially formed for the sole purpose of helping franchisees survive a number of lean financial years. After the franchisees were again profitable, the franchisee association changed its purpose and became primarily concerned with decoupling the franchise brand from that of the franchisor’s parent company. Neither franchisor nor franchisee could ever have foreseen the total change of direction.

The Ugly

The ugly referenced in our title occurs when politicians and academia get involved. Today there is growing sentiment that franchisee associations should be treated like labor unions and be granted an antitrust exemption. With this type of protection franchisee associations could engage in collective bargaining and be free to negotiate royalties, advertising fees, operational issues, termination rights and many other facets of the franchise system.

Like so many aspects of franchising, the decision of whether associations should be allowed in your system depends upon the intent of formation. Before agreeing to an association contact our firm. Together we can look at the legal ramifications pertaining to an association. Perhaps it may be more important to be proactive and form a franchisee advisory council yourself, or address the specific issues without even having to address the formation of an association. The choices you make can mean a win-win for all parties or the ultimate demise of your entire franchise system.

Promotional Contests: Winners or Losers?

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Traditionally, consumer promotions featuring games of chance, lotteries and sweepstakes have generated new sales and given Franchisors increased brand name recognition. In fact, an article in The Wall Street Journal noted sweepstake sites were a growing segment of the Internet. Sounds like a winner doesn’t it? It can be a winner if your company follows the rules.

Almost every state has codified a set of rules to regulate promotional contests. At the federal level, various agencies are empowered to initiate enforcement actions where prize, chance and consideration are inherent in the contest.  Internationally, our neighbors to the north in Canada prohibit any pure game of chance. In Latin America countries like Mexico, Brazil, Argentina, Venezuela and Columbia, promotional contests require prior governmental approval. This is also true of many European and Asian countries.

In a world filled with complex governmental regulations and judicial decisions, which vary from one area to the next, is there a “bright-line rule” to guide us? Fortunately, the answer is yes. As a general rule, to fall within a regulated activity the promotion must encompass each of the following: 1) a prize; or 2) chance, with mandatory consideration. A prize usually connotes anything of value awarded to the contestant. The value only has to be minimal. Thus, even discount coupons awarded may be sufficient to fulfill the definition. Chance refers to some random means of determination.  Perhaps the most striking example of this random determination is the Reader’s Digest and Publisher’s Clearing Sweepstakes. Consideration may be the most unsettled area of the “bright-line rule” because one would normally believe it had to be in a monetary form, for example, the purchase  of  a  product. This  approach  is actually followed in the majority of states. But there are several states that have taken the approach that the consideration may also be non-monetary. In these states the mere completion of an informational questionnaire may trigger the state’s definition of consideration.

To ensue compliance with our “bright-line rule,” creative marketers have skillfully crafted contests which focus on eliminating either chance or mandatory consideration. By making the contest a game of skill, the contestant is judged on their ability to perform an act. For instance, a contest involving “trivia” judges a contestant on their ability to correctly answer questions, thus the element of chance is eliminated. The second method commonly used is the elimination of mandatory consideration. By offering consumers a choice, the criteria of “mandatory” is eliminated. We all have seen this approach in the Pepsi and Coca-Cola games of chance or in any number of franchised fast food restaurant games. The customer is provided a game card when they make a purchase, but the contest also allows anyone to send off for a free card without any purchase. Thus, there is an alternative means of entering the promotional contest without any required purchase – no mandatory consideration.

CONCLUSION

Promotional contests can be a big winner for your franchise company and your franchisees if you have properly planned in advance. Begin your plan by making sure franchise legal counsel is a part of your planning team. A well-laid plan will make your company a winner rather than the next defendant in a lawsuit.