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Addie Heard

Using Rewards to Ensure System Compliance

By | Newsletter

The bedrock for a successful Franchise System depends upon the uniformity of its operations.  That uniformity is the essence of why consumers continually trade with one of the many Franchisees in the system.  Even though a Franchisor’s logo, name and trade address are an integral part of the system, it is a Franchisor’s trade secrets, proprietary items and business acumen that effectively give one Franchisor a competitive advantage over another.  Thus a Franchisor’s methodology of doing business constitutes one of the most important elements of the Franchise System.  Likewise, without Franchisees who comply with the system standards (methodology) there is no uniformity.  Without uniformity the Franchise System is on a downward course which eventually will reach a level where there can be no recovery.

It does not matter whether the franchise company is “McDonald’s” or a mom and pop operation, the Franchisor must exhort a willingness to protect its system standards.  Obviously a company like “McDonald’s” has the capital and manpower to enforce system standards.  Consequently a consumer knows that when they eat at a “McDonald’s” in California or Alabama they will get the same basic food.

Large Franchisors have learned that the dollars invested in enforcing system standards to create uniformity come back to them tenfold.  Unfortunately it is generally the smaller Franchisors, plagued by lack of readily available capital or a clear understanding of the value of franchise uniformity that suffer the most from problems with system compliance.  As a result smaller Franchisors must strive to find the areas that truly differentiate their franchise from others and clearly define the system, system standards and at the same time, they must find less capital intensive measures to facilitate compliance by their Franchisees.

One method that smaller Franchisors can use is the reward system.  Reward your Franchisees who do comply with system standards.  Rewards can come in any number of different approaches and are limited only by a Franchisor’s imagination.  For instance, you may consider a program that awards discounts for purchases from your company to Franchisees which are in compliance with system standards, or perhaps recognize compliance by a reduction in their percentage for royalty payments.  The same idea could be used to provide royalty rebates if a Franchisee remains compliant for a predetermined period.  The options for a small Franchisor are numerous and you don’t have to be a “McDonald’s” to create an environment where Franchisees want to comply.

CONCLUSION

Using rewards to accomplish system compliance creates a win – win for the Franchisor and Franchisee, thus ensuring consistent quality, name recognition and integrity of the Franchise. Contact Richard Duell at Duell | Law for questions about your franchise system compliance.

You Must Get it From the Company Store

By | Newsletter

For many franchising companies, the “Company Store” has been a profitable addition to their bottom line. Franchisees must either buy all or a select number of items from the “Company Store” or alternatively, Franchisees must buy from designated suppliers who in turn pay the Franchisor a rebate. For many Franchisees, it doesn’t matter that the Franchisor makes a handsome profit. The convenience of one stop shopping is all that matters. However for other Franchisees, the thought that they are being gouged (rightly or wrongly) by the Franchisor ultimately leads to litigation.

The litigating Franchisees contend that the required purchases constitute a violation of the Sherman Antitrust Act by coercing them to purchase goods or services from specified suppliers, thus restraining competition when they should be able to make purchases from sellers of their own choosing.

In today’s litigious environment, it is crucial for any Franchising Company selling products or services or requiring Franchisees to purchase from designated sources, to understand Federal, and just as importantly, State legal regulations before launching a required supplier program. Not only is a Franchisor subject to Federal antitrust laws, but some States have their own antitrust laws. Recently a State Attorney General sought to hold one of our Franchise Clients in violation of that State’s antitrust laws, a very serious charge. Fortunately, our Client had consulted with us prior to implementing their pricing program and was ready. The charge never materialized!

It is also not uncommon for States to have relationship laws which directly affect your Franchise Agreements. As a result, you must understand how to successfully structure. Franchisee programs from a legal perspective. For example, several States restrict a Franchisor’s ability to require its Franchisees to buy goods and services from the Franchisor or its designee as well as restricting rebates. A few States even prohibit sourcing restraints if goods of comparable quality are available elsewhere, or they place the burden on the Franchisor to show that restrictive purchasing arrangements are reasonably necessary.

Franchisors must also pay close attention to the disclosure requirements of the Amended FTC Franchise Rule. Now Franchisors are required to disclose supplier payments received by the Franchisor and the basis of payments made to the Franchisor from suppliers. In most cases, a Franchisor must disclose gross revenue from required Franchisee purchases.

CONCLUSION

With all these obstacles standing at the door, can it be said that the “Company Store” is still a good place to increase a Franchisor’s bottom line? Absolutely! But, the “Company Store” takes planning before it can be opened. It is essential that the legal requirements be understood in order to develop and properly structure the “Company Store” and the required purchase program before it is launched. Duell | Law is ready to help you. Plan ahead. Don’t be the next TV ad for the local Plaintiff’s lawyer which announces the multi-million dollar judgment against your Franchise Company.

If you are a franchisor who has any questions about developing a Company Store, feel free to reach out to us at 205.408.3025 or email info@DuellLaw.com.

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Co-Branding – Is It For You?

By | Newsletter

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.”

If you are a franchisor who is wondering if co-branding is right for your business, feel free to reach out to us at 205.408.3025 or email info@DuellLaw.com.

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