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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 dress 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 (part of which is encompassed in the operations manual) 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 “McDonalds” or a mom and pop operation, the franchisor must exhort a willingness to protect its system standards.  Obviously a company like “McDonalds” has the capital and manpower to enforce system standards.  Consequently a consumer knows that when they eat at a “McDonalds” 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 “McDonalds” to create an environment where franchisees want to comply.


Making a true commitment to developing, communicating and enforcing system standards will help a franchisor to ensure the consistent quality, name recognition and integrity of its franchise.  Failure to do so will lead to a continual erosion of the franchise system and its eventual collapse. 

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.


      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.