You Must Get it From the Company Store

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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.

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At The Crossroads: To Merge, Acquire or Sell

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You’ve built your franchise Company on a solid foundation and it has reached the first stage of success. Congratulations! You have reached the crossroads of growing the Company to the next level or selling it and obtaining the fruits of your labor. Either direction can be filled with potholes if you fail to plan ahead. Proper planning is accomplished by looking at the goals you initially set and determine where you want the Company to be in the next 3, 5 and 7 years. Your decision might be premised upon what capital and resources are needed for growth and what capital and resources are available. Are you looking for diversification, attempting to reduce the impact of a particular industry’s performance on the Company’s profitability? Perhaps your goal is to eliminate future competition, enabling your Company to gain a larger market share or increase supply-chain pricing power by buying out one of your supplier’s or distributor’s, thus reducing one level of cost in your profitability matrix. The decision on whether to grow may even be based on leadership. What are the strengths and weaknesses of your current management team?  Do you see a competitor with a management team in place that would fill in the gaps existing in your team? If so, it may make bottom line sense to acquire the other company in order to grow your business.  Maybe your decision is predicated on a complimentary product or service line which has synergy with those lines in your Company. By combining business lines or activity, performance at your Company will increase and costs will decrease. 

Whatever the motivating factor, without growing your Company you have only one road left to choose – the sale of your Company. Not a bad choice, and many Franchisors travel this road. To obtain the best possible price for your franchise Company, you must first do your due diligence to see if your Company is ready to sell. Due diligence requires preparation to present the best picture of a company that is organized and has each business system in place to enable a purchaser to succeed. Each of the following areas should be addressed to assure a prospective purchaser that the acquisition of your Company will lead to their success. 

  1. Make sure your Company has copies of all FDDs, UFOCs or other Disclosure Documents from the date of each Franchise Agreement. Catalog all FDDs, UFOCs or other Disclosure Documents from franchise registrations for each of your FDDs or UFOCs.  Do you have all required Transfer Agreements or Renewals for expired Agreements?
  2. Audit franchise files for proper execution of all agreements, including signed FDD and UFOC Receipt Pages.
  3. Focus on resolving compliance issues with your Franchisees. Are all royalty payments up to date? Do you have all of the ACH-Payment Agreements in place? Are Franchisees in compliance with required sales or have Area Developers completed required development schedules? If you have under-reporting or non-reporting Franchisees, make sure you have a plan in place to bring them current or establish an exit strategy when necessary.
  4. List those employees who are critical to your transition process and then establish a plan for keeping those employees in place.
  5. Determine which Franchisees have Addendums and chart any inconsistencies in your documents. It is always better to point out inconsistencies up front and explain why they are in place than to have a prospective purchaser discover inconsistencies while they are doing their due diligence.
  6. Finally, make sure you terminate Franchise Agreements with closed units or Area Development Agreements with territories that have not been developed according to the required schedule.

CONCLUSION

Whether merging with another franchise company, acquiring an existing business or preparing for the sale of your Company, don’t wait to get your franchise attorney involved in your decision.  Without the involvement of your franchise counsel, the best laid plans for success may result in a lawsuit from your own Franchisees or from the Franchisees of the other company seeking to enjoin the transaction.  Plan ahead.  Don’t wait!  Start the process of getting your Company ready now.  Put the proper systems in place straightaway and your decision at the crossroads will be like a super highway leading to success rather than the next wreck on a two lane road.

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Disclaimer, Waiver and Integration Clauses

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Disclaimer, waiver and integration clauses are quite common provisions in franchise agreements, but the manner of how they are used and the way they are incorporated into the agreement determine their enforceability and consequently, their effectiveness.

Generally, when referring to a disclaimer we mean, the repudiation or renunciation of a claim or power vested in a person. A corollary provision to the disclaimer clause is the waiver, commonly thought of as the intentional or voluntary relinquishment of a known right. Disclaimer and waiver clauses are normally used in conjunction with an integration clause, which merges all prior understandings between the parties and all contemporaneous agreements into the franchise agreement as a final expression of the parties’ intent.

When not properly incorporated into your franchise agreements, these clauses can open up a can of worms by allowing franchisees to look at other ancillary documents for their interpretation of what the franchise agreement is meant to say. Rather than protecting the Franchisor, these clauses can be a sledge hammer for the franchisee to use against you. As the Franchisor, you do not want any opening for your franchisees to use against you. The language in your franchise agreement must be specific and negate any potential opening for your franchisees.

Whether your disclaimer, waiver and integration clauses are enforceable in court usually starts with the state’s public policy. As you might expect, public policy does not normally favor permitting a Franchisor to contract out of obligations, but good news – courts do recognize the legal implications of a contract, even in the face of statutory anti-waiver provisions, because they are reluctant to ignore the intentions of the parties which are evidenced by the written contract. When courts do give effect to disclaimer, waiver and integration provisions in the face of allegations like fraud, they do so based upon the initial finding that the franchisee could not have relied on the supposed misrepresentation because of the express language of the contract itself.

CONCLUSION

So, are disclaimer, waiver and integration clauses effective? The answer lies in how they are drafted and incorporated into your franchise agreement, as well as how each state accepts them. Are disclaimer, waiver and integration clauses and provisions important? Absolutely, they can be critical if you are sued by a franchisee. Without incorporating such provisions correctly in your franchise agreement you have nothing in writing to refute a franchisee’s allegations.

If you are a franchisor who has any questions about disclaimer, waiver and integration clauses, 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?

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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.”

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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.

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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.

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