The Operations Manual is one of the most critical documents in defining and protecting the Franchisor – Franchisee relationship. It functions as a road map of a Franchisor’s entire system,…
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Your company’s founder has laid a solid foundation and the franchise business has grown to a point where economics dictate that the company must remain the same size or expand to establish a larger royalty base for profitability. If you choose the role of expansion, it could be accelerated through merger or acquisition of another franchise company. Your decision to expand may even be far removed from a financial one. It could be predicated on a product or service which is complimentary to your existing business or perhaps, another company has an excellent management team in place and you believe a merger or acquisition would help position your company as the dominant franchisor in a particular field.
Up to this point, the entire process of whether to engage in a merger or an acquisition of another company has been based upon various business decisions, all of which ultimately relate to profitability. And of course, profitability is extremely important, but you must not base a decision solely on profitability. This a good time in the decision process to call upon your franchise counsel to see if there are any legal implications before moving forward. If your decision process fails to include legal counsel as part of your merger or acquisition team, be forewarned your next step might be the defense of one or more lawsuits from franchisees in your own system.
If not handled properly, a good plaintiff’s attorney may craft a lawsuit against your company which includes breach of contract. He or she may contend that your merger or acquisition effectively created a complete modification of the Franchise Agreement, by revamping the franchise concept. They may even throw in a count for violation of the implied covenant of good faith and fair dealing based upon such issues as market expansion, encroachment, dual distribution and interference with contractual relations. Next comes one of their favorite counts, fraud. Plaintiff attorneys love to use the fraud count and if they can find a way to get the lawsuit tried in their own ballpark, “let the good times roll.” To add spice to the lawsuit, they might add a count for violation of state franchise relationship laws and franchise disclosure laws. For the icing on their lawsuit, they may even throw in an antitrust count by contending your company’s conduct and your co-conspirators’ conduct (that is, the conduct of the other company you are acquiring or with whom you are merging) is designed to eliminate their client and other similarly situated franchisees by saturation, or perhaps elimination of the market. If they are really feeling mean, they might go with a class action count or securities violation if one of the defendants is a public company. Their case for the franchisee looks pretty favorable, all because the franchisor didn’t establish a plan which included the legal aspects of merger and acquisition in the decision process. Fortunately legal consultation before making any decision on merging or acquiring another business can save you hundreds of thousands of dollars in legal fees alone.
Conclusion
A merger or acquisition may be very desirable, but it may also turn out to be a nightmare if you fail to make a proper legal plan.
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Many Franchisors ignore the thought of Foreign Expansion, believing that their U.S. market poses more than enough challenge. They reason that their hands are full just trying to ward off problems in this country, much less taking their concept to foreign shores. But BEWARE. If your franchise is successful in the U.S., you can bet there are foreign competitors looking at your concept to replicate it overseas. In fact, if you look at the website for “Hungry Jack’s” in Australia, you will find it looks familiar to the “Burger King” concept in the U.S. They even have a “Whopper”. Years ago, an enterprising Australian company snapped up much of the “Burger King” concept. After a successful run without Burger King being able to stop the replication, the company is now part of the international Burger King Corporation.
Franchising is booming overseas! There are new foreign franchisors springing up every day. Just like U.S. franchisors, foreign franchisors are looking to expand in the U.S. A good example of this is occurring in the restaurant field – Hispanic eateries are coming to America. Their initial in-road is to capture the Latino immigrants in this country. But ultimately, all these chains aim to compete with U.S. restaurants for mainstream consumers.
For the U.S. Franchisor, global markets may prove much more accessible than in earlier years. Finding information about retail trends in international markets has a multitude of websites which can provide franchisors with a vast assortment of information.
Today’s technology enables Franchisors to respond quicker than ever before. When an inquiry comes in from overseas, do you have a plan to respond? More often than not, U.S. Franchisors attempt to react and end up in a quagmire trying to dig their way out of legal and cultural differences. U.S. Franchisors should welcome the opportunity to expand overseas. In addition to building BRAND awareness, it opens new untapped markets and, with the recognition your company will receive, it also opens new doors in this country.
Don’t wait and be caught flat-footed. Start now to develop a plan and begin evaluating the viability of going overseas. From the legal standpoint, Duell Law will help you look at the different methods of franchising when going international. Next, we help you review foreign laws and work with you in developing a legal plan to make your overseas launch successful and not a regrettable one. After your legal plan is in place, we will work with you and your team to evaluate the financial and personnel resources necessary for your launch.
CONCLUSION
A Franchisor’s vision that started in this country can make the same impact overseas by laying a solid foundation through proper planning.
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With more than 3,500 active franchisors encompassing over 75 different industries, how can franchise companies compete for new franchisees? The very essence of this question may explain why one of…
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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.
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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.