Newsletter Archives - Page 2 of 9 - Duell

Oct 03

Is Bigger Always Better?

By Richard Duell lll Newsletter

Many years ago I represented a franchising company with a philosophy that the sale of franchises was paramount no matter how it was done. The company stressed franchise sales so much that their only qualification to become a franchisee of the company was whether the prospect had enough available credit to pay the initial franchise fee. As the company began selling more franchises, problems began to occur. With no solid foundation upon which the company had been built, litigation became common-place. The more sales – the more litigation. The company continued to ignore the real problems and adopted a mindset that even if only 50% of new franchisees survived, the company would still grow.

Imagine a franchise company with a Franchise Disclosure Document (“FDD”) which told the story of a 50% failure rate! But how could this franchise company have expected anything more? Signing up franchisees who did not have sufficient capital to run a business was a death spiral. The franchisees started business with two strikes against them. It wasn’t long until the franchisor found that franchisees who weren’t able to pay royalties and who were losing their businesses, led to multiple lawsuits which then led to a complete drain on the franchisor’s resources, and ultimately the demise of that company.

So is bigger always better? The answer is definitely no if the company fails to start with a solid foundation under it. A solid, successful foundation starts with a truly good management team. In the beginning, that team may consist of franchisees or that team may consist of only a couple of key people. As your company grows, search for and bring in qualified team members who understand the market, your competition and the kind of franchisees that will help your company get name recognition and dominate in your field. Perhaps you are in that interim stage where you are not quite big enough to attract the team members you know you need. Consider using a Consultant who has the expertise you need and can fill the void until you are able to afford those essential members on your team. There are any number of good franchise consultants who have the essential knowledge needed and have the years of experience that help provide the solid foundation you may be lacking.

So before your company leaves the starting gate, make sure you have the building blocks under it to be successful. Build the team that will lead your company to success. Use consultants when necessary to bridge the gap. Create a plan that helps your franchisees become successful. Successful franchisees build a successful franchise system. With a solid foundation you can then have the type of company that can be as big as you want it to be!

Thank You!

A special thanks to our clients who have called expressing their appreciation for the articles in Franchisor Alert® and have given us ideas for future articles. Your support makes a difference!

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

To have these posts sent directly to your inbox, subscribe to our newsletter here.

Sep 03

Love0

You Must Get it From the Company Store

By Addie 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.

To have these posts sent directly to your inbox, subscribe to our newsletter here.

Jul 01

Love0

At The Crossroads: To Merge, Acquire or Sell

By Richard Duell lll Newsletter

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.

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?
Audit franchise files for proper execution of all agreements, including signed FDD and UFOC Receipt Pages.
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.
List those employees who are critical to your transition process and then establish a plan for keeping those employees in place.
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.
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.

If you are a franchisor wondering if you should merge, acquire or sell, feel free to reach out to us at 205.408.3025 or email info@DuellLaw.com.

To have these posts sent directly to your inbox, subscribe to our newsletter here.

May 01

Love0

Disclaimer, Waiver and Integration Clauses

By Richard Duell lll Newsletter

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.

To have these posts sent directly to your inbox, subscribe to our newsletter here.

Mar 05

Love0

Co-Branding – Is It For You?

By Addie 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.