franchise law Archives - Page 2 of 5 - Duell

May 13

Exit Strategies for Franchisees Part Two

Economically it is good business to have a program in place to help franchisees exit the system without having to resort to litigation or arbitration. An exit plan allows you the Franchisor to control the process and bring in a new energetic franchisee who can follow your franchise system, pay royalties, become successful and be a shining example for future prospects.

As a Franchisor, you are already set up to take in new leads, so why not use some of those leads for obtaining that super star replacement franchisee. Wouldn’t it be a great turnaround to go from having a non-performing or non-compliant franchisee to have a new franchisee who is much more motivated and desirous of pleasing you, the Franchisor? Some Franchisors even have programs in place which provide credits toward future royalties or a credit toward the purchase price to employees of franchisor interested in owning a franchise. It’s a great incentive to attract good corporate employees to work for your Franchise company when they can later become successful franchisees.

From the Franchisee’s point of view, it makes sense to present their franchise in the best possible light to facilitate the sale of their business to a third party. Because the Franchisor has controlled the process, the Franchisor has created a win-win for both the Franchisor and the franchisee.

Another form of exit strategy which ultimately reaches the sale of the franchise is the Cure Agreement. This agreement can be as simple as:

An acknowledgement by the franchisee that there is a breach of the Franchise Agreement; and
A plan describing how the breach will be cured; and
The consequences of failing to follow the plan and cure the breach.

The use of a Cure Agreement if structured correctly can be a powerful tool for the Franchisor. The details of what the defaulting franchisee must do should be fully set out. Further, if done correctly the Franchisor in many states can incorporate release language, eliminating a franchisee’s claims (if any) against the Franchisor. Also there is no lag time. If the franchisee fails to cure the breach (particularly a monetary breach) the exit plan to remove the franchisee is in place and implemented immediately. The Cure Agreement is definitely a weapon that should be in a Franchisor’s arsenal.

As a Franchisor, it is imperative that you develop strategies to deal with franchisees that don’t perform or worse, refuse to abide by your agreement. With the proper plan in place you can avoid the cost of arbitration or litigation and move quickly to prevent any collateral damage with other franchisees.

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Mar 10

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Should You Consider A Merger Or Acquisition?

By Richard Duell lll Newsletter

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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Feb 13

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Have You Considered Going International?

By Richard Duell lll Newsletter

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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Dec 04

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Promotional Contests: Winners or Losers?

By Richard Duell lll Newsletter

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.

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Nov 02

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2016 Annual Legal Checkup

By Richard Duell lll Newsletter

We all acknowledge the importance of seeing our doctor annually for a physical checkup. Unfortunately, when it comes to the well-being of your franchise business, many companies never consider the importance of an annual legal checkup. If you are not reviewing documents or systems yearly, then new technology, new legislation or changing case law among other factors, may put your franchise business at risk.

Statistics show that most franchise systems which fail, do so within the first five years, principally for one or more of the following: undercapitalization; poor operations; lack of training and support; selling franchises for survival; lack of the skills required to be a successful Franchisor; or, looking only at the short term rather than building for the long-term. All of these failure precepts are likely to result in litigation against the franchise entity and against the principals and franchise sellers of the Franchisor, who are likely to be sued individually by the disgruntled franchisees. Without question, such litigation can be avoided by the company regularly consulting with its franchise attorney to provide advice and guidance in advance of any legal entanglements.

The need for a legal checkup is not just for the new Franchisor. For the mature Franchisor to be successful, there must be constant innovation and change. Change facilitates resistance from franchisees and requires close legal support from the planning stage through the implementation of the change.

A clear example of change occurred when McDonald’s added breakfast to its franchise system. Suddenly franchisees were faced with increased cost, not just for additional equipment, but new labor cost and having to manage a whole new process.

Without legal input prior to implementing the modification, McDonalds would have been in court for years from suits by their own franchisees.

In a field so seemingly narrow as franchising, it is always interesting to me that few law students and law professors have ever heard of and many, perhaps the majority of practicing lawyers, likewise have no awareness of and do not recognize the field of franchise law and the fact that there are so many subcategories of the law to consider. Franchising is filled with numerous subfields starting with the law of contracts and includes the core of franchising, trademarks, trade secrets and copyrights. Always present in franchising are antitrust issues, changing laws, litigation and the rapidly developing areas of joint liability and ostensible agency. From the initial prospect package through the termination of a dissident franchisee, a Franchisor’s records, information and processes should be reviewed no less than annually and, when necessary, updated, modified or changed to meet legal requirements.

CONCLUSION

Does your company conduct an annual legal checkup? Will you be one of the casualties when the list of former franchise companies is posted? How successful do you want to be?