franchisor - Duell

Feb 24

A FRANCHISOR’S KEY TO SUCCESS

By mwilliams 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.

CONCLUSION

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.

Jan 07

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You Must Get it from The Company Store

By mwilliams 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.

May 01

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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.

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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.