franchisor Archives - Page 2 of 4 - Duell

Jan 03

Franchise Associations: The Good, The Bad and The Ugly

By Richard Duell lll Newsletter

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.

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

Nov 02

Love0

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?

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

Oct 13

Love0

Modifying The Franchise System

By Richard Duell lll Newsletter

If there is one thing you can be sure of, it is the fact that change is imminent. In Franchising, if you don’t stay in touch with the market or consumer demands, you are setting a course for extinction. I am sure everyone can think of multiple examples of companies that remained static and are no longer with us today.

As a Franchisor, you are constantly evaluating and modifying the Franchise System to determine how new products, advancing technologies and changing consumer demands might affect your bottom line. Modifying the Franchise Systems occur in many forms. At one point, McDonalds did not serve breakfast. The modification of their Franchise System required a major investment by both Franchisees and McDonalds, with new equipment, advertising, additional labor cost and additional training. Almost all of the pizza franchises added delivery service to their system. Today you see many concepts that co-brand with other Franchise concepts. When you walk into a convenience store there are usually several franchise concepts in place under one roof. Computer technology has required many companies to modify a Franchisor’s system to stay abreast of competition.

Unfortunately, no matter how hard you work to lay the groundwork for changes to your Franchise System, there will always be one or more hostile franchisees who, even though they bought the franchise for your expertise, think they know more than expire. Be prepared for the argument that your modifications have caused a constructive termination of their Franchise Agreement or that you have modified or amended the original contract without their required written consent or that you have violated the covenant of good faith and fair dealing.

Fortunately, the good news is that courts around the country generally uphold a Franchisor’s right for modifying the Franchise System – when the Franchisor has reserved the right to do so in its Franchise Agreement. The key is reserving your right to make modifications. It is important that your franchising counsel is part of your planning team so that counsel knows what your future expectations are and can help build your documents to avoid franchisee disputes. Before making modifications to your Franchise System, be sure you have the legal ability to implement the system change. If the subject of your future Franchise System Modifications is not already on your list, make sure to add it to our annual legal checkup review.

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

Aug 13

Love0

Multi-Unit Franchising – Is It for You?

By Richard Duell lll Newsletter

Every Franchisor dreams of expanding its franchise system. But what is the most effective way to expand and how quickly do you expand? These are the two questions which plague most Franchisors. Picking the right format can make a franchise company the top player or the next casualty.

One method of expansion which has a consistently winning track record is that of multi-unit franchising. In fact, IFA studies have found that although multi-unit Franchisors make up a fraction of the total franchisee population, they account for more than 50% of all franchise units.But not all concepts are suited for multi-unit franchising. The following are pluses and minuses you should consider when deciding whether your company is a candidate for multi-unit franchising:

Pros:

Accelerated Growth – The ability to expand at a much faster rate than through the sale of single units. This also enables a Franchisor to obtain a quick injection of cash into the system.
Attract Potential Franchisees – Usually the multi-unit purchaser is more sophisticated with more liquidity and has an infrastructure already in place. This is especially true of existing multi-unit franchisees looking to expand via other franchises within an area they are already operating in.
Operating Market Efficiencies – A multi-unit franchisee usually has a well-organized professional management team. It may take a single-unit franchisee years to obtain similar efficiencies.
Market Penetration – Location! Locations! Location! A multi-unit operator often has a distinct advantage of obtaining prime retail locations with the liquidity to open multiple locations at the same time.
Reduction of Training Assistance – Even if the first store opening requires the Franchisor to fully train the multi-unit operator, additional training and assistance for subsequent locations is normally minimal.
Reward to Productive Franchisees – Perhaps no bigger win-win scenario can be found than to reward successful franchisees with the ability to open multiple locations. A productive franchisee can replicate success at other locations, thus enhancing a Franchisor’s chance of having more successful stores and greater royalty income.

Cons:

Loss of Capital – There is no bigger detriment to a franchise system than a franchisee which is too big for a Franchisor to control. Litigation with a large multi-unit franchisee could destroy the franchise system.
Loss of Prime Territory – Although the development of prime territories can be advantageous, the elimination of prime territory can be a distinct disadvantage. A Franchisor normally requires a multi-unit franchisee to develop a territory with a pre-determined minimum number of locations over a set period of time. The period for opening new locations is generally a number of years and thus the territory is taken off the market for years in the future. If a Franchisor has a number of long-term development contracts, large territories are not available and other potential franchisees will go to other competing Franchisors or other unrelated franchise concepts.
Impact on System Franchisees, Vendors, and Suppliers – The franchising grapevine has no equal. When a dominant franchisee in the system creates ill-will, it permeates the entire franchise system.
Problems Addressing Defaults and Terminations Quite often the multi-unit franchisee consists of multiple entities and without proper cross-default provisions, a Franchisor may find itself in a quagmire trying to address defaults and terminations. This becomes even more complicated when a multi-unit franchisee is conducting business in more than one state.

Conclusion:

So many Franchisors jump into multi-unit franchising without knowing the pros and cons of this method of expansion. The uniformed decision to implement multi-unit franchising can and sometimes does speak trouble. In our next post we will address “When is a Franchisor Ready for Multi-Unit Franchising?”; Qualifying Multi-Unit Franchisees; and More!

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

Jun 08

Love0

How Compliance Programs Equals Preventative Maintenance

By Richard Duell lll Newsletter

When you are in the courtroom, it’s too late to say – “If only I had started a good Compliance Program, I would not be in this mess now!” Why not be proactive and start your Compliance Program before it’s too late?

The goal of a good Compliance Program is to further the business objectives of the franchise system while avoiding disputes and franchise litigation, whenever possible. But, if a franchise company finds itself in litigation, a well-developed and properly implemented Compliance Program can serve as a shield to protect the business interest of your company, and serve as a sword to enforce the franchise system requirements of your Franchise Agreement. For example, consistently applied procedures leading up to termination of a franchise can act as strong evidence in an injunction lawsuit where the franchisee contests the franchisor’s action or refuses to acknowledge the termination. Evidence that a franchisor not only followed the provisions of the franchise agreement but also its policies and procedures should defeat a franchisee’s claim for wrongful termination. The ultimate goal of a good Compliance Program is being able to show that the franchise company acted fairly, reasonably and consistently with the provisions of the franchise agreement.

Your development and implementation of a Compliance Program can create a solid foundation for your franchise company by incorporating four fundamental steps: 1) Determine what issues are the most important when analyzing your particular franchise system. 2) Establish the policies and procedures to facilitate the franchise system’s particular business objectives. 3.) Make sure your company communicates it policies and procedures, and standards clearly and regularly to franchise personnel, as well as all franchisees. There should never be a dispute over what your policies are or whether the franchisees are aware of your policies and procedures. 4) Actively monitor and apply policies and procedures diligently and consistently throughout the entire franchise system.

Once a compliance officer is chosen, it is essential that he or she maintain a good line of communication with franchise counsel, particularly in the early stages of implementing your program. Because our firm philosophy emphasizes a team approach, we already know how important it is to work closely with the compliance officer to review federal and state laws affecting your franchise business, your FDD documents for compliance with disclosure issues that are likely to arise, required amendments to your FDD, legal aspects of advertising and registering proposed ads in certain states prior to running the ad, initiating procedures to track contacts with prospective franchisees, renewal dates, and monitoring changes in new case law which may have an effect on your company. By working with our firm, we will assist the compliance officer in tracking compliance by establishing a checklist at the pre-sale, sale, pre-opening, and performance stages of the franchise process. With a compliance officer overseeing the checklist, he or she can insure that each checklist has been completed before moving to the next stage of the process.

An effective Compliance Program must be structured to fit each franchising company’s personnel and methodology. If your company has not initiated a legal Compliance Program, then you may find your company in the courtroom asking “Why didn’t I start a Compliance Program?” If your company already has a Compliance Program, make sure you have addressed the four fundamental steps for launching a solid Compliance Program. Being proactive and building a good solid Compliance Program may mean the difference between being successful or being out of business.