Rules and statutes aside, the best franchise opportunities do provide such information. They understand that the most important question on the mind of every prospective franchisee is how much money they can make if they invest in the franchise. Every prospective franchisee asks the question. Every experienced franchise attorney will tell you that this is the single most critical bit of information.
In my thirty years of experience there are only three reasons (only one real reason) that franchisors do not give financial performance information if they have more than two or three outlets, franchised or not, that have been in business for at least a full year. First, franchisors will say that they cannot give financial performance information because they cannot rely upon their franchisees to give them truthful information. That is nonsense. They rely upon the information from franchisees for every other business purpose. They have the power to enforce their contract--which in almost every case requires truthful reporting. Second, some franchisors claim that to provide financial performance information would put them in trouble with the Securities and Exchange Commission. There may be a handful of very large franchisors for whom this is a legitimate concern--particularly if they are not providing accurate information to either the franchisees or the SEC. However, only a small fraction of franchisors are publicly traded and subject to the SEC rules. Finally, the real reason: if they provided truthful information no one would buy the franchise. They don't disclose how their existing outlets are performing because they are performing poorly--or flat out losing money.
If you are considering investing in a franchise, look only at the best franchise opportunities--those that provide financial performance information. You will be looking only at the cream of the crop and you will save yourself enormous grief down the road. The success of your franchising experience may well depend on it.
]]>Of course, success is always in the eye of the beholder. It could be measured by the shear number of franchises sold; by the profit on the franchisor's financials; by the profit showing on the franchisees' financials; by how happy the franchisees are with their investment; or by the level of customer approval of the products or services.
A franchise is a business investment by both parties. Any factor that skews the profitability quotient too far in favor of either the franchisor or franchisee will ultimately doom the franchise system to failure.
Franchisors have a unique responsibility in striking that balance. Presumably they have intimate knowledge of the business and its position in the competitive marketplace. Presumably they have experience with the profitability of the business model. Presumably they are competent in running the core business and in training and supporting franchisees in operating according to the system. With such superior knowledge and experience, a responsible franchisor will set aside greed and strive for a fair and balanced relationship with a fair allocation of responsibility and potential profit. Every franchisor should understand that, if franchisees fail under their system they may ultimately fail-because either people will stop investing in new franchises or current franchisees will be unable or unwilling to pay ongoing franchise fees. The franchisor drafts the contract-so the franchisor must strike that balance because no one else can.
The other elements affecting the success of a franchise follow from that essential balancing equation. They include financial capital (money), human capital (qualified people in positions to support the franchisees), a good brand (that people looking for the offered product or service recognize) and a system (a method of operating the franchised business that has been tested in the marketplace). Further quantifying any of these elements is possible only within the context of a particular set of facts. If the franchisor is offering franchises in only one state, it will require a lot less in capital (financial and human) than a national roll-out. If the franchisor is offering franchises only in areas near existing company outlets, a less well-developed brand may succeed. If the Franchisor has a lot of money for advertising, a new brand may succeed. If the franchisor is only offering a small number of franchises and makes full disclosure, a less well-developed system may succeed.
Before launching a franchise system, every franchisor should consult with their franchise attorney and other franchise advisors about all of these matters. These actions can help place a franchise on the prospect's list of best franchise opportunities.
]]>Most franchise agreements give the franchisor unfettered access to the computer that your franchise business information is stored on. Although franchisors have legitimate business reasons for access to your business information, it poses risks for you. The franchisor has every right to monitor and read that private email to your aunt-or to your attorney or accountant. They own the system. You have given them the right to read it. Whether you think they will, in fact, read it, you should behave as though they will.
You should be wary of using a franchisor-provided email system for any private communications. You know it is franchisor provided if it is in the format: yourname.franchisorname.com. email servers store every message--often indefinitely. When the going gets tough, they will have those emails and you will not. You will have no ability to permanently delete such messages.
Even if you are not currently in a dispute-or even having difficulties with your franchisor, you should maintain a personal computer separate from your business computer and you should never use the franchisor's email system for personal communications. Your dinner plans for the weekend are simply not the franchisor's business. The identity of and your relationship with your personal friends is not their business. Your family issues are not their business. If you value your privacy and that of your friends, you need to keep them off of the franchisor's email system and any computer the franchisor has the right to access.
This concern becomes critical at any point that you are seeking advice-whether from a friend, another franchisee or a lawyer or other advisor-regarding how to deal with some issue relating to the franchisor. You need the freedom to seek and obtain advice without worrying about whether the franchisor will use your very inquiry to decide that you are disloyal or a trouble-maker. If you are contemplating legal action, you really don't want the franchisor to know every detail of the thought processes and planning that lead up to your decision. Start by picking up the telephone and calling an experienced franchise attorney and make the first agenda item a discussion about how to communicate with them.
Especially if you have or anticipate problems with your franchisor, do not use the franchisor's email system or a computer they have access to.
]]>Think twice. You really need to do a lot of due diligence-and you need an experienced franchise attorney to guide you through the process and negotiate some critical terms.
You need real and reliable information (if from the Franchisor, it is worthless unless it is in writing and incorporated in the franchise agreement) about how the franchisees in the system have performed. If the typical franchisee is doing no better than you have been doing independently, red lights should flash and sirens wail. Keep in mind that you are going to be required to pay an initial franchise fee and a percentage of your gross revenues in most cases just for the privilege of using the franchisor's name.
Assuming the franchise offering meets or exceeds that first hurdle (many proven successful franchisees over an extended period of time), you need to look closely at the franchise agreement they will ask you to sign. Almost all franchise agreements provide that the franchisor owns your customer list (and hence the right to serve your customers) should the franchise not work out for you. Most prohibit you from providing similar services to any of your then-former customers after you leave the franchise system for any reason-even if because of something the franchisor did wrong. Most prohibit you from operating a similar business anywhere within 20 to 50 miles (or more) of any other location (anywhere in the world) where the franchisor or any of its franchisees have a business location.
Keeping in mind that only about 15% of franchisees are able to stay in business for five years or more, that means you paid a substantial initial franchise fee and tens of thousands of dollars in royalties (percentage fees) for the privilege of turning over to the franchisor those customers you developed before you even met the franchisor.
You should not sign blindly. You should never say "that won't happen to me". If you are in the position of considering buying a franchise to a business similar to one you now own, you need to consult with an experienced franchise attorney. There are important steps you can take to protect yourself-but you cannot go it alone.
]]>The essence of the battle behind the bill is the tendency of franchisors and their attorneys to write increasingly one-sided contracts-contracts that effectively waive most protections the franchisee would otherwise have under the law. The contracts almost never obligate the franchisor to do anything except allow the franchisee to use their trademark and whatever "system" they really have. Franchisees, on the other hand, are subject to dozens of pages of fine print requirements covering every detail of operating the business. The agreements prevent the franchisees from having certain outside business interests, from hiring people unless they are approved, and from earning a living in the industry after the end of their franchise experience. If they leave in the middle of the term, they owe the franchisor all the money the franchisor would have received had they stayed the full term. The agreements, in many cases, purport to impose the same restrictions on all family members of the franchisee. In most cases, the restrictions on selling the business make it nearly impossible to sell. The franchisee is a virtual indentured servant for life.
Of course, the franchise agreements almost always require the franchisee to strictly comply with an operations manual-which the franchisor can change at any time without notice.
And the franchisee thought they were buying an independent business-where they could be "in business for themselves; not by themselves".
It would still be speculative as to whether the bill will work its way through the California legislature and get the governor's signature. In the grand scheme of things, it is more important to consider how franchisors can avoid having their franchisees resort to the legislatures for relief. It is as simple as backing off on some of the controls that no franchisor really needs and offering fair and balanced contracts for franchisees to sign. When franchisors start realizing that their most valuable asset is their franchisees and treating them accordingly, legislative appeals will no longer be necessary. It takes a lot to get franchisees riled up-and the franchisee community is currently becoming justifiably riled.
Bundy Law Firm encourages its franchisor clients to look for ways to present fair and balanced franchise agreements.
]]>On December 7, 2011, the United States 9th Circuit Court of Appeals decided Red Lion Hotels Franchising, Inc. v. MAK, LLC, No. 10-34565. In that case the Court of Appeals reversed the US District Court. The District Court had found that the "franchisee bill of rights" section of the Washington Franchise Investment Protection Act (FIPA) did not apply because the franchisee was located in California--and notwithstanding that the franchisor was a Washington corporation and the franchise agreement said that Washington law applied.
The Court of Appeals looked at the purpose of the FIPA, its legislative history and at a discussion of the statute by a respected University of Washington law professor--published in 1973, shortly after the FIPA was originally adopted. The Court of Appeals concluded that the "franchisee bill of rights" protects franchisees, wherever they may be located, if the franchisor is located in the State of Washington.
The Court of Appeals went on to conclude that under the FIPA, the franchisee's remedy for a violation of the "franchisee bill of rights" was under the Washington Consumer Protection Act. The Court sent the case back to the district court to decide whether the franchisee in the case was qualified for a remedy under that act.
One might ask whether this decision changes anything. I think very little. Under Washington law (acknowledged by the Court of Appeals in the Red Lion case) the remedies for violations of the franchisee bill of rights are only the remedies available under the Consumer Protection Act (CPA). This lack of access to remedies except under the CPA is a major reason that few cases are brought for violation of the "franchisee bill of rights". It is well known that Washington Courts are somewhat hostile to CPA claims, broadly enforcing the judicially added requirement to prove a "public interest" and narrowly defining who the possible beneficiaries of the CPA remedies are.
In my view, one franchisee located in California (or Washington for that matter) can never carry the burden of proving a "public interest" under the CPA. Indeed, the franchisor will argue that the termination was in the public interest because it removed a franchisee that was not complying with their requirements and thus enhanced their ability to compete in the greater marketplace.
If ever there was a tempest without a teapot, this is it. I just hope that, in an effort to correct a perceived error by this panel of the Court of Appeals, the full Court of Appeals can avoid narrowing the reach of the FIPA remedies beyond what the District Court did. If you want to discuss the implications of this case on your situation, you should contact an experienced franchise attorney.
]]>Some people attempt to minimize franchise disputes by saying "it's just business" or "it's only money." These people have never been in a business dispute. For the business owner, franchisor or franchisee, the business is a livelihood, a part of their identity and source of pride. When they find themselves in a franchise dispute, it's very personal. Unfortunately, traditional litigation and arbitration cannot address the emotional elements of a franchise dispute. Accordingly, parties to litigation frequently report dissatisfaction with the result, regardless of the legal outcome. Mediation may offer a better outcome than litigation and could in some cases salvage the franchise relationship.
In a mediation, both parties, their attorneys and the mediator work together to address the issues and brainstorm outcomes. The mediator is a neutral party who works with each side to create a resolution. The process is entirely confidential and neither side can use settlement offers or other statements made in mediation against the other in litigation. Because both sides had a hand in drafting the settlement agreement, they are invested and more likely to abide by its terms.
Additionally, while a court or arbitrator can only impose legal remedies, a mediator can create settlements that go beyond the traditional injunctions, dissolution and damages. For instance, if the franchise relationship can be saved the mediator might suggest that the settlement agreement include additional training for the franchisee or other steps to improve franchise performance.
Finally, mediation gives franchisors and franchisees the chance to speak frankly about the dispute. A sincere "I'm sorry" or "I did not understand" may satisfy a potential litigant more than court awarded damages.
An experienced franchise attorney can help you determine whether and how to incorporate mediation in your dispute resolution agreement. A mediation provision in your franchise agreement might provide an opportunity to resolve franchise disputes without the expense of litigation.
]]>•1) Finality. One advantage of arbitration is you get a (mostly) final result. It can also be the greatest disadvantage. If a judge or jury makes a serious error you can appeal to a higher court. Not so with an arbitrator's decision.
•2) Selecting the Arbitrator. Franchise agreements often specify that the arbitrator will be selected from the panel of a national company that provides arbitration services. The parties make the final selection from that list at the time of the dispute. Arbitrators are generally private attorneys. Like everyone else, they can act based on biases that you may not identify until after the decision. It is important to carefully consider how to be sure you will have a qualified and fair arbitrator at the time of a dispute.
•3) Where to Arbitrate. Normally the arbitration clause specifies where franchise dispute resolution will take place. In some states, such location requirements may not be enforceable in franchise agreements unless they are made at the time of the dispute. If you are a franchisor, you may want the proceeding in your home city. But what if you later move your office to another city or state? If you are a franchisee, having to travel to the franchisor's headquarters city imposes a substantial additional burden.
Whether you are a franchisor or a franchisee, decisions about how to resolve disputes and whether to use arbitration are important. This gives you a few questions to consider. We will plan to address more from time to time in this Blog.
]]>1) Know Yourself-According to the International Franchise Association, franchised businesses provide nearly 18 million jobs and generate 1.2 trillion dollars annually. At the Bundy Law Firm, we have worked with franchisees from tutoring centers to tractor retailers and convenience stores to ice cream vendors. A prospective franchise buyer could easily be overwhelmed by the sheer number of possible franchises. Ask yourself what skills you bring. Extensive experience in hospitality? 10 years of home-building know how? An ability to work well with children? Make sure the franchise you are purchasing matches your unique skill set. Be wary of any business you know nothing about.
2) Know your Franchise-By now you've probably looked at franchise websites and spoken extensively to several franchise sales people, now it's time to make sure the information you've been given matches the facts. Look at the Franchise Disclosure Document (FDD) carefully. The Federal Trade Commission requires all franchisors to provide an FDD 14 days prior to signing an agreement with you or accepting any money. The franchisor, among other things, must identify its executives and describe their business experience, disclose certain lawsuits or arbitrations provide a breakdown of initial and ongoing expenses and state the conditions for renewing, selling or terminating the franchise. The franchisor likely had an attorney draft the FDD to protect their interests; you should have an experienced franchise attorney review it to protect yours.
3) Trust But Verify- The Federal Trade Commission requires that the FDD include a list of current and former franchisees. These people are a great resource to verify the franchisor's claims. Contact or visit franchisees in your area to chat about their experiences and to see first-hand the volume and type of business they're doing. You should call every person on the "former franchisee" list and as many of the active franchisees as time permits. Do not bother talking to franchisees that the franchisor introduces you to or encourages you to contact. Beware of purchasing any franchise with a high number of terminated, cancelled or non-renewed franchises.
4) Crunch The Numbers-All franchises have some start up fees and even the best business might take a few months to turn a profit. Take a hard look how much you are willing to invest and how long you can wait before the business turns a profit. Don't assume the "estimated initial investment" contained in the FDD will be enough to get you to profitability.
5) Call in the Professionals-In addition to carefully reviewing the FDD, you should have both the disclosure document and the franchise contract reviewed by an accountant and an experienced franchise attorney. An accountant can help you assess the franchise's financial information and develop a successful business plan. An attorney can help you understand your rights and duties under the franchise agreement. An experienced franchise attorney will help you protect your interests and provide you with tools and knowledge to make a good business decision.
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