Category: Business Developments
May 20th, 2013
In the opening General Session of the International Franchise Association (“IFA”) Legal Symposium on May 6, 2013, Aziz Hashim
, President & CEO of NRD Holdings, LLC (Multi-Unit Franchisee of Popeye’s, Checkers, and Domino’s Pizza) & the IFA’s current Secretary, and Kenneth L. Walker
, formerly IFA Chairman and the Chairman of the Board of Driven Brands, Inc. (franchisor of Meineke Car Care businesses), commented on franchise agreements and franchise relationship management in an interview-style program moderated by Joel Buckberg. Their comments, which are summarized below, demonstrate both the promise and the challenges inherent in franchising.
Franchise Agreement “Turn-offs”: Hashim’s “bad marks” when evaluating franchise agreements all relate to the security of the franchisee’s equity investment in the business, and are:
1. Franchisor’s right to a liquidated damages award following termination for any reason;
2. Unlimited personal guarantees required by the franchisee’s owners, particularly after an approved sale of the owner’s interest in the franchisee;
3. Franchisor’s right to require the buyer of a location to sign the franchisor’s then-current form of franchise agreement, which might have higher fees or weakened territorial rights;
4. Franchisor’s right to require “periodic” remodeling, without limitations on the frequency, timing or cost of the facility changes.
Walker did not list any concerns with franchise agreements, which is not surprising given his background as a franchisor executive. However, he did emphasize that one of his biggest “turnoffs” when he was CEO (from 1996 until 2012) was having the first contact in a negotiation coming from a franchisee’s lawyer rather than the franchisee executive himself. He was much more likely to negotiate an issue with a franchisee who first approached him directly, even if the final agreement might be worked through by each party’s counsel.
Use of Marketing Funds: Walker expressed a preference for wide franchisor discretion in deciding how to use franchisee contributions, as long as the uses were devoted to growing franchisees’ businesses. Hashim agreed, but with the caveat that franchisees had to be actively engaged and consulted as to the franchisor’s proposed uses of the monies. Hashim objected to use of such funds to cover part of franchisor’s executive salaries (such as for a Chief Marketing Officer) or to conduct product development analysis. He supported flexible uses such as contributing towards the remodeling and rebranding of franchisee restaurants. Walker agreed that franchisee engagement and “buy-in” is critical, on the basis that it is better to have a somewhat flawed marketing plan that is widely executed than an outstanding plan that the franchisees refuse to implement.
Territorial Rights: With regard to franchisees’ territory protections, Walker argued that if the brand as a whole is losing market share to competitors with its existing network of locations, then it should be able to “backfill” with additional franchises. Hashim seemed to agree, as long as the plan protected franchisees who were properly executing the system and meeting expected revenue targets.
Supply Chain Controls: Hashim argued that franchisors should not require purchases of commonly available supplies or ingredients from more expensive sources, if the franchisees can obtain the same items less expensively through other means. He said that at a minimum, there should be clear disclosure to prospective franchisees of how the franchisor makes money from the supply chain.
Facility Remodeling and “Upgrades”: The panelists agreed that it is critical for franchisors to efficiently monitor the quality of goods and services being provided and to discipline franchisees who are not meeting such standards. However, Hashim argued that franchisors need to “make the business case” as to how facility updates or remodeling are going to benefit the profitability and value of the franchisees’ businesses rather than just drive revenue growth. He also believes that “smart franchisors” help fund the costs of facility updates to obtain rapid adoption by most franchisees.
Transfer: Walker emphasized the need to make sure that approval of a transfer is unlikely to harm the viability of a location. Hashim said that it is critical that the franchisor’s rules for obtaining approval are clear, objective and disclosed to active franchisees, and if the criteria are changed the franchisor should be able to explain why change is necessary. Hashim recommends this simple test: “If you would sell this person a new franchise, then you should approve a transfer to that same person.”
Training and Operations Support: Walker believes that in-person, live training and conventions continue to have value in fostering a team spirit among franchisees and an exchange of best practices information, as compared to Internet “webinars” or recorded trainings. Hashim expressed frustration that the ratio of franchisor field staff or “business consultants” to franchisees has been decreasing over time, and the experience level of those consultants has been decreasing. He said that periodic visits by qualified field representatives play in important role in franchisee satisfaction and success.
Termination and Damages: Despite his broad disapproval of personal guarantees and liquidated damages, Hashim agreed with Walker that, if a franchisee is not in financial distress but simply wants to quit the franchise to stop paying royalties, then it is appropriate to require that franchisee to pay termination compensation to the franchisor.
Concluding Comments: Hashim made the following noteworthy comments to franchisors:
1. Recognize that you are not bestowing franchise rights, but rather recruiting important business partners;
2. Don’t make your franchise agreement so harsh that it scares of good prospective franchisees, since quality franchisees drive a brand’s success;
3. Poll your best franchisees to find out their thoughts about the brand and franchisor staff;
4. Mystery shop your franchise salespeople, to find out what they are saying (and failing to say) to prospects; and
5. Employ a true ombudsman to address franchisee complaints and concerns before they mushroom into disputes.
In many ways this program showed the best that the IFA has to offer, since it brought together franchisor and franchisee perspectives for the purpose of furthering industry best practices. It also highlighted Aziz Hashim as a rising leader in franchising who bears watching in the future.
June 29th, 2012
For the first time the annual International Franchise Expo took place in New York City from June 15 until June 17, 2012, and it was a revitalized event worthy of The Big Apple. I visited on Friday, which has been the “slow day” of the Expo in the past during which suppliers could mingle and “network” with exhibitors. Accompanied by fellow Baltimoreans Jerry Blumenthal and Nick Courtalis of Business and Commercial Ventures
(business brokers) and Anne Paulus of 3D Signs
(signmakers), I arrived at 11:30 to find a truly packed exhibit hall!
The number of exhibitors was much larger than the sessions the past several years in Washington, D.C., and also included large franchisors such as Choice Hotels and 7-Eleven that I don’t remember seeing in D.C. However, as a counselor for emerging franchisors and for many franchisees of emerging systems, I always find innovative newer brands to be interesting. Here are a few that intrigued me, with the proviso that none of the descriptions are an endorsement of the franchise:
America’s Taco Shop: an authentic Mexican fast casual restaurant founded by America Corrales Bortin, who is originally from Culiachán, Sinaloa, Mexico. I met her husband Terry, who told me that America was named after the local soccer team in her Mexican town and not as any plan to immigrate, start a business or other ulterior motive. Nice coincidence! But seriously, their food is great.
Interpreters Unlimited: the first franchise system for the provision of interpretation services, including in-person, over the telephone, and by video conference, as well as document translation services. The company has some U.S. government contracts that the franchisee could fulfill in local markets. This “work from home” opportunity could be perfect for a good salesperson.
Joshua’s Shoarma Grill: founded by Israelis living in Europe, they have had some success there and are now seeking to grow here through area developers and masters. Have an interesting Middle Eastern fusion and healthy menu in a fast casual setting.
Team Makers: an education concept with group programs for children ages 5 to 12 to prevent bullying and other inappropriate behavior. The franchisee organizes and provides in-school workshops, after-school programs, birthday parties and carnivals or special events. This company is addressing an important societal need, and could be wonderful for a parent seeking to “re-enter the workforce” after focusing on child rearing.
Boneheads: A fast casual restaurant chain with a focus on fresh fish and Piri Piri spices, which are from Mozambique, Africa, were made popular by the Portuguese, and are now “all the rage” in Europe.
Gyu-Kaku: Japanese restaurant with a twist – the customers grill their own meat at the table! Sort of like Hibachi crossed with Fondue.
CRAL: home services with layers – mold remediation, duct cleaning, ventilation, and lead abatement, with the telephone number 1-888-KIL-MOLD. Seems to indicate strong cross-selling possibilities, although also some operational complexity. Could be good for a veteran with strong operations skills – like a sergeant!
Cool De Sac: A “family entertainment center” with a modern healthy menu, “play stations” and birthday parties programs. Sort of like an upscale “Chucky Cheeses”.
The Expo included many educational seminars and other resources for prospective franchisees and those considering the franchising of their own business methods. The same company also has events in Los Angeles in October (West Coast Franchise Expo) and in Miami in January (Franchise Expo South). For more information, visit http://mfvexpo.com/.
March 22nd, 2012
On March 22, 2012 I attended the Maryland Chamber of Commerce
Business Development Council event at Under Armour
(“UA”) world headquarters in south Baltimore, located right next to Baltimore’s harbor. The presentation included an inspirational history lesson concerning UA’s growth since its 1996 founding to a $1.5 Billion company with about 5,000 employees, and also a fun tour of part of the sprawling headquarters — which includes a basketball court and a cafeteria with a very large “Living Wall” composed of actual plans.
However, the heart of the presentation was by Mark Gillen, Director of Strategic Procurement, who described what UA seeks in suppliers, which provides insight to seeking business from a nearly “large cap” company. Key takeaways were:
UA brand apparel is generally more expensive but a better value than competitors’
Founder Kevin Plank has long term vision and stable position as CEO
UA analyzes the intangible benefits of associating with suppliers, not just price
An UA executive will have at least one conversation with each prospective supplier
UA has a “Center led procurement” process, which means Mark sets guidelines for division leaders to follow when directly deciding many of UA’s supplier decisions
The key question is how supplier helps to protect and enhance the UA brand
UA seeks long term value = quality products and service, plus reasonable price
How does the supplier innovate and grow in its business methods?
UA seeks suppliers who will save us money through good ideas, even at risk to their short term profits, and view relationship with UA as a long term asset
Supplier must be nimble, comfortable with UA’s fast paced and hectic company culture
Must be willing to provide quality support & training; example cited was software platform used.
UA does seek supplier diversity and tracks its procurement to identify locally owned, small and minority or veteran owned businesses.
In charitable endeavors, UA supports women’s health projects, Habitat for Humanity, “wounded warriors”, and Ronald McDonald House, among others.
UA expansion in south Baltimore’s Locust Point neighborhood will include adding a new building and a retail store expansion. Company owns the many acres of land on which its headquarters sits.
January 25th, 2012
On January 3, 2012, the National Labor Relations Board
(NLRB) issued a decision in D. R. Horton, Inc. and Michael Cuda, NLRB Case 12–CA–25764
, that provides a powerful incentive to expand business in the U.S. methods through franchising or other methods that do not involve hiring employees. It ruled that requiring employees to sign arbitration agreements that prevent
them from joining a class action lawsuit or class arbitration over employment-related issues (like overtime pay) violates the National Labor Relations Act
(NLRA). This decision applies to all private employers, regardless of whether their employees are unionized or not.
Specifically, the NLRB ruled that “employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral and judicial.” The NLRB did not forbid agreements that require employees to arbitrate workplace disputes, but rather held that such agreements must provide a method for employees to assert class or collective claims in arbitration or through the courts.
This decision came in a case in which an employee attempted to bring a class action arbitration accusing his employer of misclassifying certain supervisors as exempt from the Fair Labor Standards Act’s overtime pay requirements. The employer refused to arbitrate on a class basis, citing a provision in the employee’s employment agreement that barred arbitration of class claims. The employee then filed an unfair labor practices claim with the NLRB, alleging that the agreement violated his rights under the NLRA. The NLRB found the employee’s claim had merit, and that “the NLRA protects employees’ ability to join together to pursue workplace grievances, including through litigation.”
The NLRB also held that, under these circumstances, its decision did not conflict with the Federal Arbitration Act (“FAA”). The NLRB distinguished last year’s Supreme Court issued a decision upholding the use of class arbitration waivers in consumer contracts, on the basis that the employer’s mandatory class action “waiver interferes with substantive statutory rights under the NLRA, and the intent of the FAA was to leave substantive [legal] rights undisturbed.” The NLRB’s basis for interpreting the FAA was a line of U.S. Supreme Court decisions, in particular Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991).
Nevertheless, given that the NLRB’s decision has wide application to all employment relationships, and it conflicts with the Supreme Court’s many recent pro-arbitration and anti-class action rulings, this decision will likely be challenged in the courts and may wind up being addressed by the Supreme Court.
In the meantime, however, this decision is another reminder that growing a business through debt or equity financing for “company-owned” locations comes with many legal risks, not the least of which is employment liability. Franchising might be an alternative worth considering for many businesses.
December 2nd, 2009
by David Cahn
With the recent boom in popularity of social networking websites, more and more companies are looking to these forums for ways to promote their business. Sites like LinkedIn, Twitter, Facebook and Yelp! are rapidly becoming the go-to resources for establishing and maintaining relationships, finding referrals, and conducting competitive recognizance. Blogs and consumer forums also are becoming more and more popular for sharing customer experiences – both good and bad – with a virtually unlimited audience.
I recently attended an International Franchise Association regional program near Washington, D.C., during which Paula Valentine, Senior Director of E-Commerce for Choice Hotels, presented an interesting summary of the uses of social networking by Choice Hotels and other businesses with a national presence. Ms. Valentine emphasized that expanding your Internet presence beyond the traditional website and online business listings can serve to: (i) reach current and potential customers on a more personal level; (ii) better enable you to track customer reviews and complaints; and (iii) help you to monitor the actions of your competitors.
When used in a professional manner, social networking sites can be valuable tools for reaching potential customers, and maintaining relationships with existing customers. Ms. Valentine noted the following examples of legitimate and professional uses of social networking forums:
- Posting business profiles on LinkedIn, Facebook, Yelp! and other true social networks to create a personality for your company and to promote your brand identity;
- “Tweeting” about innovations, developments and accolades;
- Offering discounts or specials to Facebook “fans” and Twitter “followers”;
- Searching social media websites for posts about your company;
- Posting courteous responses to posts about your company; and
- Maintaining a blog to post information relevant to your potential customer base.
Ms. Valentine stated that franchisors can also use Facebook as a cheaper alternative to the traditional franchisee intranet, and to promote interaction and feedback between and among franchisees and the franchisor’s support team. Likewise, franchisees can use social networking profiles to promote their businesses and give local updates, subject of course the limits imposed by their franchisors on online advertising and use of the franchisors’ trademarks.
Of course, all franchisees’ and employees’ use of social networking media should be carefully monitored to ensure the quality, accuracy and legality of each public statement. Remember, you are using the Internet because it allows information to spread quickly in a recorded audiovisual format—you do not want this to be used against you. Also, if you use Facebook to facilitate franchisee interaction, be sure to place limits on the types of topics discussed to avoid unintended disclosure of your confidential information.
Tracking Customer Opinions
Ms. Valentine also discussed how social networking websites can provide an easy and non-confrontational means for customers to share their opinions about a company’s product or service. By tracking relevant consumer websites and searching social media for references to its brand, products or services, a company can gain valuable insight into its public perception. In addition, Ms. Valentine stated that direct responses to posts – and even to the posters themselves – can go a long way toward building consumer confidence and lasting customer relationships.
Finally, Ms. Valentine noted how social media can also be used to conduct competitive recognizance on a variety of levels. Businesses can track their competitors’ uses of social media to make sure they are not falling behind the curve. They can also track customer complaints against competitors to look for trends and preferences among the body of relevant consumers.
Tracking competitors’ use of social media can also be used to make sure that your trademarks and copyrights are not being misappropriated or infringed. While there are certain competitive rights of “fair use”, enjoining unlawful misuse of your intellectual property is important – and can be essential – to protecting your legal rights. False and damaging posts may also be actionable under the law of defamation or as false advertising, and taking legal action to have such content deleted or rectified can also be essential to protecting the image and value of your brand.
A calculated and concerted social media campaign can be an invaluable tool for your business. Social media provide virtually limitless possibilities for promoting and protecting the interests of your company. By effectively using online social networking tools, you can take steps to ensure that your company maintains a reputation of quality and remains prominently on the front lines in the bid for your customers’ business.
September 29th, 2009
Working with Consultants to Select a Franchise Opportunity
By: David L. Cahn & Jeffrey S. Fabian
While most ordinary consumers can rattle off the most famous franchised brands, there are hundreds of smaller brands with promising franchise systems struggling to reach and identify prospective franchisees. For entrepreneurs looking to invest their life savings—and more—what resources are available to assist in the process of selecting a franchise that best matches their resources and aspirations?
Magazines like Opportunity World are a great place for the fledgling franchise prospect to begin navigating the sea of franchise opportunities, and the Internet also provides a wealth of information on available franchise opportunities. However, for those seeking more personal guidance, franchise consultants, often referred to as “franchise brokers”, can provide one-on-one, personalized assistance in the selection of a franchise opportunity. Examples of consultant networks include FranChoice, FranNet, The Entrepreneur’s Source, and The Entrepreneur Authority.
Why work with Franchise Consultants?
Franchise consultants are specially trained to conduct personality and financial analyses of franchise prospects, thereby narrowing the industries and types of franchises to which they recommend to their clients. In addition, the consultant networks typically limit the number of directly competitive franchised concepts in their inventories, thereby further limiting the overall scope of a franchise prospect’s necessary investigations. Importantly, the consultant networks also typically scrutinize the franchisors in their inventories for “red flags”, such as potential solvency issues, excess franchise terminations or unit turnover, or substantial litigation with franchisees.
Franchise consultants are generally paid on a commission basis by the franchisors in their networks’ inventories, and receive their fees once the client pays his or her initial franchise fee to the franchisor. Therefore, few franchise consultants can afford to waste their time conducting in-depth evaluations and then linking prospects with franchises with which they are unlikely to be compatible. If the consultant knows certain franchisors will be unlikely to consider you as a candidate, or that you will not be able to obtain sufficient financing for certain concepts, then these franchises will be left off of the table when you and the consultant discuss your opportunities.
What do I need to be Aware of if I work with a Franchise Consultant?
Franchise consultants are typically paid on commission based on their referrals of candidates who ultimately enter into franchise agreements with the franchisors in their network’s inventory. Thus, they have the inventive to direct you only to those franchisors that work with the particular network to which they belong. As a result, even if you work with a reputable broker, you need to independently research the opportunities they propose, and remember that there may be other opportunities out there that are equally or better suited to you and your unique situation.
Obtaining answers to the following questions can help you in the process of selecting a consultant to help you in your search for a suitable franchise opportunity:
- What tools and assessments does the network use to help determine the franchises that you should consider?
- Does the consultant have experience in franchising? In what capacity?
- How long have they been a consultant? Do they have credible client references?
- What percentages of their clients live within sixty miles of your location? Consultants with local clients are motivated to make sure that their clients succeed, since their reputation in the community is important for obtaining word of mouth referrals.
- Do they provide other consulting or business coaching services, or are commissions from franchising their sole source of income?
Finally, you should be wary of any consultant who talks too much about how much money you can expect to make if you purchase any particular franchise. Such comments are likely to be illegal under franchise sales laws, and experienced franchise brokers should know to steer away from any claims about possible financial performance.
In summary, franchise consultants can provide specialized and personalized assessments in order to better match you with franchises suited to your goals, experience and capabilities. By researching and selecting a reputable consultant, you can feel more confident that the franchise you ultimately select will be right for you.
David L. Cahn is the Managing Member of Franchise & Business Law Group, a law firm located in Lutherville, Maryland. Jeffrey S. Fabian is an associate with the firm. They can be reached at (410) 583-0099, or online at www.franbuslaw.com.
September 16th, 2009
On September 15 I attended the International Franchise Association’s 10th Annual Public Affairs Conference in Washington, D.C., and was privileged to be selected as a team captain for the group of IFA members from Maryland who attended meetings at the offices of our U.S. Senators and Representatives. I was pleased to be able to arrange for one of Maryland’s Senators, Benjamin L. Cardin, to participate in our meeting for about 25 minutes. Senator Cardin provided us with tremendous insight into the ongoing Congressional debate on health insurance reform and his personal views on the subject, which I interpreted to be supportive of a more moderate reform along the lines supported by Senator Baucus.
We also discussed the continuing challenge for new franchisees to obtain start-up loans, despite efforts to make the SBA loan guarantee more accessible. While Senator Cardin could not make any commitments as to what Congress can do to solve the problem, he is holding a program in October with bankers and small business people to try to keep the spotlight on the problem and push for improvement.
Before we went to Capitol Hill we heard from several speakers, including members of Congress and the keynote, commentator George Will. The health insurance reform debate dominated both the remarks of the speakers and the question and answer portion, and the overwhelming tone of comments was in favor of free market solutions and against aggressive federal intervention.
My personal view on the topic is that legislation should be passed to require all Americans to purchase some sort of health insurance with relatively low deductibles and co-pays. However, for the health insurance market to work well for small businesses and individuals, health insurance exchanges and cooperatives need to be able to exist beyond state lines. The Baucus legislation needs to be changed to either set up a commission to establish a pre-emptive system of minimum benefit mandates and exclusions, or to establish multi-state regions for insurance cooperatives that would establish pre-emptive REGIONAL minimum benefit mandates and exclusions. For states with less than 10 million people this is necessar to gather sufficient buying power to force competition in premiums.
What are your thoughts?
David L. Cahn
Managing Member, Franchise & Business Law Group
February 11th, 2009
From the Desk of David L. Cahn:, with assistance from Jeffrey S. Fabian
As we only begin to emerge from the nation’s most difficult economic times since the Great Depression, many franchisors (and their sales representatives) may be tempted to ease their qualifications for new franchise prospects. However, franchise agreements are long-term relationships, and franchisors are investing in their franchisees just as much as their franchisees are investing in them. Franchisors should remain cognizant of these facts and resist compromising long-term growth for short-term cash flow.
Franchisors should acknowledge and address this issue with their sales staff and independent franchise brokers. With regard to employees or independent contractor sales representatives, structuring compensation based on the performance of the franchisees they recruit should reduce the temptation to submit under-qualified prospects so as to increase the volume initial franchise fees.
The following considerations are frequently cited by industry experts as fundamental criteria for evaluating prospective franchisees. Regardless of the economic conditions a franchisor may be facing, it should remain loyal to these fundamental principles for determining the viability of candidates:
- Ability to learn and subscribe to the franchisor’s system;
- Fitting with the franchise system’s “culture”;
- Having relevant business experience or general business acumen;
- Being located in a geographic and demographic area that favors the franchise concept;
- Having access to capital; and
- Having grounded and realistic expectations.
While the specific traits and skills needed to succeed in any particular franchise system obviously will vary widely, these fundamental requirements can generally be applied broadly across all franchise systems, regardless of the industry they are in. One interesting article on franchisee selection by noted franchise consultant Mark Siebert can be found at: http://www.franchisetimes.com/content/story_result.php?article=00522
The need to select quality prospects as franchisees is particularly important for new and early-stage franchisors, though it obviously remains critical for highly-developed franchise systems as well. While one “bad apple” may not be as detrimental to the brand image or the ability to sell franchises for larger systems, unsuccessful franchisees can cause significant administrative burdens, and quite possibly legal fees, for franchisors of all sizes. As suggested above, signing an under-qualified franchisee as one of the first non-affiliated representatives of a franchise system may have dire effects on a new system’s ability to attract qualified franchisees. When counseling prospective franchisees, we recommend that they speak with as many existing and former franchisees as possible when performing their due diligence. If one or a few franchise owners are unhappy, have been unsuccessful or are simply unimpressive as people, this will impact a prospect’s view of the franchise system as a whole. Moreover, prospects may question the value of being associated with a franchisor’s brand if existing franchised outlets do not appear successful, regardless of the underlying reason for their lack of success.
By carefully screening and interviewing franchise prospects, franchisors can protect the quality and value of their franchise systems, enhance their ability to sell additional franchises, and avoid the headaches of franchise terminations and legal disputes. Selecting quality franchisees should be a top priority for any franchisor with a goal of long-term success.