Franchising Law and News

Termination Without Opportunity to Cure

2007-02-01T07:21:00.000-08:00

California law provides that a franchise agreement can be terminated for good cause. I discussed this in an earlier blog. Some events are considered good cause per se and allow the franchisor to issue an immediate notice of termination without an opportunity to cure. Some of the eleven grounds for immediate termination include failure to pay franchise fees within five days notice that the fees are overdue. Another ground is conviction of a felony. But the franchise can also be terminated for a misdemeanor conviction which is “relevant to the operation of the franchise.” A franchise agreement usually incorporates this by calling on the franchisee to “obey all laws.”

Grounds for Terminating Franchisee

2007-01-31T16:01:00.000-08:00

In California, which is where I practice, a franchisor can’t terminate a franchise prior to the expiration of the franchise agreement, except for good cause. According to California Business and Professions Code § 20020 good cause includes, but isn’t limited to, the failure of the franchisee to comply with any lawful requirement of the franchise agreement after being given notice and a reasonable opportunity to cure the failure. According to the Code, the time to cure “in no event need be more than 30 days.” California doesn’t have a clear decision that interprets “good cause” as it relates to this provision of the Code. However other states with a similar provision have found that the failure to follow the franchisor’s operation manual was good cause, as well as failing to maintain the franchisor’s standard of cleanliness. McDonald’s franchisees are graded on the level of "QSC" (Quality, Service & Cleanliness) they maintain at their restaurants. Failing grades in those areas can result in termination of the contract.

Get All the Facts Before buying a Franchise

2007-01-28T06:58:00.000-08:00

Study the disclosure document and proposed contract carefully.

Interview current owners in person. The UFOC lists current and past owners. Some franchisors, such as McDonald's, list their franchisees in random order. If you are looking for a current or past franchisee in the area you are interested in, you may have to search through a thousand listings first. However, large franchisees such as McDonald's will provide you with the names of franchise's owners in your area of interest upon request. My concern, as a buyer, would be that the names provided upon request will undoubtedly be those of operators most satisfied with their franchise experience. Searching out operators who have sold their restaurants may provide you with a countervailing viewpoint. Ask owners/operators how the information in the disclosure document matches their experiences with the company.

A potential franchisees most important concern is potential earnings When preparing a UFOC the franchisor has to be very careful to not overstate the earnings potential of the franchise. The result is that the earnings claims in the UFOC may very well be understated or be so generic that they are meaningless. Investigate claims about your potential earnings with existing and prior franchisees. Show the claims and pro formas to an accountant or attorney who has the background to understand the numbers.

Ask a lawyer to read the UFOC and proposed contract before you sign it and ask an accountant or franchise attorney to review the financial disclosure portion of the UFOC. The money and time you spend on professional assistance, and research — such as phone calls to current owners — could save you from a bad investment decision. Some franchise investors have paid a franchise fee of $30,000 or more, got cold feet, and then talked to an attorney about backing out. At that point, it can be very difficult, to have the money returned. A franchise attorney will charge between $1,250 and $2,500 to review franchise documents. This fee, of course, can vary depending on the facts, but is a small price to pay relative to cost of the proposed franchise investment.

How Franchise Attorneys Can Help You

2007-01-27T11:44:00.000-08:00

How Franchise Attorneys Can Help You
By Tom Brinic

Before buying a franchise, you must make sure that the terms are clear. Franchise agreement must be spelled out.This is where franchise attorneys enter the picture. With him coming in between, the legalities are spelled out and therefore it wouldn’t be as confusing. With their assistance, investing in a franchise business will be legitimate.

By consulting a franchise attorney who is knowledgeable when it comes to franchising, the purchaser would not only be assisted but also informed about the possible risks. At least with the franchise attorney beside the purchaser, the latter would consider whether he would invest or not invest on a particular franchise.

Here are some warning signs that you might be involved in fraud franchise purchases:
1. If the franchisor cannot disclose all important information to you, then he is probably hiding something. Ask your franchise attorney to consult with the franchisor. In that way, the franchisor will be required to show the important documents that you need to see before you make an investment.
2. Do not feel pressured to purchase a franchise or to make up your mind with the snap of your fingers. Any investment decision needs sufficient time to be thoroughly pondered on. If you can, you can converse with your franchise attorney about this. He will be able to help you be cautious with your decisions.
3. A franchise attorney will be able to distinguish unrealistic profits when he sees it. The franchisor with a successful business cannot promise you money the very minute you invest in his business. You must be very careful whenever the franchisor says that you can make a lot of money with little risk.

You must know that franchise succeeds because they operate in a system that is brought together under one trademark – such as buying power and group advertising. It may sound appealing for an investor but there is no assurance that a success is guaranteed.
A franchise attorney reminds you that there is no guarantee to make money. Franchise is a long-term investment and in order for you to take back what you spent, several years must go by before you do so. You cannot get rich quickly in this business, it is just not possible.
At least, by consulting a franchise attorney who has financial experience in the field of franchising, you get what you pay for. By seeking professional advice regarding legal and accounting matters, you will have a second opinion. If you do not follow professional advice, you might be kicking your behind later on.

Ask your franchise attorney to explain the complicated topics like advertising fees, copyright infringement, royalty payments and the effect of contract violations. You must always choose a lawyer that you are comfortable with. Plus, he must be someone you can afford. You have the right to know in advance how much initial consultations cost.
The franchise attorney can also help your study the estimate of initial expenses. In order to make the cost of buying a franchise appear to be cheaper than it really is, franchisors often underestimate these expenses. If the estimate is low, it will take a longer time for the business to actually produce a profit.

It helps to have someone beside you when you’re making crucial decisions involving money – such as purchasing franchises. At least, if you are with a franchise attorney you trust, you will be sure of your decisions before signing on the contract.

Article Source: http://EzineArticles.com/?expert=Tom_Brinic

Sources for UFOC's

2007-01-26T09:02:00.000-08:00

UFOC'S (Uniform Franchise Offering Circulars) are required to be delivered by the franchisor to the franchisee at their first meeting and ten days before any money is exchanged. The UFOC is one of the best sources of information about a franchisor and is a great tool for comparing different franchisors. Unfortunately, UFOC's are not readily available. Many franchisors will not send you one without a significant showing of interest in the franchise on your part. However, there are companies can can obtain UFOC's for you. The Franchise Insider offers over 500 UFOCs for various companies. I haven't used their service, so I can't vouch for them, but they appear to offer a very needed service to potential franchise investors.

FTC Issues Update Franchise Rule

2007-01-24T07:08:00.000-08:00

The Federal Trade Commission has approved amendments to the Franchise Rule, which was originally promulgated in 1978. The amended Rule has a phased-in effective date: as of July 1, 2007, franchisors may follow the amended Rule, or they may continue their current practice of complying with the original Rule or individual state franchise disclosure laws that require an Uniform Franchise Offering Circular (“UFOC”); but by July 1, 2008, they will be required to follow the amended Rule only.

The Franchise Rule gives prospective purchasers of franchises the material information they need in order to weigh the risks and benefits of such an investment. The Rule requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees. Required disclosure topics include, for example: the franchise’s litigation history, past and current franchisees and their contact information, any exclusive territory that comes with the franchise, assistance the franchisor provides franchisees, and the cost of purchasing and starting up a franchise. If a franchisor makes representations about the financial performance of the franchise, this topic also must be covered, as well as the material basis backing up those representations.

A primary goal in amending the Rule was to harmonize the federal Rule with state franchise disclosure laws. The Commission’s amendments also serve the purposes of updating the original rule to adapt to changes in the marketing of franchises and new technologies, reducing compliance costs where possible, and addressing complaints voiced by many franchisees during the amendment proceeding about the franchisees’ experience with franchisors after they have signed an agreement and entered into a franchise relationship.

The Rule amendments bring the FTC’s Rule into much closer alignment with state franchise disclosure laws, which are based upon the UFOC Guidelines, developed and administered by the North American Securities Administrators Association (“NASAA”). Although the amended Rule closely tracks the UFOC Guidelines, in some instances it requires more extensive disclosures – mostly with respect to certain aspects of the franchisee-franchisor relationship. For example, the amended Rule requires more extensive disclosures on: lawsuits the franchisor has filed against franchisees; the franchisor’s use of so-called “confidentiality clauses” in lawsuit settlements; a warning when there is no exclusive territory; an explanation of what the term “renewal” means for each franchise system; and trademark-specific franchisee associations. In a few instances, the amended Rule requires less than the UFOC guidelines – for example, it does not require disclosure of so-called “risk factors,” franchise broker information, or extensive information about every component of any computer system that a franchisee must purchase.
The original Rule covered, in a single Code of Federal Regulations Part, two distinct types of offerings: franchises and business opportunity ventures. Many of the very familiar national fast-food restaurants and hotels, for example, are franchises; business opportunity ventures include vending machine routes, rack display operations, and medical billing schemes ventures. These ventures, unlike franchises, typically do not involve the right to use a trademark or other commercial symbol. Nevertheless, they do call for the opportunity seller to provide purchasers with locations for machines or equipment or with clients. The amended Rule separates the requirements applicable to franchises from those applicable to business opportunity ventures. Part 436 of the amended rule covers only franchises, while a newly-numbered Part 437 preserves the text of the original rule in so far as it covers business opportunity ventures. The Commission is conducting a separate proceeding to consider amendments to what is now designated Part 437, the Business Opportunity Rule.

Federal Trade Commissions Facts for Consumers

2007-01-24T06:49:00.000-08:00

The Federal Trade Commission publishes a pamphlet on franchising for consumers. Here are some of its key points.

A franchise or business opportunity may sound appealing, especially if you have limited resources or business experience. However, you could lose a significant amount of money if you don't investigate a business carefully before you buy. The Federal Trade Commission's Franchise and Business Opportunity Rule requires franchise and business opportunity sellers to give you specific information to help you make an informed decision.

Use the FTC Rule A franchise or business opportunity seller must give you a detailed disclosure document at least 10 business days before you pay any money or legally commit yourself to a purchase. You can use these disclosures to compare a particular business with others you may be considering or simply for information. The disclosure document includes:
names, addresses, and telephone numbers of at least 10 previous purchasers who live closest to you;

a fully audited financial statement of the seller;
background and experience of the business's key executives;
cost of starting and maintaining the business; and
the responsibilities you and the seller will have to each other once you've invested in the opportunity.

If the seller doesn't give you a disclosure document, ask why. Verify the explanation with an attorney, a business advisor or the FTC by calling its toll-free helpline at 1-877-FTC-HELP (877-382-4357). Even if the business is not legally required to provide a disclosure document, you still may want one for your own information.

Importance of Trademarks

2007-01-23T10:19:00.000-08:00

Having a distinctive trademark is as important to a franchise as having a distinctive marketing or production system. The brand name is a large part of what a franchisee pays for. The franchisee is looking for basically two things: a tried and true method for running the business and a recognized brand that brings the customers in when the doors are opened.

When choosing a trademark the franchisor must strike the right balance between being descriptive and distinctive. If the name is too discriptive, such as "Bicycle Shop", its not registerable because the name is generic and not distinctive.

A trademark search must be done prior to starting a franchise. You can do a federal search on the United State Patent and Trademark office's Trademark Electronic Search System (TESS). The trademark must be secure on the federal and state levels. There have been cases where a franchisor has been sued for trademark infringement long after the trademark has been licensed to franchisees. After it was already a relatively large franchisor, Domino's Pizza was sued for trademark infringement by Domino Sugar. Although Domino's Pizza was ultimately successful in defending its name, it could have been a disaster for the company.

Franchising Sector Booming

2007-01-19T06:26:00.000-08:00

Franchised businesses are expanding at a fast pace, while new franchise concepts are appearing in greater numbers, according to an IFA Educational Foundation-FRANdata study. "More industries are choosing franchising as a method of expanding their business," says International Franchise Association President Matthew Shay, noting that the sector's impact on the U.S. economy alone was recently determined to exceed $1.5 trillion — nearly 10 percent of the nation's private-sector economy and the source of jobs for more than 18 million Americans.Drawing from a database of nearly 2,500 franchise concepts, researchers found that the number of concepts was growing in 17 of 18 industry categories. From 2003 to 2005, increases ranging from 67 percent in retail food to 4 percent in personnel services were discovered. Only the travel industry suffered a decline.Over the past three years, nearly 900 concepts started franchising, 500 of those in 2005 alone. The strongest growth in the number of franchised units — in excess of 25 percent — was experienced in three industry categories: building and construction, child-related, and service businesses.

Source: IFA is a 46-year-old trade group encompassing a broad membership of more than 1,000 franchise-parent companies, thousands of franchise small-business owners and operators, and hundreds of firms that supply goods and services to the sector. FRANdata (www.frandata.com), an Arlington, Va.-based research firm, is the leading source of information and analysis about franchising.

Written by HBM Previously published in the December 2006 issue of HOME BUSINESS® Magazine, an international publication for the growing and dynamic home-based market. Available on newsstands, in bookstores and chain stores, and via subscriptions ($15.00 for 1 year, six issues). Visit www.homebusinessmag.com

New Franchises Gearing Towards Baby Boomers

2007-01-18T06:40:00.000-08:00

Today's franchising concepts are responding to demographics, according to Matthew Shay, President of Washington, D.C. based International Franchising Association (IFA). As the Baby Booomer generation continues to get older and reach retirement, there are more products and services geared toward that population such as senior care and health fitness. Mr. Shay made his remarks at the IFA's Franchise Expo South.

Shay had a few pointers from franchisors and franchisees. "Franchise investors should be the type of people who can take direction and work well in a structured environment. They also need to be passionate about the business", Shay said. Investors should ask themselves, "Is this what I want to do on a daily basis?" Franchisors, of course, need to guard their reputation when selecting a franchisee. According to one franchisor, Kirsten Fisch, the founder of Math Monkey, a franchisor should not to be too anxious to accept anybody who is willing to write a check."

The complete article by Marcia Heroux Pounds of the South Florida Sun-Sentinel can be found here

January Big Month For Existing Franchise Sales in California

2007-01-17T06:21:00.000-08:00

BizBen, a San Ramon, California based business broker is reporting that they are experiencing a higher volume of franchise resales in California. "We saw a lot of franchise... (deals)... closing at the end of December and early January. Most of the sales were to people who left corporate America to become small business owners," said Peter Siegel MBA, founder of BizBen.com. Buying an existing franchise is appealing because the franchise has an earnings history. No one can predict with certainty the profitable of a new franchise. For those looking for immediate cashflow, an existing franchise has the financial history to determine whether the business pencil's out. You can read the entire press release at eMediaWire.

Hot Franchising Market Makes Recruiting Difficult

2007-01-16T07:28:00.000-08:00

According to a recent article in Franchise Update Magazine, the hot franchising industry is making it tough for franchisees to find and retain qualified executives to staff positions. The article quotes headhunter Lois Marshall of The Marshall Group, Carmel, California: "It is an employee's market right now." Doug Kushell, president of Franchise Search, in Nyack, N.Y. says that the top jobs in franchising today is franchise development experts, COOs, CFOs, and directors or VPs of real estate. He says that "there is a tremendous amount of demand, especially in franchise sales."

The increased demand has made it difficult to keep the best people, at a reasonable cost Taking a cue from the hgh tech industry, some franchisors are offering stock options, royalties and extended bonuses

Besides management and sales executives, companies are looking for experts in the area of real estate and legal.

From a franchisee's perspective, a lack of good people staffing the franchisor's organization can jeopardize the franchisee's equity. The franchisee is looking for top notch marketers at "corp" to strengthen the franchisor's trademark, and good real estate people to find great site locations and negotiate affordable leases. The franchisee's well being is dependent on a strong and competent franchisor.

I had to look at the top jobs in franchising today, probably the one that has remained consistent from five years ago is franchise development experts," says Doug Kushell, president of Franchise Search, in Nyack, N.Y. For Kushell, the active disciplines in franchising today are COOs, CFOs, and directors or VPs of real estate.

Initial Considerations for the Franchisee, Part 1

2007-01-15T07:32:00.000-08:00

Many potential franchisees already have a clear idea of what franchise they think they want to buy. They've visited an outlet and either feel that the system the franchise is using is "something they can do", or they think they've stumbled onto a gold mine. However, even a system that appears easy to operate to the outsider can be very difficult to operate once your're responsible for implementing it. And, the gold mine in franchises have pretty much been mined out. During the 1960's and 1970's, for instance, opening a McDonald's restaurant was like winning the lottery. Many of the early operators became millionaires. However, McDonald's operators today have to work very hard to make a profit. More on that in another blog.

Initial considerations include:

1. Making a substantial financial investment. The franchisee fee is often just a small part of the initial costs. Equipment, signage, initial inventory, employee uniforms, marketing and advertising can cost many times more than the franchise fee.

2. Willingness to give up some independence. A franchisor exercises much control over the franchisee. A franchisee is basically operating the system as laid out by the franchisor. You may have a great idea for a new product, but unless its approved by "corporate" and rolled out into the system, you won't be selling it. The relationship of franchisor-franchisee often feels more like employer-employee. You may be expected to devote your full time efforts to the system, to be present when a franchisor consultant "grades" your unit(s) and to attend frequent out-of-town meetings.

More "considerations" in future blogs.

Initial Considerations for the Franchisor

2007-01-14T08:57:00.000-08:00

Initial considerations for the franchisor.

You may know how to build a submarine sandwich, but can you build a franchising organization? Franchising requires a different set of management skills and an entirely different organizational structure from your underlying business.

You must have a prototype business that has been successful for a few years. Preferably, you will have expanded and have at least two or three "company" stores. This will give you the experience of growing. Large organization owner-operators will tell you that opening their third unit was probably the most challenging. A single store operator can usually expand and operator two units with very little change in management and organizational structure. The third unit requires letting go of direct day to day management of each unit by the operator. A supervisor or management team needs to be set up at that point.

Franchising requires disclosure. You must tell potential franchise buyers (and government regulators) a great deal about yourself as the franchisor and about the operation and profitability of the franchised business. If those disclosures will make it difficult to sell franchises then the franchisor should avoid franchising. Disclosing unprofitability or lack of experience will make it very difficult to sell a franchise.

Franchising also requires a trademark. A franchisee is purchasing the goodwill that your trademark engenders in consumers. The more recognizable your trademark is the better your chances of sellling new franchises.

The basics: What is a Franchise?

2007-01-13T10:31:00.000-08:00

What is a franchise? This is a basic but very important question. There are many different types of business associations which are similar to a franchise. Dealerships and the sale of business opportunities and various types of distributorships have elements similar to a franchise. Some companies have become "accidental franchisors" with onerous consequences because of their failure to understand the type of business system they were setting up.

In general, in California, a franchise has three basic elements. There must be a written or oral agreement between two or more parties by which (1) a franchisee is granted a right to use a marketing plan or system of the franchisee. (2) The franchisee is granted the right to use the franchisor's trademark, or other similar identifying marks. (3) The franchisee is required to pay a franchise fee, either directly or indirectly. An indirect fee provision provides a trap for the unwary, and can incude such things as the sale of training materials.

Franchisee succession planning

2007-01-12T15:43:00.000-08:00

Nation's Restaurant News published an interesting article in their January 8, 2007 issue regarding succession planning by aging franchisee's. The article points out that older franchisees, who may have developed a highly successful business over a long tenure, often have no succession plan. Franchisor's are taking note and are taking up the delicate subject of mortality with their franchisees. If the franchisee's children are not interested, and manager's do not have the capital to acquire the restaurants, what happens? Most operators have estate plans which dispose of their assets after their deaths, but it can be a burden on family and franchisor if a succession plan is not incorporated into estate planning.

Franchisor's have more to worry about that picking up the pieces after a franchisee dies. Nation's Restaurant News quotes David Novak, chief executive of Yum! Brands, Inc. He told investors that Yum! might not see any new net unit growth through 2008 because hundreds of older operators may opt out of the system. Older operators are more likely to let their contracts expire than spend money on major mandatory remodels.

For franchisees, having a succession plan may make a difference when it comes time to renew your franchising agreements. McDonald's USA vice president of franchising, John Kujawa, says McDonald's recently re-signed a 90-year old female operator in Ohio. Such a re-resigning is more assured if younger family is working in the restaurant to assure continuity of operations when the inevitable occurs.