Things To Do Before Signing That Franchise Agreement

Even if the economy continues its limpid trends though this year, someone ssomehwere will be looking at a franchise opportunity. Franchising offers wonderful opportunites to both the franchisor and franchisee. Unfortunately, franchises also offer achance for a fleeching by the unscrupulous and the criminal minded. Business Opportunities Weblog's

Franchise Contract Time Bombs does a fine job of setting out what can wrong.

* Do the numbers smell a little fishy to you? It is almost unheard of to have a franchise contract that supplies a full income statement. Watch out for exceptionally high and “pretty” looking expected income numbers.

* Take a look at what they want you to pay up front. Some franchisors make money right off the bat with a one time franchise fee. However, if the contract seems to show that you have a lot of costs up front then you should run in the opposite direction. This may mean trouble for you later when your having a tough time and they have already made their money off of you earlier on, recently stated on Forbes.com.

* Make sure your royalty payments are not going to cost you an arm and a leg. Not all franchises charge these but if they do they shouldn’t break the bank to the point where it’s impossible for you to turn a profit.

* How Easy Is It To Get Out Of Your Contract? Franchise agreements can last for 10 years, and many franchisers make it difficult for franchisees to cut and run. Breach the contract and you’ll pay “liquidation damages.” Every UFOC contains (or should contain) a section devoted to rules governing termination, renewal and transfer of contracts. Read it–closely.

I have my own bit of advice: take the francise offering circular and the agreement to a lawyer before you pay a penny.

If you need a lawyer to review a franchise agreement, please contact me for an appointment.

Congress to Restore GM, Chrysler Franchisees?

I admit I am of two minds about House bill aims to restore GM, Chrysler dealers as I can sympathize with the impulse but really do not like the method. Here, I would leave the matter to the market and let that judge the wisdom of the bankruptcy process.

Palmer Chrysler Jeep Dodge on the west side closed last month as part of Chrysler LLC's bankruptcy reorganization. But the dealership would sell the company's cars once more given the chance.

"We would do it again, yes," said Garry Huffman, a partner in the Palmer dealership that had sold Chrysler vehicles since 1956.

There's a slim chance he'll get it. The U.S. House of Representatives yesterday approved a plan to force Chrysler and General Motors Co. to restore agreements with dealers shed during their bankruptcy proceedings.

The provision, part of a spending bill that passed 219 to 208, would require the automakers to restore franchise agreements with thousands of dealers as a condition of receiving federal aid.

GM bankruptcy and Franchising Law

Another potential problem from the GM bankruptcy (and actually any franchisor's bankruptcy) gets point out in PA Joins 36 States With Objections in GM Bankruptcy Case

Additionally, Corbett said that there are serious concerns regarding the methods being used in the termination of dealer franchises, along with the terms that continuing dealers are being forced to accept.

“Pennsylvania law specifically prohibits manufacturers from coercing dealers and allows dealers to formally protest any substantial modifications to their franchise agreements,” Corbett said. “Our community-based businesses are being asked to sign away important protections they have under state laws.”

Problem I see is this: bankruptcy law being federal law trumps state law and the coercion and modification claims may go nowhere.

Thinking of Franchising?

Take a look at A Complete Description to Franchising (Parts 1, 2 and 3) for a primer on the business side a nd then read Rugh Nigut's Franchise Research is Not Difficult.

Franchising is a wonderful business tool. Like all tools they can be misused.

Talk to a lawyer with franchising experience before signing any franchising agreement.

Remember, if you want more information about retaining me for a case, please give me a call at 765-641-7906.

Indiana Franchising Law - New Bills Dies in General Assembly

So reported The Indianapolis Business Journal in Dealers seek brand security - Auto sellers want refuge from industry fallout, but trio of bills have fallen flat at Statehouse

The bills backed by the Automobile Dealers Association of Indiana would have required automakers to buy back cars and parts when terminating dealers and to pay their rent for up to two years.

One measure would have made it an unfair business practice for an automaker to prohibit a dealer from representing more than one brand of vehicles at a site.

As for whether the language could yet be inserted in other bills still on the roll, “We’re looking,” said State Sen. Randy Head, R-Logansport, who sponsored Senate Bills 497, 447 and 432. He said ADAI lobbyist and former Indiana House Speaker Nelson Becker was trying to work out a deal with manufacturing interests.

IBJ.com - Indianapolis Business Journal - Story Detail

SB 497 would have required automakers that terminate a dealer to buy back new vehicles with fewer than 300 miles on the odometer.

Automakers also would’ve had to buy back parts still in original packages and in some cases repurchase for fair-market value special tools, equipment, required computer systems and software.

The bill would have helped dealers recover facilities costs. Dealers who lease a building from someone other than the automaker would be entitled to the lesser of the amount of rent for the unexpired lease term, or two years’ rent.

Dealers owning the facility would be entitled to an amount equal to the reasonable rental value of the dealership facilities for two years.

Manufacturers, predictably, are less than enthusiastic about such legislation, which also has been introduced in other states, such as Colorado, Maryland, Montana, New Hampshire, Utah, Vermont and Virginia.

The politics between the franchisees (the dealers) and the manufacturers (the franchisors) arouses my curiosity a bit but I think the outcome was dictated by the current economy and the state of the Big Three American automakers. If anyone has any background, it might be good to add it as a comment below.

Remember, if you want more information about retaining me for a case, please give me a call at 765-641-7906.

Franchising or Not?

The Harvard Business School has a nifty newsletter, HBS Working Knowledge. Nifty sometimes just because it is free and sometimes because it is both free and practical. I say Making the Decision to Franchise (or not) falls into the second category.

Much has been written about product differentiation and its role in retail success. Now the less well-known dynamic of customer differentiation and its effect on the way businesses are structured and run is examined in a recent Harvard Business School working paper, "Organizational Design and Control across Multiple Markets: The Case of Franchising in the Convenience Store Industry." The study was written by HBS professors Dennis Campbell and Srikant Datar, with Tatiana Sandino (HBS DBA '04) of USC's Marshall School of Business.

***

The impact of organizational design choices on performance will be considered in other papers; Campbell notes that early evidence indicates that unit sales are lower for firms that expand into multiple markets without franchising or providing some incentive system for local managers.

"This research is really a starting point," says Campbell. "To our knowledge, no one has drawn this link between the complexity that is imposed by customers with divergent demand preferences and these broad organizational design choices."

Franchising Common Sense

Thinking of buying into a franchise? Please read Dissed-enfranchisedg from MyBizBroker:

"In a shaky economy, more people interested in running a business may turn to franchising, looking for a built-in roadmap to success. But here are three warnings that can be gleaned from the Cold Stone shakeout to consider before taking the plunge:

1. Is there too much expansion? Cold Stone’s rapid pace of store openings was enticing. Everyone wants to be on board with a winner. But you may not want to be invested in a brand if locations are too close together, or brand saturation among consumers sets in. Cold Stone says it closed more than 100 stores last year. One list on its Web site showed 303 stores for sale, more than 20% of the company’s total as of last December.

2. What’s the company’s policy with national coupons? While franchisees often love national advertising, they don’t always love national coupons or discounts because not every market’s economics are the same. In the case of Cold Stone, franchisees contend that a two-for-one coupon cut into profits. Cold Stone has agreed to stop distributing them.

3. Will the product survive a downturn? A $4 scoop of ice cream is fabulous business when most folks are feeling flush. It isn’t such an easy sell when people are cutting back discretionary spending. Ask yourself how you’d market any franchise during tough times as well as good times. And prod the"

FTC Revising its Business Opportunties Rule

If you are selling or buying a business opportunity, take a look at FR Doc E8-13899:

"SUMMARY: In a Federal Register notice published on March 26, 2008,\1\ the FTC requested comment on its Revised Notice of Proposed Rulemaking (``RNPR'' or ``Notice'') in connection with the Business Opportunity Rule. The Notice stated that comments must be submitted on or before May 27, 2008, and that rebuttal comments must be submitted on or before June 16, 2008. In response to a request to extend the rebuttal comment period received on June 5, 2008, the Commission has extended the rebuttal comment period for an additional 15 days."

Franchise Financing News

My Biz Broker's More On Franchises interests me for this bit of information:

Indeed, with banks becoming more tight-fisted, the SBA is becoming the place more would-be franchisees are turning to. It’s what the SBA was created for, to provide access to capital for small businesses who can’t get it through conventional means.

Circumstances such as paying clients have lead me a bit away from current news on franchising but I think would have seen this information. Not that it seems strange considering our current economic conditions but I would like to see some confirmation for certainty. Meanwhile, it does seem good advice for new franchisees and franchisors.

Franchising: Evaluating a Franchisor

Rush Nigut has another good franchising post, Evaluate the Strength of a Franchisor, which comments on Evaluate the Strength of Your Franchisor Before Signing On from First Prize Franchise.

I, too, commend the original article to any potential franchisee. However, I think Mr. Nigut does a great job condensing everything written about the dangers and risks of franchising for franchisees:

One critical aspect to consider in my view is the brand itself. Is the brand recognizable? If not, the franchise better have a fantastic system, unique concept or protected intellectual property. Otherwise, I think you need to question whether the franchise is right for you.

If you would not spend your money at the franchise, why should anyone else?

And, yes, I know I said was cutting out the franchise articles but this was too good not to pass along.

Franchising Epiphany

Before explaining what caused the epiphany, let me explain what is an epiphany. After all, I have heard some strange uses of the word. Here is the relevant part of the definition:

3. a. A sudden manifestation of the essence or meaning of something.
b. A comprehension or perception of reality by means of a sudden intuitive realization

This epiphany occurred while reading Rush on Business Blog's Franchise Due Diligence: Ask what they don't do well:

He says this evoked the best responses from franchisees when he conducted his due diligence. If you are considering a franchise be sure to talk to as many franchisees as possible. Speaking to only a handful is not enough

Frankly, I am quite annoyed at myself for not thinking about this when I was in-house counsel for a franchisor. Great advice for a potential franchisee.

Litigation: Indiana Jurisdiction Over Out of State Companies

I chucked a post on Indiana's long-arm jurisdiction when I saw COA: Court has personal jurisdiction over CIDs in yesterday's Indiana Lawyer Daily:

Indiana trial courts can assert personal jurisdiction over out-of-state companies for the purposes of enforcing an Indiana Attorney General's petition to enforce a civil investigative demand, ruled the Indiana Court of Appeals today.

***

In Everdry Marketing and Management, Inc. v. Steve Carter, Attorney General of Indiana, No. 49A02-0706-CV-452, Everdry, an Ohio corporation that provides waterproofing services for homes, had franchises operating in Fort Wayne and Indianapolis. It had not filed a Uniform Franchise Registration Application with Indiana before franchising the company. After receiving complaints about the Indiana franchises failing to honor "lifetime warranties" on Everdry's waterproofing systems, the Attorney General's office found Everdry's Web site contained a very similar warranty statement as the one that appeared in the customer's contracts. Pursuant to Indiana Code Section 4-6-3-3, the Attorney General's office issued a CID upon Everdry at its Ohio office. CIDs are a pre-litigation tool to determine whether an Indiana law has been violated and address whether a subject has certain information relevant to the investigation.

Reading the opinion, I see a rather lengthy discussion of both CID's and the jurisdiction of Indiana's courts. Worth a good look by anyone facing the issue of being from out of state and being hauled before an Indiana court.

This particular case turns on whether Everdry consented to Indiana jurisdiction because of its franchising activities in Indiana. The Court of Appeals held that it had consented to jurisdiction.

However, the Court of Appeals did not stop there. The Court of Appeals proceeded to analyze Everdry's contacts with Indiana pursuant to Indiana Trial Rule 4.4(A) and constitutional due process (for the lawyers in the crowd: International Shoe does get a mention).

Out of state franchisors need to pay attention to this case. I expect a petition to transfer to the Indiana Supreme Court and we will need to see if that court accept transfer.

My original post on this subject will be up tomorrow.

International Franchising

One thing I am learning with this blog is the areas of law I need to discard. This will probably be my last post on franchising law. What drives my practice is leading me to direct more attention to other areas. I will be happy to take on any new cases from franchisors or franchisees but I will write less on the subject.

One area that I never dealt with but have had an interest in was international franchise operations. This month's Franchise World published an article on the subject,
In the international arena there is no substitute for good prior planning and judgment.

"When U.S. franchisors structure international franchise arrangements, they too often take the domestic approach that they are accustomed to, only to later realize that the rules change and that engaging in disputes in foreign adversarial proceedings can be substantially more difficult, expensive and time consuming than the domestic judicial battles to which they are accustomed. Many franchisors find that a domestic kitchen-sink approach to drafting international franchise agreements is frequently a “turn off” to prospective international franchisees. In many cases, broad inclusion of standard domestic requirements appropriate for a domestic arrangement could be characterized as a knee-jerk response, wholly inappropriate for an international transaction setting the arrangement up for immediate confrontation or failure, simply due to lack of forethought. For example, provisions governing events of default that subject the franchisee to automatic termination without notice, mandatory contributions to advertising funds, mandatory accounting reviews, certain concepts of equity and even jury trials are not always appropriate for inclusion in international franchise agreements. Such forced inclusions by the franchisor are often an initial recipe for disaster."

Franchising News: Basketball

Hoosier Hysteria has a new outlet? I pass along Taking shot at franchises Fishers’ Fieldhouse hoops venue signs 2 deals, plans many more from the Indianapolis Business Journal without much more comment than these quotes:

"Scott Burton, CEO of The Fieldhouse, said deals have already been signed with franchisees in Merrillville and in Naperville, Ill. The local firm hopes to have up to seven franchise locations open this year, and is in discussions with groups in Atlanta, Austin, Chicago, Dallas and Kansas City. Negotiations are also taking place with potential franchisees in Minneapolis, Orlando, San Diego, Tampa, Toledo and even London, England."

Anyone contemplating buying or starting a franchised business needs to take the following to heart:

“There’s a lot more to running the facility than saying, “Build it and they will come,” Burton said. “That makes a great movie, but not a great business model.”

Franchising: Terminating The Franchise

What event acts as the flashpoint for litigating a franchise? Termination. Today, I want to comment on the process of termination.

My experience consists of the relationship between franchisor and franchisee declining till termination is the only alternative. More like the ending of a marriage than some may want to admit, the resulting situation has an emotional component on both sides of the franchisor/franchisee line. Heading off unnecessary litigation may require heeding the emotional state of the parties. On the other hand, the situation may dictate litigation.

Documenting the problems ought to have been the first step of both parties, but most definitely the franchisor's first step.

If not corrected, then go to the franchise agreement. Sending a written notice of the problems is generally the next step. Franchisees need to take heed of this notice.

At this point, both sides need to decide what they want from the business relationship. I think both need to understand one thing about their respective positions:

1. Franchisees: when all is done, the franchisor owns the system and trademarks.
2. Franchisors: a malfunctioning franchisee injures the whole system.

Now the parties must choose between staying together or splitting apart. Those parties seeing a benefit in remaining together will stay together but those seeing a lack of such a benefit will want the relationship to end. Another issues comes when a split looms: a peaceful split or not?

Legal counsel ought to give their respective sides the costs and benefits of staying together or not, and of fighting over the split or not.

Franchising: Online Franchising Resources

Just a quick one day for potential franchisors, franchisees and their lawyers:

1. The Forum on Franchising is from the American Bar Association. More for the lawyer segment.
   
2. Holmes & Lofstrom, LLP; Franchise & business counsel. Seminars, FAQ's from a law firm concentrating on franchise law.
3. FRANCHISING Archives. Kind of ugly but worth mining - again more for the lawyers.

Franchising: Where to Find the FTC's Franchise Rule Opinions

Yes, the Federal Trade Commission publishes its Franchise Rule Opinions online. The FTC plainly labels the page: Recent Franchise Rule Opinions (1995 to Present). If you researching federal franchise law, you need to take a look at this page.

Franchsing - What is Franchising Good for?

For an answer to this question, read What Market Segments is Franchising a Good Model for? on Blue Maumau.

Franchising: Quiznos News

Having written about Quiznos here and here, I noticed Another former Yum exec surfaces at Quiznos from the Louisville Courier Journal.

David Deno, formerly chief operating officer at Louisville-based Yum, will become president at Quiznos, reporting directly to the company’s CEO.

Deno resigned from his post at Yum in early 2006, citing “family reasons” for his departure. Denver-based Quiznos said in a statement that it has created an “extraordinarily seasoned management team” over the last year, drawing heavily from former Yum managers. The list of Yum Brands alumni at Quiznos also includes Mike Elliott, Steve Provost and Kevin Dearth.

Blue Maumau comments on this at Quiznos Board Member Becomes President.

Remember you can find more of my articles on franchising here.

Franchising - Questions Before You Start

From Entrepreneur Magazine comes Final Answer:

"Take the guesswork out of franchising with answers to these top 10 franchise questions--guaranteed to put you in the know."

1. Is it a good product or service?

2. Do I have the skills franchisees need on a daily basis, and do I have the temperament to follow the directions of the franchisor when operating the business?

3. Do I have the financial means to grow the business and reinvest in it when necessary?

4. Will the franchise help me reach my business and personal goals?

5. To what degree does the franchisor exert operational control over the franchisee?

6. Given what you know today, would you purchase this franchise again?

7. What did it actually cost you to develop your franchise?

8. Can you describe the training program?

9. Does the franchise system's management have experience managing other franchise systems?

10. Is the franchisor selective about whom they sell franchises to, or are they simply selling to whomever is willing to buy?

I have another question to add to these: do you have a lawyer to examine the franchise circular? Everything else may look good but there may be things behind the curtain that are not so pretty. Having a lawyer looking at the franchise circular and agreement gets behind that curtain.