What Do You Need to Know About the “Liquidated Damages” Clause in Your Franchise Agreement?
Nov 2, 2016 - Blog by Jeffrey M. Goldstein |As a struggling franchisee, you might think that your franchisor signaling its intent to terminate your franchise agreement represents the end of a long nightmare. Unfortunately, in many cases, it is just the beginning. This is because, with increasing frequency, franchisors are including “liquidated damages” clauses in their franchise agreements. A typical liquidated damages clause may look something like this: Within 30 days of the Franchisor’s termination of this Agreement, the Franchisee will pay the Franchisor, as liquidated damages and not as a penalty, an amount equal to three (3) times the royalty fees payable either (i) during the last twelve (12) months of the Franchisee’s active operations, or (ii) the entire period that the Franchisee has been in business, whichever is the shorter period. In plain English, what this says is that, 30 days after the franchisor terminates the franchise agreement, the franchisee must pay the equivalent of three years’ royalty fees to account for the royalties that the franchisor theoretically would have earned had it not terminated the agreement. This is true even though the franchisor is electing to terminate the agreement—presumably because the franchisee has been unable to meet its royalty obligations while actually trying to operate the business. Sounds fair, right? Unfortunately, many, many franchisees have liquidated damages clauses in their agreements, and several courts around the country will enforce these clauses without regard to the often-devastating financial effects they have for terminated franchisees. Challenging the Enforceability of a Liquidated Damages Clause That said, there are […]
10 Key Considerations for Due Diligence in Purchasing a Franchise
Nov 1, 2016 - Blog by Jeffrey M. Goldstein |When considering a franchise opportunity, it is critical to conduct your due diligence. Buying a franchise is a substantial, long-term investment, and your success or failure will hinge in large part on the actions, omissions and obligations of your franchisor. Franchise due diligence is an involved process that takes time, effort and a commitment to finding real answers instead of simply trying to validate your interest in the franchise. The following is a list of 10 examples of steps prospective franchisees can take to learn more about their potential franchise opportunities: Franchise Due Diligence: 10 Steps 1. Talk to Current Franchisees. How are their businesses doing? How long did it take them to become profitable? How supportive is the franchisor? Current franchisees can provide invaluable information to help you decide whether to pursue a particular franchise opportunity. 2. Talk to Former Franchisees. Former franchisees are a key source of information as well. Why did they leave the system? Would they do it again if they had the chance? What is their opinion of the franchisor? 3. Visit the Franchisor’s Headquarters or Company-Owned Location. The in-person visit is an important step in the due diligence process. You will want to meet the franchisor’s key personnel in person, and see if you think you will be a good fit for the way they do business. You should also try to visit several franchised locations. 4. Review the Franchisor’s Franchise Agreement and FDD. While you should hire an attorney to review the franchisor’s […]
Are Franchisees Just “Middlemen”?
Oct 31, 2016 - Blog by Jeffrey M. Goldstein |When was the last time you visited a Starbucks franchise? You might be surprised to learn that the answer is, “Never.” Starbucks is among the largest chains in the world not to franchise, and CEO Howard Schultz had this to say about why all Starbucks locations are company-owned: "To me, franchisees are middlemen who would stand between us and our customer… If we had franchised [as some executives wanted to in the 1980s], Starbucks would have lost the common culture that made us strong.” So, are franchisees really just “middlemen” who get in the way of providing quality service to the customer? The Value Franchisees (Can) Bring to the Table I know quite a few people who would disagree with Mr. Schultz’s assessment of the franchise model. Some would even say that it demonstrates a lack of familiarity with the nature of franchising and the franchise relationship. Franchisees are independent business owners, but this does not mean that they have any less interest in seeing their businesses succeed. If anything, their independence provides even more incentive to make sure that they meet, if not exceed, their customers’ expectations. Mr. Schultz continued: “We teach baristas not only how to handle the coffee properly but also how to impart to customers out passion for our products. They understand the vision and value system of the company, which is seldom the case when someone else's employees are serving Starbucks coffee.” Of course, franchisees, like franchisors, rely on their employees to sell their products […]
License vs. Franchise: What’s the Difference?
Oct 28, 2016 - Blog by Jeffrey M. Goldstein |While sharing certain similar characteristics, licenses and franchises are different relationships that, by law, must also have certain key distinctions. If you are considering a franchise or another business opportunity that involves a license, it is important to have at least a basic understanding of the unique features each type of relationship entails. The Legal Definition of a Franchise We’ll start by looking at the definition of a franchise. Under the Federal Trade Commission (FTC) Franchise Rule, a business relationship must have three essential elements in order to be deemed a franchise: The franchisee must receive, “the right to operate a business that is identified or associated with the franchisor's trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor's trademark;” The franchisor must “exert or ha[ve] authority to exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation;” and, The franchisee must “make [] a required payment or commit [] to make a required payment to the franchisor or its affiliate,” as a condition to opening for business. Certain states’ franchise laws include slightly-modified definitions, but they generally incorporate some variation of these same three key elements. In order for a business relationship to constitute a franchise, all three elements must be present. So, what happens if one is missing? In most cases, the would-be franchisee receives a license. The first element of a franchise (“the right to […]
Can Franchisors Impose Different Obligations for Different Franchisees?
Oct 27, 2016 - Blog by Jeffrey M. Goldstein |You own a franchise, and everything is going reasonably well. You have begun to turn a profit after a couple of years, you are getting repeat business, and you are finally starting to think that this could be something you could do successfully for a long time. Then, you get a site visit from your franchisor. It seems like it goes well, but a short time later you receive a notice identifying all of the ways that you are out of compliance with the franchisor’s current system standards, and stating that you need to make numerous costly updates in order to avoid defaulting under your franchise agreement. You make a call to another franchisee a few ZIP codes over, and she says that her outlet is a lot older than yours, and she’s sure her business is far more “outdated” than yours. So, what gives? When Franchisors’ System Standards Are Not Uniform As it turns out, there are a number of reasons why franchisors may choose to treat different franchisees differently. Despite franchisees’ expectations (and, in some cases, franchisors’ representations) that system standards will be uniformly enforced, it is not at all unusual for some franchisees to face more-onerous obligations than others. Here are just some of the reasons why: Different Franchise Agreements – When trying to figure out why your franchisor is treating you and other franchisees differently, one of the first questions to ask is: When did each of you sign your franchise agreements? Franchisors frequently update their […]
Considerations for Choosing Between New and Established Franchise Systems
Oct 26, 2016 - Blog by Jeffrey M. Goldstein |For several years now, the franchise model has been growing in popularity as a way for established businesses to expand into new markets. With Franchise Times publishing a list of the “Top 200 Franchise Systems,” there are many, many more franchise systems out there – with hundreds, if not thousands, of franchise systems registered in various states nationwide. You know some of the most-established franchise systems well: Subway, McDonald’s, 7-Eleven and Dunkin’ Donuts are perennially among the largest franchise chains in existence. Then, there are national chains, regional chains, local chains, all the way down to the independently-owned business with one location that is seeking to sell its first franchise opportunity. So, if you are thinking about purchasing a franchise, which way should you go? Should you buy into a big franchise system where you will be one of hundreds (or thousands) of franchisees; or, should you join the ride for a fledgling system that is seeking to expand? Three Factors Affecting Your Choice of Franchise Opportunity 1. Brand Recognition When it comes to choosing between different sizes of franchise systems, one of the most important factors can be brand recognition. The ability to instantly benefit from a known brand is a key benefit for many new franchisees, and this benefit will generally be stronger with a larger, more-established franchise system. On the other hand, maybe a beloved, local business has decided to franchise. In this scenario, you could still benefit from brand recognition without being perceived as a part […]
What Not to Expect from Your Franchisor
Oct 25, 2016 - Blog by Jeffrey M. Goldstein |If you are considering a particular franchise opportunity and have been through the franchise sales process, you probably have lots of expectations of your potential franchisor. On-site support, system-wide marketing, big-time promotional campaigns to get customers through the door – these are just a few of the benefits many franchisors tell prospective franchisees they will receive once they sign on the dotted line. But, in reality, new franchisees’ expectations are often overblown. If you thinking about buying a franchise, here are five things not to expect from your franchisor: 1. Marketing Dollars Directed to Your Territory While you may be required to make weekly or monthly contributions to a system-wide marketing fund, you are not guaranteed to see any benefit from your contributions. Take a look at your franchise agreement. What does it say about what the franchisor is actually required to do with marketing fund contributions? If you don’t see anything, it’s probably because it isn’t there. Franchisors typically retain broad control over how they choose to conduct system-wide marketing, and as a result, franchisees generally should not rely on their franchisor’s marketing efforts to promote their products or services. 2. Consistency Franchisees need to get used to inconsistency. Not all franchisees are subject to the same obligations (franchisors regularly modify their franchise agreements, and some franchisees may negotiate more favorable terms than others), and not all franchisors treat all franchisees alike. In addition, your franchise agreement may require you to make updates and adapt to system changes over […]
What is a “Business Format” Franchise?
Oct 24, 2016 - Blog by Jeffrey M. Goldstein |If you have been researching different franchise opportunities online, you may have come across references to the term, “business format” franchise. You might even be – in fact, you probably are – considering a business format franchise opportunity. So, what exactly does this mean? Business Format Franchising 101 Most franchise opportunities today are what are known as, “business format” franchises. When you put all of the pieces together, this is ultimately a lot like it sounds. With a standard business format franchise, franchisees receive: A License to Use the Franchisor’s Principal Trademark – A license to use the franchisor’s principal trademark is a key component of the business format franchise. As a business format franchisee, you operate under the franchisor’s principal trademark—which is typically the name, or “brand,” you use to identify your business. Subway, Motel 6, RE/MAX, UPS Store – these are all examples of business format franchises. Access to the Franchisor’s System and Standards – As a business format franchisee, you also receive the right (and obligation) to use the franchisor’s system and standards to operate your business. This typically includes initial training, standard buildout plans, access to an “operations manual,” some level of ongoing support, and instructions for use of point-of-sale (POS) systems and key functionalities. The Right (and Obligation) to Sell the Franchisor’s Products or Services – The third major aspect of a business format franchise is the right to sell the franchisor’s products or services. This may include branded items, food recipes, suites of services, […]
Goldstein Law Firm Named Franchise Law Firm of the Year
Oct 21, 2016 - Blog by Jeffrey M. Goldstein |We are pleased to announce that the Goldstein Law Firm was recently named North America’s “Franchise Law Firm of the Year” in the 2016 edition of the Finance Monthly Global Awards. We are extremely proud of this recognition, and we are excited to share this news with our colleagues, clients and friends. About Finance Monthly Finance Monthly is a respected global publication that delivers “news, comment and analysis to those at the centre of the corporate sector.” Through multiple platforms, Finance Monthly reaches nearly 200,000 readers on a monthly basis. Finance Monthly’s headquarters are located in Lichfield, England, approximately midway between Manchester and London. About Finance Monthly’s 2016 Global Awards Winners of Finance Monthly’s 2016 Global Awards were selected through a nomination process which included client and peer research focused on “identifying the most successful organisations and advisors from around the globe.” In announcing the 2016 award winners, Finance Monthly released a statement saying: “[W]e are excited to present you a publication which contains some of the most successful and trusted firms operating in the dynamic financial sector, which will undoubtedly continue to experience growth through their commitment to excellence in 2016 and beyond.” Goldstein Law Firm’s Recognition in the 2016 Global Awards The Goldstein Law Firm was the only franchise law firm to be recognized among the approximately 130 winners worldwide. As published in the 2016 Global Awards: “Although Jeff Goldstein and the Goldstein Law Group are known as exceptional negotiators, they are also recognized as commanding litigators in […]
Considering a Franchise Transfer? Be Sure to Review Your Franchise Agreement
Oct 20, 2016 - Blog by Jeffrey M. Goldstein |Whether you are seeking to sell your franchised outlet or buy an existing franchise as opposed to an independent business, it is important to understand that franchisors often exercise strict control over the transfer process. To a certain extent, this is understandable: Franchisors have a legitimate interest in controlling who operates under their brand and system, and as a result evaluating a transferee should involve much the same process as evaluating a completely new franchise prospect. However, for any of a variety of reasons, some franchisors take their control over franchise transfers too far. As a result, if you are considering buying or selling an existing franchised outlet, here are some key transfer provisions to keep in mind: Common Transfer Restrictions in Franchise Agreements 1. Franchisor Consent to Transfer First, you can be almost certain that the current franchise agreement contains a provision that requires the franchisor’s consent in order to transfer the business. If the current franchisee hired an attorney before purchasing the franchise, he or she may have negotiated a “reasonableness” limitation (i.e. “The franchisor’s consent to transfer cannot be unreasonably withheld”) into the agreement. In addition, state law may require the franchisor to exercise its contractual rights in good faith. However, these are both subjective standards, and obtaining franchisor consent can often be a significant hurdle in the franchise transfer process. 2. Transferee Approval Along the lines of a consent requirement, many franchise agreements also state that the transferee is subject to franchisor approval. Ideally, this approval […]