The Covenant of Good Faith and Franchising in 2019: Survival, Opportunism, and Distortion

Dec 4, 2018 - Franchise Articles by |

The Covenant of Good Faith and Franchising in 2019: Survival, Opportunism, and Distortion By: Jeffrey M. Goldstein The seemingly-omnipresent, but erroneous, belief that franchisors are legally prohibited at all times and in every instance from acting unreasonably or in bad faith vis-à-vis their franchisees is held not just by franchisees, but also by some prominent franchise lawyers. Rarely a day goes by without a potential client suggesting to me that his or her franchisor has acted unlawfully by having failed to meet its obligation to act in good faith and with fair dealing. Many times these franchisees repeat to me verbatim what they’ve just been told by another franchisee litigator to whom they’ve just spoken on the phone. Whereas franchisees generally readily latch onto the incorrect belief as a matter of survival, some franchise lawyers regularly peddle the myth to generate business. Quite simply, the misuse, misunderstanding and misapplication – intentional and unintentional — of the covenant of good faith in conversation, teaching and litigation leads ineluctably, over time, to a severe diminution in the inherent worth of the covenant of good faith as well as its use as a potential litigation tool for franchisees. The implied covenant of good faith and fair dealing is not applied uniformly by courts. Indeed, the covenant of good faith is a pure doctrinal bastard – sometimes it is viewed by courts as implied, and other times it is viewed as only explicit; sometimes it is used by courts to merely interpret a contract, […]

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Is Amazon a Threat to Franchisees?

Nov 30, 2018 - Blog by |

Amazon has been taking business away from brick-and-mortar stores for years. Despite promoting the benefits of selling through its marketplace to small businesses, it is clear that Amazon (along with other online shopping platforms that offer fast shipping and easy returns) is increasingly becoming a threat to retail businesses that rely on a steady stream of customers to maintain profitability. But, even for franchisees who do not have to compete with Amazon for customers, there is another potential risk as well—particularly for those located near HQ2 and Amazon’s various shipping and fulfillment centers around the country: the risk of losing out on quality employees. According to a recent article on franchise news website BlueMauMau.org: “Mark Zandi, chief economist of Moody’s Analytics, pointed out in a conference call . . . that Amazon announced it was increasing its entry level wages to $15 per hour, which is more than double the federal minimum wage. ‘It is indicative of how tight this labor market is,’ said Zandi. “He anticipates that this will put increasing pressure on employers that employ lower skilled workers to also raise their wages. ‘I fully anticipate wage growth accelerating as we move to 2019.’” As Amazon and other companies start offering higher wages even at entry-level positions, franchisees who find themselves struggling to make payroll may face even greater struggles in the near future. Are Franchisees Hiring? Will They Be Hiring in 2019? However, even as wages trend upward (many states have minimum wages increases set to take […]

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NLRB Provides Franchise-Specific Guidance in Latest Update on Joint Employer Standard

Nov 23, 2018 - Blog by |

The legal standard for determining when an entity may be considered a “joint employer” of another entity’s employees has been in a state of flux since the National Labor Relations Board’s (NLRB) Browning-Ferris ruling in 2015. While the NLRB reversed the Browning-Ferris decision late last year, the uncertainty over the past few years left a host of lingering questions, particularly in the world of franchising. To address these questions, the NLRB has been working on a set of regulations to help clarify when the joint employer standard should be applied. It recently released a first draft of its proposed regulations. The Joint Employer Standard in Franchising The proposed regulations start by defining what constitutes a “joint employer” (a definition that is notably absent from the current regulatory framework). As proposed: “[A]n employer may be considered a joint employer of a separate employer’s employees only if the two employers share or codetermine the employees’ essential terms and conditions of employment, such as hiring, firing, discipline, supervision, and direction . . . [and] a putative joint employer must possess and actually exercise substantial direct and immediate control over the employees’ essential terms and conditions of employment in a manner that is not limited and routine.” However, with regard to franchising, the NLRB has taken the position that, “[f]ranchisors generally exercise some operational control over their franchisees, which renders the relationship subject to application of the [NLRB’s] joint-employer standard.” Additionally, as noted in a recent article on BlueMauMau.org discussing the draft rulemaking, the […]

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What Can You Really Hope to Negotiate in Your Franchise Agreement?

Nov 16, 2018 - Blog by |

You have decided to buy a franchise. All that is left is to sign the franchise agreement and pay your initial franchise fee, and then you will officially own your own business. So, is it worth it to try to negotiate? Or, is it safe to assume that the franchise agreement is being offered on a “take it or leave it” basis? Unfortunately, over the past several decades, franchisors have honed the art of drafting one-sided franchise agreements. At the same time, franchise salespeople have come up with myriad ways to convince franchise candidates that negotiating is unnecessary. The truth is, if you are thinking about buying a franchise, it is strongly in your best interests to have the franchise agreement reviewed by an attorney, and most quality franchisors will expect you to request certain changes. Requesting Reasonable Modifications to Your Franchise Agreement So, the question then becomes, “What changes can I reasonably expect my franchisor to accept?” While there is no magic formula and nothing is ever guaranteed, some of the franchise agreement provisions that are most likely to be on the table include: 1. Initial Term Whether the initial term of the franchise agreement is too short or too long, this is a provision of the franchise agreement that often merits careful consideration. You want to make sure that you have enough time to recoup your investment, but you also want to avoid being locked in for too long if the business simply isn’t profitable. If you can […]

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Franchise Industry Statistics: Most-Popular Industries and Locations

Nov 9, 2018 - Blog by |

When buying a franchise, there are numerous factors that should guide your decision with regard to both (i) the type of franchise you choose, and (ii) where you choose to open for business. Statistics on the top franchised industries and top franchise locations can lean in both directions. On the one hand, it makes sense to choose a popular franchise in a location where people are used to shopping and eating at well-known brands. On the other, if you buy into too much competition in an over-saturated market, you could be setting yourself up for failure. Earlier this year, Franchise Direct published lists of the most-popular franchises and the locations that are most popular for opening a franchise. Neither list includes an explanation of its methodology, so take these for what they are worth. But, the rankings make sense, and even general trends are worth considering when deciding on the franchise opportunity that seems like the best fit for you. Most-Popular Franchised Industries According to Franchise Direct, as of May 2018, the 10 most-popular franchised industries in the United States were as follows: Food Franchises Children’s Franchises Coffee Franchises Home-Based Franchises Automotive Franchises Business Opportunities Vending and ATM Franchises Restaurant Franchises Cleaning Franchises Pet Franchises Notably, there is a bit of ambiguity in Franchise Direct’s list, as the list includes broad categories in addition to niche industries that could fall into one or more categories. For example, while “Children’s Franchises” ranks at number two, Retail Franchises come in just outside […]

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4 Special Considerations for Purchasing a Home Services Franchise

Nov 2, 2018 - Blog by |

Buying a home services franchise allows you to be your own boss; and, for many first-time franchisees, it means using your home as your “headquarters” and driving to job sites in your local area. For many franchise candidates, it offers the perfect blend of independence and day-to-day interaction. Many home services franchises also offer relatively low barriers to entry (i.e. a modest initial investment), and the time from signing a franchise agreement to opening for business can be relatively short. But, like all franchise opportunities, home services franchises also come with a variety of risks. If you are thinking about getting into the business of remodeling, repairing, upgrading or protecting other people’s homes, here are some key legal considerations to keep in mind: 1. Liability and Auto Insurance If you (or your employees, if any) will be going into other people’s homes and installing new materials, using cleaning solvents or pesticides, or making substantial modifications, the risk of something going wrong is something you need to consider. The best way to mitigate your risk of liability due to a personal injury or property damage claim (aside from conducting thorough due diligence) is to purchase adequate liability insurance. Since you will be driving on a daily basis, you will want to make sure you have adequate insurance coverage as well. Your state’s mandatory minimum coverage requirements may not be enough if you cause a serious accident, and you will likely need to purchase commercial auto insurance rather than a standard personal […]

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What Does it Really Mean to Be Named a “Top Franchise”?

Oct 31, 2018 - Blog by |

Franchisors love rankings. Visit any well-known franchisor’s website, and you are bound to see a laundry list of rankings purporting to provide third-party validation of the franchisor’s superiority in its niche, if not in the franchise industry as a whole. Similarly, a Google search for “franchise rankings” provides links to web pages and articles with titles like: Top 100 Global Franchises 2018 Franchise 500 Ranking Top 100 Franchises – Rankings of Global Franchises 2018 Rankings of the Best Franchises America’s Best and Worst Franchises to Buy Top 50 Franchises in the World Top 100 Franchises of 2018 As a prospective franchisee, how much stock, if any, should you put in a particular opportunity’s ranking as a “top franchise”? Understanding Franchise Rankings When considering what value to place on a ranking, it is always important to consider the source. As a general rule, legitimate media outlets (such as Forbes.com and Entrepreneur.com) will be more reliable than websites that exist solely to sell advertising (often for their own “top-ranked” franchise opportunities). A site that seeks to have some legitimacy behind its rankings should disclose the source of its data and its methodology as well. For example, in compiling its list of “America’s Best and Worst Franchises to Buy,” Forbes.com relied on five years’ worth of statistical data compiled by FRANdata examining system sustainability, system demand, value for investment, franchisor support and franchisor stability. On the other hand, the Forbes.com list also relies on data that are a minimum of two years old, […]

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Do Franchise Scams Still Exist?

Oct 17, 2018 - Blog by |

Although scams exist in virtually all industries, in today’s world, franchising is arguably one of the exceptions. If you understand the basics of the franchise model, and if you do your due diligence before paying an initial franchise fee, the truth of the matter is that you should be able to spot and avoid any scams pretty easily. For this reason, franchise scams have largely gone by the wayside, and those that still exist barely resemble legitimate franchise opportunities. Of course, this does not mean that your success as a franchisee is guaranteed. There is a big difference between a scam and an unprofitable franchise. Franchisees fail, and even entire franchise systems can go off of the rails, but most franchisees who lose their investments will need to sue for reasons other than being sold on a fraudulent scam. Making Informed Decisions as a Prospective Franchisee Buying a franchise is a complex investment, and it needs to be treated accordingly. This starts with understanding franchisors’ disclosure obligations. Under the Federal Trade Commission (FTC) Franchise Rule, all franchisors are required to you with a Franchise Disclosure Document (FDD), “14 calendar-days before you sign a binding agreement with, or make a payment to, the franchisor or an affiliate in connection with the proposed franchise sale.” If you are being asked to sign an agreement or pay money and you have not been provided with an FDD, then you are not being offered a legitimate franchise. But, once again, in today’s world this […]

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Is Franchise Regulation a Myth?

Oct 3, 2018 - Blog by |

Blue MauMau recently published an article entitled, “Shattering the Myth: The Franchise Industry Is Heavily Regulated?!?” It is a click-worthy headline, no doubt, but what about its implications: Is franchise regulation really a myth? The “Myth” of Franchise Regulation The article goes on to state some indisputable, and relevant, facts about franchise regulation. For example, while the franchise industry falls within the oversight of the Federal Trade Commission (FTC), the FTC does not actually review franchisors’ Franchise Disclosure Documents (FDDs). Additionally, although the FTC’s enforcement efforts targeting franchisors are minimal, the FTC’s Franchise Rule does not provide franchisees with a private right of action. In the words of the article’s author, Keith Miller, “Who would consider a filled-out document, which is actually not reviewed by any regulatory agency, to be a heavily regulated document?” The article also goes on to note that there is no federal franchise “relationship” law, and less than half of all states have these laws in place. However, the article omits any reference to state franchise “disclosure” laws, of which there are several, and many of which do require review of franchisors’ FDDs. There are some other issues with the article as well. For example, the article asks rhetorically, “[W]hy do the vast majority of franchise agreements require the franchisee sign it as an individual and not as a business?” While this is not directly relevant to the issue of regulation, it is also not entirely accurate. Legitimate franchisors today universally allow franchisees to form business […]

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An Example of What Not to Look for in a Franchise System

Sep 28, 2018 - Blog by |

If you are thinking about buying a franchise, you probably have at least some idea of what to look for in a franchise opportunity: Brand recognition, system stability, reasonable fees, happy franchisees – these are all key characteristics of a successful franchise system (of course, as a franchisee, your success is never guaranteed). But, do you also know what not to look for? Are you aware of the types of red flags that would (or, at least, should) send most prospective franchisees in search of a different opportunity? If not, this recent article on Blue MauMau is worth a read. These are the Hallmarks of a Toxic Franchise System The article highlights the recent downturn of the Dickey’s BBQ franchise system. According to Blue MauMau: “In fiscal year 2017, [the franchisor] opened 88 Dickey’s franchised outlets, but [73] ceased operations, according to its FDD.” “But[,] 2018 made 2017 look good. In the latest year, the brand opened 72 new franchised units, but had 89 terminations and 24 ceased operations, for a net store loss of 41 units.” With 562 franchised units at the start of the year, these 2018 figures represent a reduction in size of more than seven percent; and, adding in transfers, the total “churn” (the number of franchisees leaving the system) was an “alarming” 28 percent. “Many [franchisees] said they were unprofitable, and should close, but had to weigh the decision of whether they would lose more money staying open or being sued for 5 years of […]

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