Franchise Articles

The novel coronavirus pandemic is having unprecedented effects on our nation’s economy, and many companies are being forced to lay off their employees due to mandatory closures of “non-essential” businesses. Certain industries, such as the restaurant and fitness industries, have been hit particularly hard; and, in order to avoid the risk of being laid off again, some individuals may be considering the possibility of becoming their own boss by buying a franchise. If you fall into this category, should you think seriously about getting into the world of franchising? Here are some important considerations to keep in mind: 1. You Should Not Make a Long-Term Decision Based on Your Short-Term Circumstances While the novel coronavirus pandemic is (hopefully) a once-in-a-lifetime event, things will eventually return to normal. So, while you may be out of work for now, the job market will bounce back, and employers in certain industries are actually hiring aggressively during the pandemic. If you understand the franchise model and are serious about becoming a franchise owner, it may be an option worth considering. However, if you are simply focused on weathering the storm, there are likely better (and less risky) alternatives available. 2. You Will Need to Have Sufficient Cash Reserves to Build a Profitable Business When you buy a franchise, your business will not be profitable immediately. It takes time to build a profitable business, and most franchisors recommend that their franchisees have anywhere from three to twelve months of capital reserves on hand when they […]

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Each year, the Franchise Times publishes its list of “Best Franchises to Buy,” also known as the “‘Zor Awards” (for those who aren’t in the know, “‘zor” is industry shorthand for “franchisor”). It recently published its list of award recipients for 2020, with the following franchises named the best in their respective categories: Around the House (Home Repair) – The Glass Guru Quick Flip (Quick-Service Burger Restaurants) – Culver’s Fresh Baked (Bakeries and Cafés) – McAlister’s Deli Cut & Dry (Lawn Care and Painting) – Five Star Painting Game, Set, Match (Sports Bars) – Twin Peaks After the Storm (Disaster Restoration) – Paul Davis Restoration Window Shopping (Retail) – uBreakiFix Sweat It Out (Boutique Fitness) – CycleBar Help Wanted (Employment and Staffing) – PrideStaff Bring it Home (Delivery and Takeout Pizza) – Toppers Methodology for the Franchise Times ‘Zor Awards So, what does it mean for a franchise to be named the “best” in its category by the Franchise Times? In How We Chose the ‘Zor Awards, the publication breaks down its selection process: Identifying Candidates for Inclusion – In order to be considered, a franchise must have fallen into one of the 10 categories listed above, and it must have been listed in the Franchise Times’ “Top 200+” database. The Franchise Times, “further narrowed the list by analyzing the quality of information in each brand’s Item 19 [disclosures] or other key financial data, and also focusing on brands that are currently expanding inside the United States.” Financial Metrics Focused […]

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If you are serious about buying a franchise, you are most likely aware of the recommendation that you hire a lawyer to perform a franchise business review. But, with all of the up-front costs you will need to incur already, and since you are prepared to move forward even though the opportunity has its risks, do you really need to pay for a review? Of course, you know our answer already. With more than 30 years of experience in franchising, we have represented thousands of new and existing franchisees, and we have seen far too many franchisees struggle and lose their businesses simply because they failed to take the necessary precautions during the buying process. With this in mind, here are our top four reasons why we believe all prospective franchisees need franchise business reviews. 4 Reasons Why All Prospective Franchisees Need Franchise Business Reviews 1. Buying a Franchise is a Major, Long-Term Investment You have heard this before too, but it bears repeating: Buying a franchise is a major, long-term investment that could have significant implications for your family’s finances. If you decide to move forward, your decision needs to be based on the advice of experienced professionals who understand what you are getting yourself into. 2. The Franchisor is Putting Its Best Foot Forward During the buying process, the franchisor is giving you its sales pitch. If you are a strong candidate, it wants you to buy a franchise because it knows that (i) you have a reasonable […]

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Court Prohibits Tax Franchisee from Operating by Enforcing Post-Term Restrictive Covenant By: Jeffrey M. Goldstein A federal judge in Washington recently issued a preliminary injunction enjoining a former Liberty Tax franchisee from operating as an independent tax preparer for two years following the termination of the franchise agreements. JTH Tax LLC v. McHugh, No. C20-329RSM, 2020 U.S. Dist. LEXIS 61139 (W.D. Wash. Apr. 7, 2020)  As discussed below, the court agreed with the franchisor’s argument that McHugh knowingly and intentionally breached her Franchise Agreements with Plaintiffs by operating KVC, a competing tax preparation business, after Plaintiffs terminated her franchise. BACKGROUND In 2015, Defendant Lorraine McHugh entered into Franchise Agreements with Liberty Tax and she was given a territory of areas near and including Federal Way, Washington, in which to operate her franchise. The Franchise Agreements included a non-compete clause, which stated that: “[f]or a period of two (2) years following the . . . termination . . . of the Franchised Business . . . you agree not to directly or indirectly, for a fee or charge, prepare or electronically file income tax returns . . . within the Territory or within twenty-five miles of the boundaries of the Territory.” The Franchise Agreements also included non-solicit and non-disclosure clauses. Further, in the Franchise Agreements, McHugh agreed that Liberty Tax is “entitled to a temporary restraining order, preliminary and permanent injunction for any breach of duties under any of the non-monetary obligations of paragraph 9 [post-term obligations] above or of this […]

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Franchisee Lawyer’s Failure to Oppose Preliminary Injunction Motion Results in Imposition of Post-Termination Restrictive Covenant By: Jeffrey M. Goldstein As if the plight of franchisees and dealers in contested litigation were not challenging enough, a recent case from the United States District Court for the Western District of North Carolina arguably makes that predicament more formidable. Maaco Franchisor SPV, LLC v. Sadwick, No. 3:20-CV-147, 2020 U.S. Dist. LEXIS 81391 (W.D.N.C. May 7, 2020). Most damaging to franchisees and dealers is that because the franchisee in Maaco failed to file an opposition to the franchisor’s motion for a preliminary injunction to shut down the franchisee’s business after a challenged termination, the federal court judge decided the injunction request without any opposition evidence or argument from the franchisee. Specifically, the ruling in this case, rather than being based on the rigorous argument and evidence from both sides, ultimately relied upon several quasi-theoretical factoids prepared by the franchisor’s counsel that normally are found in the pro-franchisor ether of restrictive covenant jurisprudence. These types of mutated factual myths, each time they are raised by litigants and then incorporated as ‘valid’ in a court order, further erode the economic realities underlying both the formation of franchise and dealership agreements as well as the restrictions on competition and competitors following the termination or expiration of such agreements. In this regard, the perpetuation by litigants and courts that “the franchisee deserves to be restrained by the preliminary injunction because the franchisee ‘brought it upon himself by acting […]

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Legal Life after the Coronavirus Death for Small Businesses, Franchisees and Dealers By: Jeffrey M. Goldstein  www.goldlawgroup.com Second in a Series: COVID-19 HAS KILLED MY BUSINESS – MAY I LEGALLY TERMINATE MY CONTRACTS? Those who hope or believe that the consequences, effects, and sources of COVID-19 will soon be arrested and contained might be wondering whether their inability to have complied with their contracts, leases, and mortgages during this waiting period can lead to a subsequent termination of or suit under their agreements for failure to have fully complied with all of the contractual obligations in these contracts. Although I don’t anticipate that ‘other parties to your contracts’ individually or as a group are preparing or conspiring to terminate, default, or cancel anyone’s agreements, this does not rule out the high probability that when things return to normal (when market forces begin to work again unimpeded by the myriad current external shocks), every firm will naturally begin to focus again on ‘maximizing profits’ – the legitimate and necessary goal of individual suppliers in a free market economy. In general, whether you’re able to use COVID-19 as a legal ‘excuse’ for your inability to pay or otherwise perform during the coronavirus downtime is subject to whether the agreement in issue contains a provision or language that excuses your performance for unanticipated or unforeseen events. While many agreements contain such clauses, referred to as ‘force majeure’ clauses (clauses that excuse performance based on unexpected events such as floods, epidemics, riots, wars, etc.), […]

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When you bought your franchise, the last thing you expected was that you would end up in a dispute with your franchisor. You had a good relationship with the people you talked to, you were excited about the opportunity, and it seemed like everyone was on the same page. But now, the relationship has soured, you aren’t happy with your outlet’s financial performance, and you find yourself in need of a franchise dispute lawyer. What happens now? Coming to Terms with Your Franchisor There are a number of potential ways to resolve franchise disputes, and the options that are available depend on the specific facts and circumstances involved. For example, if you have received a notice of termination, you may need to act more quickly – and your options may be more limited – than if you were facing a dispute with regard to something like advertising approvals or adopting an expensive new point-of-sale system. 1. Attempting to Negotiate a Mutually-Agreeable Resolution Generally speaking, however, your first option will be to attempt to negotiate a mutually-agreeable resolution. Is there a misunderstanding that simply needs to be cleared up? Is it in both parties’ best interests to quickly find a way forward? If so, then your chances of negotiating an outcome that you can live with might be fairly good. Negotiating doesn’t have to mean sitting down in a board room and going toe-to-toe. In fact, in many cases, issues can be resolved with an email exchange or a few phone […]

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In January 2020, Franchise Direct published two articles, A Look at How Franchises Impact the Economy and Franchising by the Numbers, that provide a nice overview of the current state of the franchise industry. Here, franchise attorney Jeffrey M. Goldstein covers some of the highlights: 1. There are More than 750,000 Franchises in the U.S. with More than 8 Million Employees According to Franchise Direct, as of January 2020, “[i]n the United States, over 750,000 franchise establishments are operating and employ around 8.17 million people.” Franchise Direct also reports that another 13.3 million jobs are “supported by franchises.” Citing the most-recent economic data, Franchise Direct reports that gross revenue from franchisees topped $868 billion in 2016, compared with $675 billion a decade earlier. 2. Food Continues to Dominate the Franchise Industry Across all sectors, food establishments accounted for the most employment in franchising, providing just under 473,000 jobs across the country. Based on global sales data, the three most-successful U.S.-based franchises are McDonalds, 7-Eleven, and KFC. 3. Franchise Ownership Demographics are Shifting It used to be that the majority of franchise owners were middle-aged or older, and typically seeking to transition out of an unfulfilling job or use their career experience to build their own business. While this is still the case today, Franchise Direct reports that 12 percent of franchisees are now 34 years of age or younger, and more than half of franchisees (54 percent) own two or more outlets. 4.  Franchising is Expected to Continue Its Upward […]

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The Sale of a Franchise System May Imperil Franchisees’ Existing Exclusive Territories By: Jeffrey M. Goldstein      The sale of a franchise system to a new third party frequently raises the anxiety of existing franchisees on a broad array of business support issues, specifically including the potential encroachment on existing franchisees’ exclusive territories. In the instance where the new franchisor is already operating its own separate competing franchise system, the merger or acquisition can create an existential threat to those existing franchisees who, after the franchise system sale, are forced to compete with third party branded franchisees owned by the purchaser, or new franchisor. A Florida Supreme Court from 1998, prompted by a question to it from the federal appellate court in Florida, addresses an interesting permutation of this issue under Florida tortious interference law. Gossard v. Adia Servs., 723 So. 2d 182 (Fla. 1998). The case remains good law in Florida. The claim of tortious interference is interpreted broadly in Florida. The franchise business in Gossard began in 1974, when Larry Carr began operating an independent business which provided temporary nurses to health care facilities and individuals. Within a few years, Carr began selling franchises under the name Nursefinders.  In May of 1986, Richard Gossard became a franchisee when he purchased a franchise which covered, among other areas, Florida’s west coast. In 1987, Carr sold Nursefinders to Adia, and the following, year, Adia purchased Star-Med, a company also in the field of temporary nursing help business. Gossard’s franchise […]

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On February 7, 2020, the International Franchise Association (IFA) published an article expressing its strong opposition to the Protecting the Right to Organize (PRO) Act (H.R. 2474), which passed in the U.S. House of Representatives on February 6. The PRO Act proposes to codify the National Labor Relations Board’s (NLRB) joint-employer standard adopted in its highly-controversial Browning-Ferris decision from 2015. It would also adopt certain aspects of the California state court decision of Dynamex Operations West v. Superior Court, which created a so-called “ABC” test for determining whether an individual should be classified as an independent contractor or an employee. According to the IFA: “This bill would pose a massive threat to America’s 733,000 franchise businesses and the 7.6 million workers they employ. Already, the joint employer standard that this bill seeks to codify has cost the franchise industry $33.3 billion per year and led to a 93% increase in joint employment litigation. . . . [The PRO Act] could have the detrimental impact of turning every franchise owner into a de-facto employee of the brand.” The Protecting the Right to Organize (PRO) Act (H.R. 2474) In its current form, the PRO Act, if enacted, would create a new standard for joint employment that follows the NLRB’s Browning-Ferris decision. In pertinent part, H.R. 2474 states: “Section 2(2) of the National Labor Relations Act (29 U.S.C. 152(2)) is amended by adding at the end the following: ‘Two or more persons shall be employers with respect to an employee if each such […]

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