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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What Does it Mean if My State Has (or Doesn’t Have) a Franchise Law?

Sep 21, 2018 - Blog by |

Nationwide, 21 states and Washington D.C. have laws in place that govern the franchise disclosure process, the franchise relationship or both. Due to the heavily one-sided nature of franchising, these laws are designed to protect franchisees by helping ensure that they receive accurate information, and that they have at least some opportunity to protect their investment if things do not go as planned. The states that have franchise laws are: Arkansas California Connecticut Delaware Hawaii Idaho Illinois Indiana Iowa Kentucky Maryland Michigan Minnesota Mississippi Missouri Nebraska New Jersey Tennessee Virginia Washington Wisconsin If your state has a franchise law, the implications for your franchise will depend on the type of law (disclosure, relationship or both) and the scope of its provisions. Franchise laws vary widely from state to state, and some provide significantly more protection than others. Examples of State Franchise Law Provisions 1. Franchise Disclosure Requirements (and Consequences) In states with franchise disclosure laws (i.e. California, Illinois and Maryland), franchisors must meet certain requirements in addition to those imposed under the Federal Trade Commission’s (FTC) Franchise Rule (the FTC Franchise Rule establishes the nationwide standard for the 23-item Franchise Disclosure Document (FDD)). One of the most-common provisions in these laws is an extension of the “cooling off” period before a franchisee can be asked to sign a franchise agreement. Potential remedies for disclosure violations under state franchise laws can include an option to terminate the franchise; although, the circumstances in which this option is available are usually pretty limited. […]

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I Am Fed Up With My Franchisor. Can I Terminate My Franchise?

Sep 14, 2018 - Blog by |

It finally happened. You’ve decided that enough is enough, and you are ready for the nightmare of franchise ownership to be over. Your hopes have been dashed. Your expectations have gone unfulfilled, and your franchisor has gone silent as you have struggled to keep up with your monthly expenses. Unfortunately, this is an all-too-common reality for franchisees in all types of franchise system. Despite the industry-published statistics on franchisee success and the promises your franchisor made before you signed your franchise agreement, building a profitable franchise is not easy. A significant percentage of franchisees close before the initial terms of their franchise agreements expire, and these “failures” are often due to the fact that franchisors fail to uphold their end of the bargain. So, you are ready to get out. What do you need to know? What You Need to Know about Terminating Your Franchise 1. Franchise Agreements are Long-Term, Legally-Binding Contracts For most fed-up franchisees, the initial prognosis is not good. A franchise agreement’s initial term is both a minimum and a maximum, which means that (i) you are bound until the agreement expires, and (ii) when your agreement expires, it is largely up to your franchisor whether you get to renew. How many months (or years) are left in your franchise agreement’s term? If you are close, you may be able to find a way to wait it out; or, you may be able to use this as leverage in termination negotiations with your franchisor. But, until you […]

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5 Risks Associated With Choosing a New Franchise System

Sep 7, 2018 - Blog by |

When buying a franchise, you need to make a number of important decisions. One of these decisions is: Should you buy into a well-established franchise system; or, should you get in on the ground floor of an up-and-coming franchised brand? Both options offer potential benefits. While buying into a well-known franchise can offer instant brand recognition, buying into a new franchise system can reduce the risk of territorial encroachment and intra-brand competition.  Established franchisors offer experience, while new franchisors may offer fresh ideas and a more-contemporary approach to doing business. Should You Buy into an Up-and-Coming Franchise? But, both options come with potential drawbacks as well. Here are five risks associated with choosing a new franchise system: 1. Lack of Franchising Experience Franchising is a unique business model, and not everyone who succeeds in building a retail brand will be successful operating as a franchisor. When you are relying on a franchisor for guidance and operational support, it can be challenging to work with executives and personnel who are not experienced in managing a franchise system. 2. Lack of Brand Recognition In most cases, one of the primary benefits of buying a franchise is to benefit from the franchisor’s brand recognition. Instead of promoting a new brand that no one has ever heard of, you get to benefit instantly from the goodwill that the franchisor has cultivated over years of consistent marketing and providing quality service to its clients or customers. But, if you will be the first franchisee in […]

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4 Special Considerations for Purchasing a “Green” Franchise

Sep 5, 2018 - Blog by |

“Green” franchises became mainstream a handful of years ago, and their popularly has held steady ever since. From commercial cleaning and pressure washing franchises to franchises that install synthetic turf systems and home efficiency technologies, if you want to start a business that is eco-friendly, there is probably a franchise opportunity that will appeal to you. But, as with all franchise opportunities, when purchasing a “green” franchise, it is important to perform your due diligence. This means talking to the franchisor, talking to current and former franchisees, and hiring a franchise lawyer to review the Franchise Disclosure Document (FDD) and franchise agreement. In addition to the legal concerns that apply to franchise opportunities generally, here are some “green”-specific considerations to keep in mind: 1. Substantiation of “Green” Advertising Claims When “green” businesses started popping up with increasing frequency, so did references to the concept of “greenwashing.” This term refers to businesses spinning, misrepresenting, or selectively publishing information in order to make themselves appear “greener” than they really were. Significant cases of greenwashing can constitute false advertising, which is a form of consumer fraud As a franchisee, you will likely use advertising materials that have been prepared by your franchisor. But, this does not necessarily mean that you are immune from liability for false advertising. Your franchisor should be able to readily substantiate its claims of environmental friendliness; and, if it can’t, your best option may be to consider a different franchise opportunity. 2. Mandatory Suppliers For product-based franchises, the commitment […]

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What Should Prospective Franchisees Take Away From Litigation Disclosures in Item 3?

Aug 31, 2018 - Blog by |

As a prospective franchisee, reviewing the terms of a franchisor’s Franchise Disclosure Document (FDD) is a critical early step in the due diligence process. When reviewing the FDD, it is important to review all of the 23 “Items” – not just the ones dealing with fees and the estimated initial investment. Among the more “legal” sections of the FDD that prospective franchisees frequently overlook is Item 3: Litigation. But, whether the franchisor provides a “negative disclosure” or details multiple ongoing pending lawsuits, Item 3 can often provide valuable insights into the risks of choosing a particular franchise opportunity. Potential Takeaways from the Item 3 of the FDD 1. An Item 3 “Negative Disclosure” If a franchisor does not have any litigation history that is subject to disclosure under the Federal Trade Commission’s (FTC) Franchise Rule, it must simply state in Item 3, “No litigation is required to be disclosed in this disclosure document.” While this is generally what you want to see as a prospective franchisee, it is important to note that not all types of lawsuits are subject to disclosure in Item 3 under the FTC Franchise Rule. For example, lawsuits that do not need to be disclosed in Item 3 include: Criminal actions that do not involve allegations of fraud; violations of franchise, antitrust or securities laws, or other “comparable allegations;” Civil lawsuits that are considered “ordinary routine litigation incidental to the business;” and, Bankruptcy proceedings subject to disclosure in Item 4. 2. Litigation Against Franchisees Under the […]

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Can a Franchisor Sell Franchises on a “Take It or Leave It” Basis?

Aug 24, 2018 - Blog by |

“Take it or leave it.” While hearing a franchise salesperson utter these words is less common than it used to be, high-pressure tactics remain a central component of the sales process in many franchise systems. Although buying a franchise is a unique and high-risk investment, franchisors use traditional methods to sell franchises, and their salespeople get paid on a commission basis. This means that they have a financial incentive to close as many sales as possible, and the last thing they want is for their commission to get held up due to franchise agreement negotiations. As a result, franchise salespeople will often imply that there is no room for negotiation in the franchise agreement. They may say things like, “Our franchisor doesn’t agree to changes,” or “We already offer better terms than any of our competitors.” Regardless of whether or not these statements are true (which is another matter entirely), the simple fact of the matter is that all franchisees have the right to make informed decisions and protect their investments. In fact, most good franchisors will not only be willing to negotiate reasonable modifications, but they will even expect quality franchise candidates to request changes to their standard terms. The reason for this is simple: Franchisors know that their agreements are heavily one-sided. They know that franchisees who accept their standard terms are taking a huge risk, and they know that they need to be reasonable in order to attract top talent. Key Risks of Signing a Franchise Agreement […]

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7 Special Considerations for Purchasing a Fitness Franchise

Aug 17, 2018 - Blog by |

Fitness franchises came into vogue about a decade ago; and, since then, the range of fitness-oriented franchise concepts available for purchase has exploded. From full-service 24-hour fitness centers to children’s gyms and rock-climbing centers, if you are looking for a franchise opportunity in the fitness industry, there is a very good chance that there are options available. Like all franchises, buying a fitness franchise comes with certain inherent risks. This includes risks that apply to the owning a franchise generally as well as risks that are unique to operating a fitness center or gym. If you are thinking about buying a fitness franchise, here are seven considerations to keep in mind: 1. Initial Term and Renewal Rights Opening a fitness franchise typically involves a sizeable initial investment. Remodeling costs, fitness equipment, point-of-sale equipment and other initial costs can easily reach the hundreds of thousands or millions of dollars. In order to protect this investment, it is important to ensure not only that the initial term of your franchise is sufficient, but also that you have adequate protections at the time of renewal. 2. Grounds for Termination In this same vein, it is also critically important to understand your franchisor’s rights of termination. Franchisors typically reserve broad termination rights, including the right to terminate for non-payment of minimum royalties, so you will minimally want to ensure that you have adequate cash on hand to meet your financial obligations without relying on income from your franchised business during your initial months of […]

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What Does it Mean if My Franchise Agreement Requires “Mandatory Arbitration”?

Aug 10, 2018 - Blog by |

Many franchise agreements include provisions requiring franchisees to submit to binding arbitration in the event of a franchisor-franchisee dispute. While these “mandatory arbitration” provisions are supposedly designed to minimize both parties’ costs in the event that a dispute would otherwise lead to litigation, the reality is that these provisions routinely serve franchisors’ interests to the detriment of their franchisees. What is Arbitration? Arbitration is a form of alternative dispute resolution (ADR) proceeding that falls somewhere in between mediation (where a neutral “mediator” helps disputing parties reach a consensus) and litigation (where a judge renders a binding decision in court). In arbitration, each party will typically conduct limited discovery, and then each party will present its case in the arbitration venue. The dispute may be heard by a single arbitrator or a panel of three (or more) arbitrators; and, at the conclusion of the proceeding, the arbitrator(s) will render a binding decision which, if necessary, can be enforced by obtaining a judgment in court. Where Does Arbitration Occur? Typically, franchise agreements will require arbitration proceedings to take place in the city where the franchisor’s headquarters are located. This usually means that franchisees are forced to incur travel costs in order to assert their legal rights (and this is one of the first ways that mandatory arbitration provisions tend to work in the franchisor’s favor). Franchisors can also designate specific arbitration service providers in their franchise agreements, and hearings will typically take place at these providers’ office locations. Two of the most-commonly-used […]

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Hiring Considerations for Franchisees

Aug 3, 2018 - Blog by |

As a franchisee, you own your own business. This means forming your own corporation or limited liability company (LLC), taking on your own loans, entering into your own contracts, and being responsible for your own success or failure. For many franchisees, it also means hiring your own employees. The employment relationship is fraught with legal issues, so much so that there is an entire segment of the law (called “labor and employment law”) devoted to issues involving employers and employees—just as “franchise law” governs the relationship between franchisors and franchisees. However, the nature of the franchise relationship also has unique implications for employment; and, as a franchisee, it is critical to have a clear understanding of your employment obligations and your employees’ legal rights. Are You Preparing to Take on Employees as a Franchisee? There are textbooks, statutes, regulations and decades of court precedent dedicated to defining the employer-employee relationship. So, there is far more to hiring employees than we can possibly discuss here. As a franchisee, if you are preparing to hire, here are some of the basic principles you need to know: 1. Your Employees are Your Employees While there has been much discussion about franchisors’ exposure to liability for claims filed by franchisees’ employees, one principle that was never in doubt is that franchisees’ employees are franchisees’ employees. When you hire employees, you make the hiring decisions, you are responsible for making payroll and you are obligated to respect your employees’ regulatory, statutory and Constitutional rights. 2. […]

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