47th annual international franchise association convention ... 47th annual international franchise...
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a program presented bya program presented by Dennis E. Wieczorek and Philip F. ZeidmanDennis E. Wieczorek and Philip F. Zeidman DLA Piper US LLPDLA Piper US LLP February 25, 2007February 25, 2007
47th Annual International Franchise Association Convention47th Annual International Franchise Association Convention Elements of Building a Successful Elements of Building a Successful
Franchise NetworkFranchise Network
Getting on the Same PageGetting on the Same Page
Types of Franchises • Product Distribution • Business Format • Conversion Franchising
Tax & Accounting
Drug Stores/ Vitamins
AMENDED FTC RULE GOES INTO EFFECT
JULY 1, 2007
Benefits of Franchising: Franchisor • Increase capital investment in
system • Rapid system expansion • Permits adequate control
Benefits of Franchising: Franchisee
• Degree of Independence • Proven Concept • Assistance
– Personnel Training – Operating Standards – Quality Control
Disadvantages for Franchisors • Some diminution in “control” • Profit per unit vs. return on investment
Disadvantages for Franchisees • Lack of absolute autonomy • Impermanence of the relationship
Different Forms of Different Forms of Franchise RelationshipsFranchise Relationships
The Single Unit Franchise
Most common:Most common: Franchisee owns and operates
one franchised outlet.
The Area Development Franchise • Right to establish a designated number
of franchised outlets within a prescribed territory
• Must follow development schedule • Frequently, separate franchise
agreement for each unit
Sub-Franchising • Franchisor grants certain rights to sub-
franchisor. • Typically:
– Offer and sell franchises to sub-franchisees – Sub-license franchisor’s trademarks – Collect fees for franchisor – Assist with training – Enforce system standards – Frequently, permits establishment of units
• Two-Party Agreement
• Three-Party Agreement
• One person granted right to recruit prospective franchisees
• Franchisee contracts directly with franchisor • Area representative has no right to contract
with franchisee, but may be delegated rights and obligations
SMALL FRANCHISORS PLUS LARGE
FRANCHISEES: A NEW PHENOMENON?
Establish a Franchise Establish a Franchise Network With The Right Network With The Right
• Quality of the franchisees will greatly influence network success.
• Granting franchises to the wrong people is a common mistake.
• You have less flexibility to pick your franchisee
Leads to Prospective Franchisees
• The Internet • Existing Franchisees • Referral Networks
• If you get leads, respond to them on a timely basis
• Sets the tone for the relationship
BROKERS ARE HOT -
SOME SAY TOO HOT
Geographic Expansion • Radiating circles • Hit major markets
PROPERTY COSTS “SKY HIGH”
FRANCHISORS SEEK ALTERNATIVES
Earnings Claims -- Why aren’t you using them?
• More franchisors using earnings claims • May provide some degree of protection
• Agreements and UFOCs only become relevant if there is a problem
The key document is the The key document is the operating manual.operating manual.
Take Advantage of Take Advantage of Franchise Experience and Franchise Experience and
• Effective communication • Franchisee opinion of franchisor • Intranets
Franchisee Advisory Councils & Associations
• Work with advisory council or association to: – Enhance communication – Compensate for communication barriers – Resolve network issues
FRANCHISORS & FRANCHISEES
WORK TOGETHER ON LEGISLATION
Providing Services And Providing Services And Exercising ControlExercising Control
Restricted Supply Sources
• Are restrictions necessary? • Is franchisor involved, directly or indirectly?
• If you sell products to franchisees or receive rebates from vendors, provide disclosure
• Even if a start-up, resales will pop up • Need policies and procedures
Financial Services and Guidance
• Franchisor-Lender relationships • Franchisor credit enhancement • SBA financing • Financial guidance
BROADENS ITS BEACHHEAD
Exploit Technology and the Internet
• Single vs. Multiple Websites • Advertising Fund Financial Support • Business-to-Consumer eCommerce • Management Software
Intranets & Extranets
• Enhance network communications • Training programs • Automated ordering from suppliers • E-mail within network
Importance: Avoiding causes of noncompliance • Company outlets
– Training – Communication – Follow through
DonDon’’t create system t create system standards and then fail to standards and then fail to
check on compliancecheck on compliance
DonDon’’t ignore your right to t ignore your right to auditaudit
• Franchisor may be responsible for acts and omissions of franchisees
• More control may mean more risk
• Proper insurance coverage • References to “independently owned and
• If you say nothing, you will litigate • Choosing between litigation and arbitration
FRANCHISE LAWYERS DEBATE LITIGATION,
• Ombudsman • Informal ADR • Mediation • Arbitration
Managing Change in The Managing Change in The Franchise NetworkFranchise Network
What Causes Change?
PRIVATE EQUITY DISCOVERS
FRANCHISORS BUY OTHER SYSTEMS:
How To Anticipate How To Anticipate Change in the Change in the
Franchise NetworkFranchise Network
•• Plan contract Plan contract carefully.carefully.
Do not promise what you Do not promise what you may not be able to deliver may not be able to deliver
at a later date.at a later date.
Programs or rights not Programs or rights not included at outset will prove included at outset will prove
difficult to initiate later.difficult to initiate later.
…… but how much is too but how much is too much?much?
Don’t box yourself in economically.
•• All your documents areAll your documents are NOTNOT equal.equal.
Make maximum use of ancillary documents.
Establish objective criteria, or self-
executing mechanisms or
events that eliminate need to take
confrontational position with franchisees.
If certain changes are If certain changes are anticipated during the term anticipated during the term of the agreement, make it of the agreement, make it
clear to the franchisee at the clear to the franchisee at the outset of the relationship.outset of the