47th annual international franchise association convention ...47th annual international franchise...

1

a program presented bya program presented byDennis E. Wieczorek and Philip F. ZeidmanDennis E. Wieczorek and Philip F. ZeidmanDLA Piper US LLPDLA Piper US LLPFebruary 25, 2007February 25, 2007

47th Annual International Franchise Association Convention47th Annual International Franchise Association ConventionElements of Building a Successful Elements of Building a Successful

Franchise NetworkFranchise Network

2

Getting on the Same PageGetting on the Same Page

2

3

Types of Franchises• Product Distribution• Business Format• Conversion Franchising

Tax & Accounting

Truck/Car Rental

Pets

Postal Delivery

Drug Stores/Vitamins

Fast Food

Travel

4

EXTRA! EXTRA!

AMENDED FTC RULE GOES INTO EFFECT

JULY 1, 2007

5

Benefits of Franchising: Franchisor• Increase capital investment in

system• Rapid system expansion• Permits adequate control

6

Benefits of Franchising: Franchisee

• Degree of Independence• Proven Concept• Assistance

– Personnel Training– Operating Standards– Quality Control

7

Disadvantages for Franchisors• Some diminution in “control”• Profit per unit vs. return on investment

8

Disadvantages for Franchisees• Lack of absolute autonomy• Impermanence of the relationship

9

Different Forms of Different Forms of Franchise RelationshipsFranchise Relationships

10

The Single Unit Franchise

Most common:Most common:Franchisee owns and operates

one franchised outlet.

11

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

12

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

13

Sub-Franchising

• Two-Party Agreement

• Three-Party Agreement

14

Area Representative

• 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

15

EXTRA! EXTRA!

SMALL FRANCHISORS PLUS LARGE

FRANCHISEES: A NEW PHENOMENON?

16

Establish a Franchise Establish a Franchise Network With The Right Network With The Right

PeoplePeople

17

• Quality of the franchisees will greatly influence network success.

• Granting franchises to the wrong people is a common mistake.

18

• Resales

• You have less flexibility to pick your franchisee

19

Leads to Prospective Franchisees

• The Internet• Existing Franchisees• Referral Networks

20

• If you get leads, respond to them on a timely basis

• Sets the tone for the relationship

21

EXTRA! EXTRA!

BROKERS ARE HOT -

SOME SAY TOO HOT

22

Geographic Expansion • Radiating circles • Hit major markets

23

EXTRA! EXTRA!

PROPERTY COSTS “SKY HIGH”

FRANCHISORS SEEK ALTERNATIVES

24

Earnings Claims -- Why aren’t you using them?

25

Earnings Claims

• More franchisors using earnings claims• May provide some degree of protection

26

Franchise Documents

• Agreements and UFOCs only become relevant if there is a problem

27

The key document is the The key document is the operating manual.operating manual.

28

Take Advantage of Take Advantage of Franchise Experience and Franchise Experience and

InnovationInnovation

29

Communication

• Effective communication• Franchisee opinion of franchisor• Intranets

30

Franchisee Advisory Councils & Associations

• Work with advisory council or association to:– Enhance communication– Compensate for communication barriers– Resolve network issues

31

EXTRA! EXTRA!

FRANCHISORS & FRANCHISEES

WORK TOGETHER ON LEGISLATION

32

Providing Services And Providing Services And Exercising ControlExercising Control

33

Restricted Supply Sources

• Are restrictions necessary?• Is franchisor involved, directly or indirectly?

34

Sourcing

• If you sell products to franchisees or receive rebates from vendors, provide disclosure

35

Resale Programs

• Even if a start-up, resales will pop up• Need policies and procedures

36

Financial Services and Guidance

• Franchisor-Lender relationships• Franchisor credit enhancement• SBA financing• Financial guidance

37

EXTRA! EXTRA!

TECHNOLOGY INVASION

BROADENS ITS BEACHHEAD

38

Exploit Technology and the Internet

• Single vs. Multiple Websites• Advertising Fund Financial Support• Business-to-Consumer eCommerce• Management Software

39

Intranets & Extranets

• Enhance network communications• Training programs• Automated ordering from suppliers• E-mail within network

40

System Standards

Importance: Avoiding causes of noncompliance• Company outlets

– Training– Communication– Follow through

41

DonDon’’t create system t create system standards and then fail to standards and then fail to

check on compliancecheck on compliance

42

DonDon’’t ignore your right to t ignore your right to auditaudit

43

Vicarious Liability

• Franchisor may be responsible for acts and omissions of franchisees

• More control may mean more risk

44

Reducing Risk

• Proper insurance coverage• References to “independently owned and

operated”

45

Dispute Resolution

• If you say nothing, you will litigate• Choosing between litigation and arbitration

46

EXTRA! EXTRA!

FRANCHISE LAWYERS DEBATE LITIGATION,

ARBITRATION, MEDIATION

47

ADR Programs

• Ombudsman• Informal ADR• Mediation• Arbitration

48

Managing Change in The Managing Change in The Franchise NetworkFranchise Network

49

Example One

50

Example Two

51

Example Three

52

What Causes Change?

53

EXTRA! EXTRA!

PRIVATE EQUITY DISCOVERS

FRANCHISING

54

EXTRA! EXTRA!

FRANCHISORS BUY OTHER SYSTEMS:

WILL “CONSOLIDATE”

55

56

57

58

How To Anticipate How To Anticipate Change in the Change in the

Franchise NetworkFranchise Network

59

•• Plan contract Plan contract carefully.carefully.

60

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.

61

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.

62

…… but how much is too but how much is too much?much?

63

Don’t box yourself in economically.

64

•• All your documents areAll your documents are NOTNOT equal.equal.

Make maximum use of ancillary documents.

65

Establish objective criteria, or self-

executing mechanisms or

events that eliminate need to take

confrontational position with franchisees.

66

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 relationship.

67

Limit change that may be Limit change that may be required.required.

68

DonDon’’t impose on t impose on franchisee what is not franchisee what is not

uniformly imposed.uniformly imposed.

69

Term of Agreement:How to balance?

70

Term of Agreement:Term of Agreement:How to balance?How to balance?

71

Use appropriate occasions Use appropriate occasions to require franchisee to to require franchisee to

update or improve.update or improve.

72

• Preserve right at renewal to require franchisee to –– Sign a current franchise agreement– Upgrade its facility to current standards

73

• Make change more palatable for franchisee.

74

Enforce the legal obligation Enforce the legal obligation for a franchisee to make a for a franchisee to make a

necessary change.necessary change.

75

What if you’re wrong?

76

How to create change most effectively by making franchisees your allies

77

EXTRA! EXTRA!

OPPORTUNITIES LIE ABROAD

FRANCHISORS SAY

78

Questions

79

a program presented bya program presented byDennis E. Wieczorek and Philip F. ZeidmanDennis E. Wieczorek and Philip F. ZeidmanDLA Piper US LLPDLA Piper US LLPFebruary 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