differences in forms of franchising · differences in forms of franchising area development, ......
TRANSCRIPT
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Differences in Forms of Franchising Area Development, Subfranchising, &
Area Representation
Presented By: Bret Lowell
DLA Piper US LLP
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Overview
• Forms of Multiple Unit Franchising• Disclosure Issues• Choice of Multiple Unit Techniques• Drawbacks of Multiple Unit Franchising• Benefits of Multiple Unit Franchising
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• Benefits of Single Unit– Franchisee is Easy to Manage and Lead– Franchisee Unlikely to Impact Entire System
• Drawbacks of Single Unit– Slow Growth– Many Franchisees to Work With– Franchisees Less Sophisticated– Franchisees Weaker Financially– Franchisees Costly to Manage and Supervise
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Benefits of Area Development
• Fewer Franchisees In the System• No Need to Approve New Applicants• Large Up Front Fees• Schedule for Development• Each Location has Single Agreement• Franchisees Generally Sophisticated• Reduced Per Unit Support Costs
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Drawbacks of Area Development
• Relying on Financial Resources of One Developer
– Negotiation of Favorable Agreement– Lock-in of Franchise Agreement Terms– Powerful Negotiator– Potential for Loss of Large Market
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Subfranchising (2 party)
FF’’oror
Sub FSub F’’oror
Sub FSub F’’eeee
FA 1 FA 2 FA 3
SFA
Sub FSub F’’eeee Sub FSub F’’eeee
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Subfranchising (3 party)
FF’’oror
Sub FSub F’’ororSFA
SubSubFF’’eeee
SubSubFF’’eeee
SubSubFF’’eeee
SubSubFF’’eeee
FA 1 FA 2 FA 3 FA 4
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Benefits of Subfranchising
• Not Responsible for Day to Day• Large Up Front Fee• Schedule for Unit Openings• Subfranchisor Provides Training, Inspection,
Collections, Etc.• Lower Costs
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Drawbacks of Subfranchising
• Registration of UFOC• Double Disclosure• Virtually No Control Over Unit Franchisees• Level of Performance
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Area Representative
FF’’oror
Area RepArea RepARA ($?)ARA ($?)
FA 1FA 1 FA 2FA 2
FF’’eeeeFF’’eeee
Solic
it * Service
* Not sell; not negotiate
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Franchise Brokerage
FF’’oror
BrokerBrokerFBA
FA 1 FA 2
FF’’eeeeFF’’eeee
Solic
it *
Solicit *
* Not sell; not negotiate
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Benefits of Area Representatives
• Not Relying on Financial Resources of One Area Developer
• Rapid Growth Possible• Retain Control• Area Rep Provides Site Selection, Training,
Field Support• Manageable Registration & Disclosure
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Drawbacks of Area Representatives
• Potential Liability• Less Control Over the Day-to-Day Operations• Broker Issues
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Questions...
• Disclosure to Whom?
• How Many UFOC?
• Which Entity in UFOC?
• Who Handles Registration?
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Questions...
• Disclosure to Whom?• How Many UFOC?• Which Entity in UFOC?• Who Handles Registration?
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Subfranchising (2 party)
FF’’oror
Sub FSub F’’oror
Sub FSub F’’eeee
FA 1 FA 2 FA 3
SFA
Sub FSub F’’eeee Sub FSub F’’eeee
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Questions...
• Disclosure to Whom?• How Many UFOC?• Which Entity in UFOC?• Who Handles Registration?
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Area Representative
FF’’oror
Area RepArea RepARA ($?)ARA ($?)
FA 1FA 1 FA 2FA 2
FF’’eeeeFF’’eeee
Solic
it * Service
* Not sell; not negotiate
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Questions...
• Disclosure to Whom?• How Many UFOC?• Which Entity in UFOC?• Who Handles Registration?
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Franchise Brokerage
FF’’oror
BrokerBrokerFBA
FA 1 FA 2
FF’’eeeeFF’’eeee
Solic
it *
Solicit *
* Not sell; not negotiate
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Disclosure Issues
• Area Development Agreement– Typically Include in Main UFOC– Key Disclosures
• Item 1 Description of the Area Development Opportunity• Item 5 Area Development Fee• Item 12 Territory and Schedule• Item 17 Cross-default to ADA (one-way)• Item 22 Copy of ADA
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Disclosure Issues• Subfranchise Agreements
– Not Practical to Include in Main UFOC– Key Disclosure (to Subfranchisor)
• Item 1 The Franchisor• Item 5 Subfranchise Fee• Item 6 Ongoing Fees (Royalty Split)• Item 11 Franchisor’s Obligations• Item 20 List of Subfranchisor Statistics
– Key Disclosure (to Subfranchisees)• Item 1 Description of Subfranchisor• Item 2 Subfranchisor Information• Item 11 Subfranchisor Responsibilities• Item 21 Subfranchisor Financial Statements
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Disclosure Issues• Area Representative Agreements
– Optional To Include in Main UFOC (If $ paid)• Item 1 Description of the Area Rep Opportunity• Item 5 Initial Fees Paid by Area Rep• Item 7 Initial Investment of Area Rep• Item 9 Franchisee Obligations• Item 11 Franchisor Obligations• Item 12 Territorial; Rights of Area Rep• Item 20 Area Rep Statistics• Item 22 Copy of Area Rep Agreement
– Disclosure to Franchisees• Area Rep as “Broker”
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Conversion from Single-Unit to Multi-Unit
• Overlay of Additional Agreement (ADA, SFA, or ARA)
• Registration and Disclosure• Exceptions for Sales to Existing Franchisees• Then-current F/A May Differ from Existing F/A
– Reconcile in Favor of Old– Reconcile in Favor of New– No Reconciliation
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Resources
• Financial• Personnel• Physical Facilities• Local Credibility• Regional Knowledge• Legal Capability
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Analysis of Multi-Unit Alternatives
ObjectiveObjective Single UnitSingle Unit Area Dev.Area Dev. SubSub--Fran.Fran. Area Rep.Area Rep.
RapidRapid ExpansionExpansion Low Moderate High Moderate
RiskRisk Low Moderate High Moderate
System System ControlControl High Moderate Low High
Cash FlowCash Flow Low Moderate High Moderate
CumulativeCumulative OO OO OO + 1+ 1
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Disadvantages• Financial
– Giving it all away
• Loss of Control (large & powerful/difficult to manage & lead/bargaining power)– Sales – Operations
• Substantial System Impact• Registration/Disclosure• Complex Agreements• Vicarious Liability