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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
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Getting on the Same PageGetting on the Same Page
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Types of Franchises• Product Distribution• Business Format• Conversion Franchising
Tax & Accounting
Truck/Car Rental
Pets
Postal Delivery
Drug Stores/Vitamins
Fast Food
Travel
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EXTRA! EXTRA!
AMENDED FTC RULE GOES INTO EFFECT
JULY 1, 2007
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Benefits of Franchising: Franchisor• Increase capital investment in
system• Rapid system expansion• Permits adequate control
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Benefits of Franchising: Franchisee
• Degree of Independence• Proven Concept• Assistance
– Personnel Training– Operating Standards– Quality Control
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Disadvantages for Franchisors• Some diminution in “control”• Profit per unit vs. return on investment
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Disadvantages for Franchisees• Lack of absolute autonomy• Impermanence of the relationship
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Different Forms of Different Forms of Franchise RelationshipsFranchise Relationships
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The Single Unit Franchise
Most common:Most common:Franchisee owns and operates
one franchised outlet.
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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
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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
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Sub-Franchising
• Two-Party Agreement
• Three-Party Agreement
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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
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EXTRA! EXTRA!
SMALL FRANCHISORS PLUS LARGE
FRANCHISEES: A NEW PHENOMENON?
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Establish a Franchise Establish a Franchise Network With The Right Network With The Right
PeoplePeople
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• Quality of the franchisees will greatly influence network success.
• Granting franchises to the wrong people is a common mistake.
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• Resales
• You have less flexibility to pick your franchisee
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Leads to Prospective Franchisees
• The Internet• Existing Franchisees• Referral Networks
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• If you get leads, respond to them on a timely basis
• Sets the tone for the relationship
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EXTRA! EXTRA!
BROKERS ARE HOT -
SOME SAY TOO HOT
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Geographic Expansion • Radiating circles • Hit major markets
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EXTRA! EXTRA!
PROPERTY COSTS “SKY HIGH”
FRANCHISORS SEEK ALTERNATIVES
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Earnings Claims -- Why aren’t you using them?
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Earnings Claims
• More franchisors using earnings claims• May provide some degree of protection
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Franchise Documents
• Agreements and UFOCs only become relevant if there is a problem
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The key document is the The key document is the operating manual.operating manual.
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Take Advantage of Take Advantage of Franchise Experience and Franchise Experience and
InnovationInnovation
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Communication
• Effective communication• Franchisee opinion of franchisor• Intranets
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Franchisee Advisory Councils & Associations
• Work with advisory council or association to:– Enhance communication– Compensate for communication barriers– Resolve network issues
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EXTRA! EXTRA!
FRANCHISORS & FRANCHISEES
WORK TOGETHER ON LEGISLATION
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Providing Services And Providing Services And Exercising ControlExercising Control
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Restricted Supply Sources
• Are restrictions necessary?• Is franchisor involved, directly or indirectly?
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Sourcing
• If you sell products to franchisees or receive rebates from vendors, provide disclosure
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Resale Programs
• Even if a start-up, resales will pop up• Need policies and procedures
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Financial Services and Guidance
• Franchisor-Lender relationships• Franchisor credit enhancement• SBA financing• Financial guidance
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EXTRA! EXTRA!
TECHNOLOGY INVASION
BROADENS ITS BEACHHEAD
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Exploit Technology and the Internet
• Single vs. Multiple Websites• Advertising Fund Financial Support• Business-to-Consumer eCommerce• Management Software
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Intranets & Extranets
• Enhance network communications• Training programs• Automated ordering from suppliers• E-mail within network
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System Standards
Importance: Avoiding causes of noncompliance• Company outlets
– Training– Communication– Follow through
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DonDon’’t create system t create system standards and then fail to standards and then fail to
check on compliancecheck on compliance
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DonDon’’t ignore your right to t ignore your right to auditaudit
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Vicarious Liability
• Franchisor may be responsible for acts and omissions of franchisees
• More control may mean more risk
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Reducing Risk
• Proper insurance coverage• References to “independently owned and
operated”
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Dispute Resolution
• If you say nothing, you will litigate• Choosing between litigation and arbitration
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EXTRA! EXTRA!
FRANCHISE LAWYERS DEBATE LITIGATION,
ARBITRATION, MEDIATION
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ADR Programs
• Ombudsman• Informal ADR• Mediation• Arbitration
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Managing Change in The Managing Change in The Franchise NetworkFranchise Network
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Example One
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Example Two
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Example Three
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What Causes Change?
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EXTRA! EXTRA!
PRIVATE EQUITY DISCOVERS
FRANCHISING
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EXTRA! EXTRA!
FRANCHISORS BUY OTHER SYSTEMS:
WILL “CONSOLIDATE”
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How To Anticipate How To Anticipate Change in the Change in the
Franchise NetworkFranchise Network
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•• Plan contract Plan contract carefully.carefully.
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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.
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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.
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…… but how much is too but how much is too much?much?
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Don’t box yourself in economically.
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•• All your documents areAll your documents are NOTNOT equal.equal.
Make maximum use of ancillary documents.
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Establish objective criteria, or self-
executing mechanisms or
events that eliminate need to take
confrontational position with franchisees.
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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.
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Limit change that may be Limit change that may be required.required.
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DonDon’’t impose on t impose on franchisee what is not franchisee what is not
uniformly imposed.uniformly imposed.
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Term of Agreement:How to balance?
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Term of Agreement:Term of Agreement:How to balance?How to balance?
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Use appropriate occasions Use appropriate occasions to require franchisee to to require franchisee to
update or improve.update or improve.
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• Preserve right at renewal to require franchisee to –– Sign a current franchise agreement– Upgrade its facility to current standards
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• Make change more palatable for franchisee.
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Enforce the legal obligation Enforce the legal obligation for a franchisee to make a for a franchisee to make a
necessary change.necessary change.
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What if you’re wrong?
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How to create change most effectively by making franchisees your allies
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EXTRA! EXTRA!
OPPORTUNITIES LIE ABROAD
FRANCHISORS SAY
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Questions
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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
