In 2007, the Federal Trade Commission unveiled its new FTC Franchise Rule.  The FTC granted franchisors the option of converting their Uniform Franchise Offering Circular format over to the new Disclosure Documents format or continuing with the UFOC until July 1, 2008.  This date is fast approaching and with the majority of franchise systems taking advantage of the July 1, 2008 date, the state regulators are going to be inundated with applications.  In order to avoid the backlog this is expected to create, and thus the potential risk of being unable to sell in registration states during the delay, you should make sure your system’s conversion to the new rule is completed as early as possible and submitted to the regulators well before the July 1, 2008 deadline.  We are recommending to our clients that the updated Disclosure Documents be submitted to state regulators no later than April 1, 2008.

In the much discussed 2007 case of Bray v. QFA Royalties, a Federal court held that Quiznos acted in a “retaliatory” and “punitive” manner when it terminated the franchise of the head of an independent association of largely disgruntled Quiznos franchisees.  Quiznos correctly argued that its franchise agreement permitted it to terminate the franchisee under the circumstances.  That is technically what the franchise agreement said, but the court looked beyond the four corners of the contract and examined Quiznos motives and methods.  The lesson for responsible franchise companies is to be careful when enforcing the contract edges close to arbitrary action and retaliation.

 Franchise agreements typically place enormous power in the hands of the franchisor.  There is nothing wrong or unfair about a franchise agreement that reserves powerful rights and remedies to the franchise company.  Any franchisee who has had a customer complain about poor service or bad food at “Your company’s other store down the street”  knows how important it is for the franchisor to have the power to sanction and even terminate poor operators who are hurting the system.

 The key, though, is for the franchisor to make judicious use of its rights and remedies.  We counsel our franchisor clients on how to identify disputes with franchisees before they become big issues.  Regular and candid communication doesn’t solve every problem, but it can keep the differences of opinion civil — and keep them out of court.

Sometimes a franchisee has to be terminated. Before taking that step, though, the franchisor should, first, work hard at trying to help the franchisee fix the problems and, if necessary, carefully document the efforts it makes to resolve the issues.  We work with franchisors on ways to resolve conflict with franchisees. 

Focusing on assisting even troubled franchisees to maximize the value of their investment is the key, and when a franchisor takes its eye off of that simple goal, sometimes trouble ensues.

Too often I see new franchise companies who slap dash their franchise offering together.  It is hard enough to launch a new brand with a well conceived franchise program.  Going to market with a vague or confusing operating system, a weak neighborhood marketing program, inadequate training systems and legal documents not crafted to the business’ needs can be a disaster.  All too often that is what the thinly capitalized franchisor does. 

I believe that this happens, not because the franchisor wants to launch a flawed offering or even because it cannot afford a better conceived program.  I believe it is because new franchisors – usually expert in their own business– are not expert in designing or running a franchise company.  For example running a restaurant successfully requires different skills and experience than running a franchise company.  New franchisors often do not understand how to design a strong franchise offering that fits their particular business.

By helping clients understand how franchise distribution works from the broadest view – “the view from 30,000 feet” – we at franchiselawsource.com help you understand the importance of careful and thorough development of your franchise offering.

The power of the franchise model of distribution is incredible.  We help clients stay focused on the essential reasons for the power of franchising.  Traditional ways to finance the growth of your company would include borrowing from a bank or selling stock to equity investors.  In each of those situations you give up some measure control over your business and invite meddling or demanding “partners” into your company.  Lenders impose covenants, require extensive financial reporting and place liens on your assets.  Stockholders get to vote on who serves on the Board of Directors and who runs the company among other things.  Franchise companies, on the other hand, access their franchisees’ capital without having to share power.  In fact, quite the opposite is the case.  Your franchise company’s growth will be paid for by franchisees investing in their franchise locations, and yet you will be in complete control. 

The unique power of this model of financing growth comes from 1) the absolute control you maintain over your company and 2) the virtually unlimited availability of more franchisees and, hence, more capital.  It is hard to imagine any way that Fred DeLuca could have financed the construction of almost 30,000 Subway restaurants through conventional financing methods.  Instead, by growing his brand with his franchisees’ capital he has kept control of his company, kept it out of debt and grown it beyond his wildest dreams.

We help aspiring franchisors understand that the initial investment in developing a strong franchise offering is more than a quick path to modest expansion.  It is a way to harness enormous capital to expand your business.  Once a smart entrepreneur internalizes this message,  the need to “do it right” in developing the operating system, the marketing, the training and the legal compliance is obvious. I hope that we can help you through the process of developing a franchise offering that will allow you to take advantage of this powerful financing and growth model for your business.

Scott Kern,  Attorney and Founder

franchiselawsource.com

scott@scottkernlaw.com  

One of the leading sources of leads that franchise companies work in their efforts to sell new franchises are so called “lead generation portals.”  These websites with promotions for many companies’ franchise offerings can be daunting to the casual surfer looking for information on franchise investments.  One leading portal has forty franchises advertised on its homepage and and another lists so many franchise companies that it has decided to remove them all from its homepage, listing instead nearly thirty industry categories and about a hundred subcategories on the home page for the visitor to click on.

The visitor to one of these portals may be overwhelmed by the enormous amount of information about franchise offerings, but these sites are generating a lot of leads for franchisors hungry to grow their brands.  They are also a quick way to get information about a franchise you’re interested in buying.

If you are responsible for a franchise development budget in your company, you need to make sure that your ad dollars are spent wisely on the internet.  There are over three hundred sites now touting franchise opportunities on the web.  Where to turn?  Where to spend?

Check out this article by eMaximation, a leader in franchise sales management services, that ranks the top lead generation portals.  Sure, the cost will be higher, but only the high traffic portals will generate the number of leads you need.

Franchise development folks have always said that a gloomy economy bodes well for franchise sales.  Several years ago Terry Hill of the International Franchise Association said “When the economy starts to take a nose dive, we notice a pick-up in what we call leads, people looking for new franchise opportunities.”  Whether it is laid off managers and professionals in need of a job or corporate refugees fed up with working for big organizations, a dipping economy yields ready investors in large numbers.  Explaining why new Subway store openings jumped in a down economy, one exec at Doctors Associates described the new prospects: ”They may be a little disappointed with the corporate world and they might want to take the bull by the horns and go into a business to be their own boss.”  With the sub-prime mortgage debacle in full swing, the housing market in decline and the economy generally uncertain, now may be the time to take advantage of the coming upswing in franchise investments.

Existing franchisors know all about this and are cranking up development plans for 2008.  The huge turnout of industry players and interested visitors expected at Franchise Expo South at the Miami Beach Convention Center January 11-13 is only the beginning of that trend.

Aspiring franchisors have to be aware that the lead time in developing a franchise offering is substantial.  If yo want to franchise your business, operating methods, training materials and marketing plans all have to be systematized and made into deliverable media that franchisees can use.  Legal compliance requires carefully drafted franchise agreements and a very detailed disclosure document.  Some states require registration of disclosure materials.  All of this takes time and money, but the uncertainty in the economy means this is not the time to sit on the sidelines. 

Planning, scheduling and budgeting a project to develop a new franchise offering can be done in just a few weeks.  Now is the time to explore whether your business is one that can ride the coming wave of franchise investment.  Contact us at franchiselawsource.com to discuss how we can teach you about the development process.  A modest investment today can give you a sound understanding of the prospects for using the tremendous leverage of franchising in your business.

We at franchiselawsource.com want to meet you at Franchise Expo South in January.  Don’t miss this premier showcase of the franchise industry.  Whether you are looking to invest in a franchise or you are an existing or aspiring franchisor, you need the information you can discover at this major industry confab. We will be in the Professional Center on the floor of the show at Booth 833-A.  Come by and pick our brains about franchise transactions, regulatory concerns, developing a franchise company and any franchise questions you’re wondering about.

Don’t think that Franchise Expo South is just for potential franchise buyers.  Whatever your interest in franchising — whether you are a supplier to franchise companies, a financier of franchise projects or a business owner thinking about expansion — there will be experts from every segment of the industry in Miami looking to talk with you.

We hope to meet you at Franchise Expo South at the Miami Beach Convention Center January 11-13, 2008.

The last thing many aspiring franchisors think about when assembling a team to develop a franchise offering is industry seasonality.  Scheduling a franchise development project needs to be done well in advance of launching a franchise, and it needs to be done with the optimum launch date in mind.  You don’t want to sell your first ice cream shop franchises in June so that — after training, site selection, leasing and buildout — they are ready to open in January in a snowstorm.

The success of your first classes of franchisees is critical to future franchise sales.  Your earliest dealers will either be your best allies or your worst enemies as you try to grow your franchise system.   Make sure that your timing is right.

Our firm offers aspiring franchisors an economical Franchise Development Planning, Budgeting and Scheduling Process that will quickly educate you about putting a franchise offering together — how it’s done and by whom, how long it takes and how much it costs.  Read more about how we help new franchise companies realize their goals at http://www.scottkernlaw.com/new_franchisor_solutions.html.