Starting Your Own Franchise System
Mitchell J. Kassoff, Esq. (firstname.lastname@example.org 973-762-1776) is an attorney who deals exclusively in the litigation, business and corporate aspects of Franchising and has been engaged in this area in all 50 states for more than 30 years. For complete information about Mr. Kassoff and to read the articles that he has published in Law Journals and other publications see http://legal-franchise.com/curricul. Mr. Kassoff provides complete services for the formation and operation of franchise systems and all other areas of Franchising.
You can reach Mr. Kassoff by email at email@example.com days, nights and weekends. You can also reach Mr. Kassoff by telephone 9 A.M. to 5 P.M. Eastern Time Monday through Friday at (973) 762-1776.
Unlike other attorneys and law firms who engage in many areas of the law, Mr. Kassoff only engages in Franchise Law. Which attorney or law firm would you want to represent you and your interests, an attorney or law firm which splits their interests and attention among many areas of the law or Mr. Kassoff who spends his entire time exclusively on Franchise Law? In addition, unlike franchise companies and many other attorneys, Mr. Kassoff represents both franchisors and franchisees in Court throughout the entire United States. This provides to Mr. Kassoff the current and up to date knowledge and experience to know how to prepare your Franchise documents to give you the maximum protection should you be sued at some time in the future. Mr. Kassoff’s clients include companies who have not yet begun to franchise to publicly traded international franchisors.
In conjunction with franchising businesses, Mr. Kassoff prepares, files, registers and protects a franchisor’s trademarks and copyrights. Mr. Kassoff can file your business as a corporation or LLC in the state of your choice. Since Mr. Kassoff deals exclusively with franchise matters, he can also handle all matters that concern your franchise system of every kind and nature. Mr. Kassoff can also take care of all legal matters of your franchise system, leaving you to be able to concentrate on the business aspects.
Most non-litigation work can be done by Mr. Kassoff on a flat rate basis. This will enable you to know your entire cost before you decide to proceed.
Franchising is an excellent way to increase your profits, much more rapidly than if you expanded on your own. As a franchisor, you will have franchisees, people who own their own business, working for you. Therefore, your franchisees will have every possible incentive to work extremely hard to make their business a success.
There is no legal requirement for a prospective franchisor to have a working store or business that he wishes to franchise.
The advantage of franchising is that the franchisee provides all of the money, the management and takes all the risks. You as the franchisor typically receive $15,000 to $50,000 as an initial franchise fee, plus a continuing royalty, usually in the amount of 10% to 15% percent of the gross income of your franchisee. This allows you to finance the growth of your franchise system through advertising and marketing at the expense of your franchisees. The usual term for a franchise is ten years, providing a steady stream of royalties.
How to Start Your Franchise System
There are two possible methods of starting a franchise system. The first method is to have a Franchise Disclosure Document (formerly called a Uniform Franchise Offering Circular or UFOC) prepared and registered in your home state. This will allow you to sell franchises in the states listed in the next paragraph (Partial Registration). The second method is to have the Franchise Disclosure Document registered to enable you to sell franchises in all fifty states and Washington, D.C. (Full Registration).
Depending on various factors, the approximate states a Partial Registration will cover is Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, Georgia, Idaho, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Vermont, West Virginia, Wyoming and Washington, D.C. Some of these states will require registration as a franchise or business opportunity if a franchisee is provided with estimates, projections or promises as to earnings, income or profits, an agreement to repurchase the franchise, assistance in providing or establishing retail locations or accounts, vending machines, rack machines or other equipment for the sale of goods or services, assurance that there is a market for the goods or services to be sold or other items.
The states that are included in a Partial Registration will vary depending on several factors. These include the case where the franchisor has a federally registered trademark or a large net worth. In both of these cases the number of states that do not require state registration and would therefore be included in the Partial Registration will increase and the number of states that require registration will decrease.
The only advantage of a Partial Registration is that you can begin franchising with a lower initial cost. The problem is that if you are not registered in a state from which someone wants to buy your franchise, you cannot even offer to sell a franchise to this prospective franchisee. The advantage of a Full Registration is that you will be able to sell franchises to whomever contacts you.
If you wish, you can do a Partial Registration plus selected other states. Please note that this will be more expensive in the long run that doing a Full Registration from the start. The reason is quite simple, when a Full Registration is requested an assembly line is made for all of the states, which is far more efficient. You receive the benefit of this efficiency by obtaining a lower cost per state registered.
If you sell one franchise this will, in most cases, cover the cost of a Partial Registration. If you sell two franchises this will, in most cases, cover the cost of a Full Registration. In most cases, the sale of the next franchise will put you in a profit position as to the cost of franchising. For both cases, the calculation is over the life of a franchise. If you do not feel that you can sell at least two franchises, then you should not consider franchising your business.
Prior to the advent of the Internet, franchises were typically sold first locally, then regionally and then nationally. With the use of the Internet being virtually universal, at very little cost you can set up an Internet web page (or simply add a button to your present web page stating to click it if the viewer wishes to purchase a franchise) showing the benefits of someone purchasing a franchise from you. Therefore, your receipt of inquiries for the purchase of a franchise will emanate from the entire country. An analysis of this data shows the importance of a Full Registration to avoid the forfeit of sales of your franchise and the more rapid expansion of your franchise system.
In fact, while a slow, careful and conservative approach in limiting your franchise registration to the Partial Registration states might be prudent in many areas of business, paradoxically in franchising your business it is actually a very risky method of operation. Quite simply, many (if not most) of your potential franchisees are in the very states (which constitute far more than half of the population of the United States) in which you will not be able to sell franchises. This will result in you irrevocably losing revenue that you would have earned had you been able to sell franchises in these states.
You should note that there is a long lead time to have all of the registrations of the various states accepted. This can range from weeks to months. The time is measured from when you have provided all necessary information, executed all necessary filing forms, all necessary documents and they have been filed with the appropriate state agencies. This lead time is a factor to consider as to whether you should immediately proceed with a Full or Partial Registration. The problem arises when you receive a call from a prospective franchisee from a state in which you are not registered to sell franchises. Even if your registration documents are immediately filed with that state, by the time the government acts and your registration is approved you will have lost that franchise sale. Considering that the sale of that one franchise would most likely have financed the difference between a Full and Partial Registration, the cost of the Full Registration is not as great as it might seem and is much more cost effective.
After considering the information stated above, Mr. Kassoff invariably receives the question from a prospective franchisor should I do a Full or Partial Registration. Based upon the information that you have read, it should be clear that a Full Registration would be the smarter alternative for you to maximize your profits.
The procedure to start your franchise system is that you inform Mr. Kassoff of your concept of your proposed franchise system. Mr. Kassoff then prepares a contract based on your ideas using the knowledge that Mr. Kassoff has obtained from what has been successful for other franchisors. You will receive a proposed franchise agreement for your review within ten business days from the time Mr. Kassoff has received the information that he has requested from you concerning the contract. After you approve the contract, you will receive a proposed disclosure within ten business days from the time Mr. Kassoff receives the information that he has requested from you concerning the disclosure. You will receive all information by e-mail. You will review the documents and send your comments, additions and deletions to Mr. Kassoff. You are entitled to any number of drafts until you are completely satisfied with the contract. Since the work is done on a flat rate basis, you can be certain that you receive exactly what you want without worrying about the time that Mr. Kassoff is spending on your work.
In many cases (if you are located in a non-registration state) you will receive the Franchise Disclosure Document and can begin franchising within three weeks from the time that Mr. Kassoff receives the information that he requests from you. If you are in a registration state, this will depend on how long it takes the state employees to process the request, which is typically a few months for most states.
As to registration, it is Mr. Kassoff’s obligation to have the state accept your registration. If for some reason a state does not accept the initial submission, Mr. Kassoff will make all changes required until the registration is accepted. Your flat fee covers all of Mr. Kassoff’s work until each state accepts your registration. By working in this method, all the risk is mine to insure that your registration is accepted.
Unlike many attorneys and others who deal with franchising, Mr. Kassoff does not have any hidden or extra charges. What most people fear when working with attorneys is that when billed on an hourly basis they (a) do not know how much they will pay and (b) they are afraid every time they communicate with an attorney it will cost them money. Mr. Kassoff’s Flat Rate Franchise Disclosure Document Fee includes everything to have a Franchise Disclosure Document prepared and registered in the states that you specify.
Please note that there is a long lead time to have all of the registrations accepted. This can range from weeks to months. The time is measured from when you have provided all necessary information and executed all necessary filing forms. Based on this lead time it is suggested that if you are serious about franchising you consider beginning the registration process as soon as possible.
Mr. Kassoff knows what has and what has not worked based on the more than 25 years that he has been franchising companies. This information and experience is used for your benefit to maximize your profits.
In addition, unlike franchise companies and some other attorneys, Mr. Kassoff does not provide cookie cutter franchise documents. Each document is designed for your particular business. Consider if you would like a young paralegal making decisions about your entire future or an attorney with more than 20 years experience. Finally, would you like some paralegal advising you as to all of the complex legal questions that you will incur throughout the years, or an attorney who actually litigates these matters in Court?
Legal Fee to Start Your Franchise System
Multiple drafts of the Franchise Agreement and the Disclosure Statement will be prepared and sent by e-mail to you until you are completely satisfied with their format and contents. Only then will the payment for these documents will become due. The legal fee for the Partial Registration is $100,000, plus any applicable filing fees, reproduction costs and FedEx charges (Disbursements). The cost for the Full Registration $150,000, plus Disbursements. These fees also include answering all of your questions regarding franchising by e-mail for the calendar year in which the documents are prepared. This is quite important since it will be used by you to inquire as to all matters concerning franchising.
For your information, the fee for a large law firm to perform this service is more than double Mr. Kassoff’s fee. Since Mr. Kassoff’s overhead is far less than a large law firm, he can perform higher quality services at a lower legal fee. You also have the knowledge that Mr. Kassoff is personally performing your work for you, not some clerk or newly minted attorney.
There is an old saying that you get what you pay for. The paperwork is only a part of the services that Mr. Kassoff provides. An important part of the services provided by Mr. Kassoff is the ongoing assistance on a real-time basis to insure that you are protected from litigation to the maximum extent possible. This assistance is of a significant benefit, which greatly amplifies the value of Mr. Kassoff’s services.
Once your Franchise Disclosure Document is prepared, to sign up a franchisee all you need to do is to fill in the franchisee’s name and address at the beginning of the Franchise Agreement and have him sign on the last page. Therefore, it is cost free to sign up each additional franchisee.
You should note that the sale of only one franchise will (in many cases) pay the entire legal fee over the term of the franchisee’s contract with you.
If you e-mail (firstname.lastname@example.org or telephone (973-762-1776, Monday through Friday 9:00 A.M. to 5:00 P.M. Eastern Time) Mr. Kassoff any questions that you have regarding franchising will be answered.
There is no charge if you wish to discuss your franchising concept with Mr. Kassoff by telephone.
You should be advised that due to Mr. Kassoff’s nationwide franchise law practice he does not physically meet with 90% of his clients. In these days of e-mail, faxing and Federal Express it is simply not necessary. However, should you desire a meeting it can be easily arranged.
If you wish to meet with Mr. Kassoff at his office or your office this can be arranged.
If you wish, you can meet with Mr. Kassoff at the hotel located on the grounds of Newark Liberty International Airport. This would enable you to fly to the airport, meet with Mr. Kassoff and then fly back to your location.
Legal Requirements to Franchise
Many people unsuccessfully attempt to avoid the franchise laws by stating that they are selling licenses, dealerships or distributorships. Since there are steep legal penalties for the failure to follow the franchising laws, this is both a dangerous and expensive proposition that is self-defeating. This is especially true in many cases since the sale of one franchise can pay for the cost of a franchise registration, while the cost of defending and possibly paying the penalty for the failure to register as a franchisor will in many cases be a multiple of this amount. It is therefore Mr. Kassoff’s recommendation that you do not attempt to circumvent the law by not complying with the franchise laws and concentrate on selling franchises and profiting from the sale of your business concepts.
To give an example of one state’s law, the following is a quotation from the New York statute so you can see the definition of a franchise in New York to enable you to make your own determination. You will note that New York General Business Law §681.1.3 (a) and (b) [shown below] cover most business schemes of selling licenses, dealerships or distributorships. Please note that this is just one example of the numerous federal and state laws and regulations that regulate franchising.
In New York, Article 33, Section 681.1.3 of the General Business Law states that a franchise means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:
(a) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor and the franchisee is required to pay, directly or indirectly, a franchise fee, or
(b) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate and the franchisee is required to pay, directly or indirectly, a franchise fee.
Section 681.1.7 states that a Franchise fee means any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay directly or indirectly for the right to enter into a business under a franchise agreement or otherwise sell, resell or distribute goods, services, or franchises under such an agreement, including, but not limited to, any such payment for goods or services.
Section 681.1.18 states In any proceeding under this article, the burden of proving an exemption or an exception from a definition is upon the person claiming it.
Franchise Documentation Required
Before you are allowed to sell a franchise you are required to have a Franchise Disclosure Document prepared. This is a package conforming to federal and state laws that contains numerous specific disclosures regarding you and your company’s history and operations, financial statements and your Franchise Agreement. In addition, the Franchise Disclosure Document must be registered in many states prior to selling your franchise.
You are not permitted to offer or sell a franchise without first taking the steps stated above and then giving a Franchise Disclosure Document to a prospective franchisee prior to having him sign any documentation or taking any money from him. If you fail to follow these steps, you are subject to serious financial liability.
Your Franchise Agreement will specify your concepts, methods of doing business, what you offer the franchisee and what the franchisee is obligated to perform. Naturally, it will also state the upfront franchise fee and the percentage of the gross sales that your franchisee must pay to you.
In addition to receiving money from your franchisees, you can receive a percentage of gross sales of your franchisees for advertising purposes. In effect, your franchisees will be paying for you to expand your franchise system.
Information Regarding Franchising Companies and Consultants
It should be noted that a significant part of Mr. Kassoff’s law practice is suing and defending franchisors. When he prepares the Franchise Disclosure Document for his clients he utilizes this knowledge to minimize the legal risks of his franchisors. This is something that no corporate attorney, franchise company or franchise consultant can do.
With the Internet you will find that by placing a button on your Web site Click here if you are interested in purchasing a franchise that in many cases prospective franchisees will contact you. This is obviously done at little cost to you and is a most effective way of obtaining franchisees in many cases. Based upon this, in many cases you will find that you have no need of Franchise Consultants, Advertising Consultants, Franchise Companies or any similar type of business. The amount of money that you will save by not having to use these companies will pay for a Full Registration, effectively making the legal cost to franchise free.
Mr. Kassoff does not make disparaging comments about anyone else that provides franchise services. The following is to respond to what some franchising companies say.
Franchise companies state that they provide business and marketing advice. You should note that your work is not done by an attorney who specializes in franchise law, it is done by a clerk. Franchise companies state that franchise attorneys do not provide business and marketing advice. This is true regarding many franchise attorneys. However, since Mr. Kassoff has been involved with franchising since 1979, this does not apply to the services that Mr. Kassoff provides. Mr. Kassoff’s services do include marketing and other business considerations into the documents and communications with you. This includes the business and marketing ideas that Mr. Kassoff has found have worked throughout the years, as well as avoiding ideas that have not worked.
Franchise companies do not provide appropriate, timely and crucial legal advice as to how to keep you and your franchise system out of trouble and/or litigation. This is crucial since franchise law is constantly evolving, which requires continuous monitoring by a franchise attorney expert. Franchise companies cannot do this for the simple reason that the people who work with you are clerks, and not attorneys. Therefore, you are basing your entire financial future on the work of clerks who have no formal legal training.
Franchise companies provide legal documents (on a cookie cutter basis), not documents or legal advice crafted specifically for you and your franchise system. To provide the proper franchising protection for your company goes far beyond the preparation of the documents (which Mr. Kassoff prepares specially and uniquely for you), since this is only the beginning of what must be done. A franchise attorney watches the legal rules, regulations, statutes, laws and cases on a month-to-month basis to protect you and your business. Franchise companies cannot do this since they do not employ attorneys to work on your matters. Just losing one case in Court because your work was not kept current with the changes in the law could cost you hundreds of thousands of dollars.
Franchise companies will tell you that they do both the legal work (which is not done by attorneys) and marketing (which is done the same way for each customer by clerks). You would be far smarter to have an attorney do your legal work and at the beginning engage in your own marketing to save a considerable amount of money. Mr. Kassoff will inform you how you can market your franchise at minimal cost. After time passes, then it might be appropriate to have someone handle your marketing. However, in many cases, you will never need an outsider to handle your marketing, which will greatly increase your profits. This is especially true in the Internet age where prospective franchisees will find you on the Internet. By proceeding in this manner you maximize your legal protection and marketing resources.
Some franchise companies will not even tell you what they will charge you to franchise your company. They might tell you how much they charge for a legal drafting fee; however, they will not tell you what the other costs are. If you want to find out how much you will have to pay them to franchise your company you have to pay them to go to their seminar. Mr. Kassoff’s charges are clearly stated herein.
Some franchising companies will charge a fee in excess of $100,000 (plus disbursements which can exceed $25,000) to do a full registration and the services that Mr. Kassoff provides. After the franchising company drafts the franchise agreement it will ask you to submit it to your attorney for his review and approval. This means that you will have to locate and retain an attorney at your cost to review the franchising company’s work. Obviously, this is not the case for the services that Mr. Kassoff provides.
If you want clerks to determine your future then this is your choice. Since the law on franchising is changing on a monthly basis, if you do not have an attorney who specializes in this work you can end up in serious trouble that can not only cost you hundreds of thousands of dollars, but might even jeopardize your entire franchise system. Quite simply, if you want someone who is a legal expert in both the corporate and litigation aspects of franchising, a franchise attorney, not a franchise company, will best support your needs and maximize your profits.
Should You Franchise Your Business?
If you are reading this, it took time and a lot of hard work but you are finally beginning to reap the rewards from the business you started on your own. The brand name you coined is now recognizable. Because of the success of your first location, you may have opened branches in other locations. You have established a degree of loyalty among your customers, who come back to your place of business on a regular basis. Some of them have even inquired if they can become a franchisee of your business.
OTHER PEOPLE’S MONEY, PEOPLE and TIME
The main advantage of franchising for entrepreneurs is that it allows you to use other people’s time, other people’s people and other people’s money in expanding your business.
MONEY. Instead of continuing to expand your business by investing money from your operations or by borrowing from the bank, you can expand using franchisees capital. Franchisees put up most, if not all the money required to open a franchised outlet.
PEOPLE. Franchisees make the best managers of outlets. They have much more at stake than a professional manager because they’ve invested their money, maybe their life-savings, into the business. Franchisees are a motivated lot.
TIME. Franchising allows you to expand quickly. Since the entrepreneur is not limited by how much money he has to expand with, or who will manage the additional outlet, he can expand very rapidly. This is very important specially if the product or service is new and you need to open many outlets in order to establish the market lead (just look at the pearl shake phenomenon).
Other people’s Money, People and Time are the main advantages. However, it does not stop there.
When you have a network of outlets franchisee- and company-owned, your collective buying power increases. Because of the buying volume under your disposition, you can get more discounts, rebates and supplier contributions (to your advertising budget, for example). These savings can in turn be shared with your franchisees.
Since franchisees contribute to a system-wide advertising fund, the advertising financial burden is shared among outlets. The Royalty you collect also contribute to expenses you used to shoulder on your own back when you only had company-owned outlets. For example, improving your product through Research & Development does not have to be an expensive proposition.
When done properly, franchising can result in tremendous profits! There are many possible sources of revenue. However, these revenue streams must continue to result in a win-win formula for you and your franchisees.
Once you have mastered the skill of running a franchise operation, you can continue your expansion overseas (watch out, McDonald’s!).
To summarize, franchising has grown because it results in many benefits to those who have used it properly.
Some Questions Regarding Franchising
Q: Why should a company consider franchising its business?
A: These are some of the advantages of franchising:
- Fast expansion and access to broad, new markets.
- Development is accomplished primarily using the capital of others, the franchisees.
- Risk of business failure is spread and shared with franchisees that own and invest in the franchise.
- Make extensive use of advertising to increase customer recognition of your product or service, with the advertising paid for by franchisees rather than your company.
- Take advantage of a top quality pool of talented people who want to own their own businesses and are not available as employees.
- Local owners are recognized as more motivated and efficient than employees and often generate greater revenues.
- In relation to the potential financial benefits, the outlay to establish a franchise program is not substantial.
- Frequently, a franchise produces substantial revenues in relationship to the services performed for franchisees.
- Most franchisees have long-term contracts and have made major investments. They are in the business for the long haul, which adds stability to the franchisor/franchisee relationship.
A: Will my business succeed as a franchise?
Q: Of course, there is no simple, foolproof formula. However, based on substantial experience dealing with companies large and small, Mr. Kassoff can suggest some generally applicable answers.
The 5 Factors for Franchising Success
Certain factors are present repeatedly in businesses that succeed in franchising. Although no company should expect to have all of these factors, the more you possess, the greater your chances of success. Can your business succeed in franchising? Here are the 5 factors for franchising success:
- A Disorganized Industry, Dominated by Mom-and-Pop Shops
If your industry is relatively untouched by centralized decision making and is the domain of small, independent operators, then you have a distinct advantage. Many of the giants of franchising, such as McDonald’s, AAMCO, Holiday Inn and 7-11, provided cohesion and organization to just such industries.
- Simplicity of Concept
In franchising, novices must quickly learn to operate an unfamiliar business system. The easier that system is to learn and implement, the better the odds for both franchisor and franchisee success.
- Is It a Bicycle-Built-For-Two?
Franchisees require one thing above all else – the ability to make money. Can your business give them this opportunity? Is it profitable enough for both you and the franchisee to share in the wealth? These are basic questions in the franchise success formula.
- Reasonable Capital Investment Requirements
The initial investment requirements must be reasonable in order not to strap new franchisees for working capital. Remember, franchisees have to finance the business start-up plus a few months expenses while the business is getting established. The franchisee’s initial investment must be reasonable in light of the necessities of the business and its profit potential.
- A Service Business
Service businesses offer franchisors many advantages that businesses in other sectors of the economy do not possess. They often require a modest capital investment to establish, maintain and provide the degree of adaptability that franchisors often need to succeed in today’s turbulent business environment. Many successful franchises are therefore in the service sector.
Q: What are the Characteristics of the Franchisable Business?
A: 1). The Market Will Accept Its Product or Service.
The franchise either will offer new products, better versions of old standards, or will develop new formats or strategies for the sale of established products or services. Overall, there must be a market for the product or service.
2). There Must Be a Prototype.
Most successful franchises start with a prototype, or model unit upon which subsequent ones are based. They are invaluable in establishing the legitimacy and profitability of your business and also serve as the experimental laboratory in which the business is developed and refined.
3). The Business Can Be Detailed.
Uniformity is critical to franchise success. Standardized operation increases efficiency and builds a single, easily identifiable image with which consumers can relate. In order to accomplish this, detailing of the business is a necessity.
4). You Must Be Able to Train Franchisees in a Short Period of Time
Education is time consuming and labor intensive and most franchisees cannot spare a lengthy time away from income-producing activities. To be successful, you need to train franchisees properly and get them into the field as quickly as is prudently possible.
5). You Must Be Able to Service Your Franchisees.
In order to develop a successful network, you as the franchisor must provide a variety of services. Therefore, in order to franchise, you must be willing and able to do this.
Q: Will you enjoy franchising?
A: Here are nine questions to ask yourself:
1. Do you work well with others?
One of the greatest skills you will need to succeed in franchising is the ability to work effectively with other people.
2. Can you accept and manage risk?
To franchise, you invest time and money in an endeavor which has an element of risk. You must be able to understand the nature of the risk and to manage it.
3. Are you single-minded?
The ability to stay the course and commit to the long term is a tremendous advantage in business and particularly in franchising, which is a long and involved process. The determined and focused franchisor is often the successful one.
4. Do you have a strong ego?
You must believe in your dream and have a confident personality in order to build enthusiasm and interest in others. Franchising is a high profile undertaking.
5. Are you a good salesman?
Salesmanship is critical to franchise success. After all, growth depends upon finding prospects and then selling them your business.
6. Are you a good communicator?
So much of franchising involves communication that a system that does not facilitate the free exchange of information is doomed to failure.
7. Are you an entrepreneur?
An entrepreneur sees potential where others see problems and opportunity where others see only obstacles. The entrepreneur identifies real needs in the market and commits the necessary effort to fill these openings.
8. Are you hard working?
Getting a franchise program off the ground is a significant undertaking. It takes time and effort, which translates into work.
9. Are you adaptable?
The ability to adapt to constantly changing circumstances is a necessity in a multi-faceted area such as franchising.
Developing the Franchise Package
While many fundamentals of most franchise systems are similar, the differences in the franchise packages are as varied as the industries they represent. However, certain factors are common to all franchise packages.
Franchisee qualifications. Who is qualified to apply for a franchise? Each franchisor should have set criteria for franchisees. Having this list upfront will help an investor weed out franchises that do not match his qualifications. Take note though that qualifying for a franchise is not about the money. It is more about building a long-term relationship with another entrepreneur and as such, characteristics like integrity, passion for work, dynamism will come into play. In the case of corporations applying for a franchise; it is good for a franchisor to meet all partners, even the silent ones to ensure a smooth working relationship.
Franchise agreement. The most important document in the package is the franchise agreement, for it will define the scope of the licensing, allowable use of trade or service mark, the business format, the responsibilities of both franchisor and franchisee, the policies of the company and the duration of the contract.
This document will also bear the signatures of both franchisor and franchisee, signifying their agreement in entering into the partnership.
Please note that the use of the franchisor’s brand name and logo (service mark) is the main point of acquiring a franchise. Thus, it is key that the franchisor has them registered to his name and is known as the undisputed owner of the brand/trade/service marks.
The operations manual. The operations manual should contain in detail the complete process for conducting the franchised business. As part of the franchise agreement, it should specify the manner in which the business must be operated and specify which tasks in the business’ operations are to be handled by franchisees and which are responsibilities of the franchisor. Procedures for reporting, recruitment, staff training and administration to be used and followed uniformly by all franchisees should be included in this manual, as well as information tackled during the training of the franchisee management and staff.
Pre-opening support. Franchisees, as management trainees of the business, will rely heavily on the expertise and guidance of the franchisor in setting up and opening the franchise. As such, the franchisor has to be clear as to how he intends to train and assist the franchisee in finding a suitable site, looking over the leasing agreement, constructing the franchise, training the staff, handling a soft opening and operating the franchise. Apart from stating the activities he will engage in during pre-opening, the franchisor must give a time frame upon which the progress of the franchisee franchise may be based.
Marketing plan. Franchisees expect the franchisor to have a range of marketing materials and activities such as advertising, in-store promotions and PR planned to help maintain interest in the brand. Since a marketing support fund (MSF) is contributed by all franchisees in the network from their gross sales, it must be apparent to them that they will enjoy significant benefits in comparison with independent competitors.
Ongoing support. Franchising is a long-term relationship and as such it is important that the franchise package include ongoing support in franchise operations, training, human resources, etc. Ongoing support should include venues for discussing franchisee concerns such as regular meetings with the franchisor, as well as a dedicated franchisee monitoring team.
Territorial protection. With regards to franchisees locations, the franchisor must be clear as to the boundaries of area of operations for each franchise so that their franchisees would not be put in a position where they are forced to compete among themselves. The borders of each area or territory should be specified in the franchise package. The franchisor must assign exclusive rights to a particular territory within which no other franchisee in the network may infringe. It is also possible that the franchisee will not be assigned an exclusive territory.
Franchisee benefits. The franchise package should likewise offer the investor the advantages of being part of this particular franchise system. Will they enjoy special discounts from suppliers? Will they enjoy some prestige or recognition for being part of your brand’s network of franchises? Will they really enjoy more time for themselves? Will they benefit from continuous theoretical and practical training from the franchisor? Such benefits can often influence emotions or convince shrewd minds, so it is important not to leave these out of the franchise offer.
Time frame. It is in the best interest of both parties that a time frame for the franchise process be laid out at the beginning. In franchising as in most other things, haste often makes waste, so it is better to stick to a slow but sure pace when carrying out the franchise application process. For first time franchisors, patience is not only a virtue; it could very well be a business saver. Take time to pick out and develop the first franchisee as this decision could often make or break the venture.
Do not be greedy and keep accepting applications without qualifying your franchisees. Remember that you have a brand name and reputation to protect.
Based on the foregoing, begin to formulate your franchise package. Remember that the key is to give investors evidence of their opportunity to make a decent living while enjoying the perks of a turnkey business as well as camaraderie and long-term support from the franchisor.
Why Are Prospective Franchisees Attracted to a Franchise?
One of the universal questions we all ask in the franchise business is, “Why are prospective franchisees attracted to a franchise.” The obvious follow-up question is, “How can we attract more and better quality franchisees to our system.”
New franchisees are attracted to franchising for a number of reasons. Though these reasons vary from person to person, we’ve learned over the past 20 years that most investors are attracted for one or more of the following:
Many prospective franchisees are driven by the frustration they’ve felt in past employment situations where they didn’t have enough control of their work environment to influence results in the manner they desired. Perhaps they had a micro-managing boss, a parent corporation that wouldn’t listen, or something comparable. In any case, they are drawn to the idea of being their own boss, having the final say in relation to business decisions, and being able to accept either the credit or the responsibility for whatever outcome their business produces.
In the past 15 years, there has been an increasing trend in large corporations to displace more experienced managers in favor of less experienced (and therefore less expensive) workers. This dynamic has created a pool of experienced managers in the 45 to 60 year-old age bracket who have found it quite difficult to gain employment comparable to what they had before. In many cases they cannot afford to retire and need to create a replacement income for a period of time. More and more, these experienced managers are being attracted to franchising as a vehicle to accomplish this goal without the fear of having to go through another down-sizing again in the future.
Another major attraction for many prospective franchisees is related to lifestyle issues. We see a steady stream of potential investors who talk about their desire to reduce business travel, job-related stress and the number of hours they work per week. They often also want to find businesses with down times at certain points in the year so they can take more time off with their families or for other leisure activities. The advantage of franchising to these people is that there are so many options to choose from they are undoubtedly able to find an opportunity that matches their desires.
Investors aren’t buying a business, they are buying a result
Wealth Creation Goals
Many prospective franchisees have figured out that though their work efforts may be creating a significant amount of wealth, in most cases they are not sharing directly in the wealth they are creating. They will put in their 40-plus years and then retire on whatever they’ve managed to save plus Social Security. Many investors are attracted to franchising because they understand that their efforts have the potential to create significant amounts of wealth and they will be the ones who own the wealth that is realized when it comes time to sell the business they’ve built.
Though there are other reasons that an investor might be attracted to any given franchise opportunity, one or more of these four reasons will almost always be present in the prospective franchisees your company is dealing with. In order to best answer the second question posed above, “How can we attract more and better quality franchisees to our system,” it is necessary to seek some additional information from the investor and have strong discipline in your franchisee recruiting process.
In order to make your franchise more attractive, always start by asking a prospect the reasons that they’re interested in your franchise opportunity. It could be one or more of the reasons mentioned above or perhaps they have an entirely different motivation for wanting to become a franchisee. In any case, you need to know if you’re going to make your company more attractive to them.
Spend some time exploring in detail their motivation for wanting to become a franchisee. If it is not possible for them to achieve whatever their goal is through your opportunity, the time to determine this is early on so you won’t waste time on a prospect who is never going to be happy as a franchisee in your system.
Tailor Your Presentations
Assuming they can meet their goals through your franchise opportunity, make sure to stress whatever is most important to the investor during your conversations in the investigation and research phase with this prospect. In other words, if they are very focused on the economic need to get something going soon and the wealth creation aspects of owning their own business, but don’t seem to care at all about lifestyle issues, tailor your presentations accordingly.
You’ll be showing you care about what’s most important to them and that will make your opportunity more attractive than someone else’s who is not as attuned to the priorities of the prospect. Never forget that investors aren’t buying a business, they are buying a result that they want in their life, so focus on that result if you want to attract them.
The answer to getting better-qualified, new franchisees in your system is easy to state but harder to accomplish for many franchisors. The answer is to have the discipline to determine the characteristics that define an excellent new franchisee for your system and then don’t accept any candidate unless they meet the definition completely.
This starts with financial qualifications such as net worth and liquidity, but often goes into a number of other characteristics involving personality, skills, attitudes and values. Many franchisors, especially fairly new ones, think that they have to take anyone willing to become a franchisee in order to produce growth.
If you’re in this frame of mind, ask other experienced franchisors. Most have had to learn the hard way that a new franchisee who is unqualified or the wrong fit for a system is a nightmare far worse than simply having no new franchisee. Set your standards and you’ll be a lot happier and more successful in the long run.
The 10 Commandments of Franchise Sales
Everyone in the franchisor’s organization must understand the legal do’s and don’ts of franchise development.
Every successful franchise system has built its foundation with several key components. One of the essential building blocks is a franchise development program that effectively finds and then convinces high-quality franchisees to join the system in a manner that meets the company’s growth objectives without violating the franchise sales laws.
Very few successful franchisors blame the franchise laws for any failure to meet their franchise sales goals. Understanding what you can and can’t say from a legal perspective simply is one part of the franchise sales process. The franchisor and franchise development professionals who know the legal aspects of franchise sales are much better positioned to get the job done with remarkable results.
Those franchisors or development personnel who don’t understand or disregard the franchise laws are headed for tough times. Even if they meet their development goals, their foundation is cracked and likely will crumble at some point with potentially devastating consequences.
This briefly addresses several of the important legal issues that commonly arise in the franchise sales process. I refer to them as the 10 Commandments of Franchise Sales. If you understand them, embrace them and live by them, you will improve your chances for building a successful franchise system.
1. Thou shalt deliver a Franchise Disclosure Document at the earliest of the first personal meeting or 10 business days prior to signing an agreement or receiving consideration.
The Federal Trade Commission Rule defines a personal meeting as one between a franchisor and a prospective franchisee which is held for the purpose of discussing the possible sale of a franchise. The purpose of the meeting can be determined by considering the following factors: who initiates the meeting; are fees and initial investment expenses discussed; is any earnings claim made to the prospect. Telephone, mail or e-mail communications do not qualify as a personal meeting.
Franchisors often wonder if they need to disclose people they meet at a trade show. No one hands out a Franchise Disclosure Document to each person who stops at their booth for the typical introductory conversation. However, if you arrange for a follow-up meeting over a cup of coffee or a more in-depth presentation in a separate meeting room, then you should treat this as a personal meeting and deliver a Franchise Disclosure Document. Also, a franchisor’s tradeshow booth or promotional hand-outs must not include any type of earnings claim, as the FTC Rule defines that as a triggering event for disclosure.
Notably, the proposed revisions to the FTC Rule would eliminate the first personal meeting requirement and simply require delivery of a Franchise Disclosure Document at least 14 days before signing an agreement or receiving consideration.
2. Thou shalt not offer or sell a franchise in a registration state without being registered.
Many franchisors want to jump the gun on responding to inquiries by sending out promotional materials or a Franchise Disclosure Document to any prospect regardless of whether the franchisor is registered in the state where the prospect resides or wants to locate the franchised business. A franchisor must work with its franchise counsel to understand which of the 14 registration states may be off-limits because the franchisor has not registered with the state. The franchisor also must know if an isolated sale exemption is available because certain states will allow an isolated offer or sale prior to registration with the state. Further, because state laws are triggered with an offer, not just the sale, the franchisor’s Web site should include disclaimer language that explains that communications on the Web site are not directed to residents of any states where the franchisor is not registered.
3. Thou shalt not make any statements contrary to information disclosed in the Franchise Disclosure Document.
This commandment sounds simple. Yet it is the easiest one to violate if a franchisor does not insist that its personnel know and understand the information disclosed in the Franchise Disclosure Document. In order to accomplish this objective, the franchisor must coordinate regular meetings of its personnel to discuss the Franchise Disclosure Document and its contents, to discuss how to respond to prospects frequently asked questions, and to insist that individuals talk only about what they are qualified to discuss you don’t want your marketing representative discussing product distribution/supplier issues during a Discovery Day.
4. Thou shalt not make any earnings claim that is not contained in the Franchise Disclosure Document.
Illegal earnings claims probably are alleged in franchisee lawsuits more than any other allegation. In order to avoid these allegations, the franchisor and all of its personnel and agents must understand that an earnings claim is defined as any information given to a prospect from which a specific level or range of actual or potential sales, costs, income or profit from franchised or non-franchised units may be easily ascertained. In effect, if you don’t make an Item 19 earnings claim, you can’t provide any financial information to a prospect. Those franchisors who do not make an earnings claim generally encourage prospects to talk to existing franchisees. If this is the franchisor’s practice, then it is absolutely critical that the franchisor’s personnel understand they can’t assist or review a prospect’s pro forma and they can’t refer prospects to any company publication that contains an earnings claim.
Most industry statistics indicate that approximately 30 percent of franchisors include an Item 19 earnings claim in their Franchise Disclosure Document. Although no franchisor should make an earnings claim believing that it will eliminate legal liability, each franchisor should carefully consider, with assistance from legal counsel, whether an earnings claim would assist them in the franchise sales process.
In many instances an earnings claim provides credibility with prospects, it responds to one of the most important questions a prospect will ask during the sales process and it can assist the prospect with its pro forma and financing due diligence. Also, each franchisor should understand that its earnings claim can be customized to fit their business. Some claims include average sales only; others will be based on sales and certain key expenses. Some claims will be based on franchised units; others will include company and franchised units. The key is that there is no single format, provided the franchisor discloses all factual bases, material assumptions and otherwise complies with the Item 19 requirements.
5. Thou shalt not seek to limit or restrict the current or former franchisees with whom a prospect consults.
This commandment has become more complicated in recent years due to the rigorous franchisee validation process that many franchisors use. I simply used to say that a franchisor should not direct a prospect to its top performing franchisees as a way to avoid making an earnings claim and lead the prospect to believe that the top performers were representative of the franchise system overall.
Recently, more franchisors are scheduling validation conference calls where prospects can talk to existing franchisees about the franchisor, the franchise system and the franchise opportunity. The purposes for this process can be legitimate, but franchisors must exercise care in the mechanics and should discuss the relevant pressure points with its franchise counsel. For example, a franchisor should not arm prospects with a list of questions to ask during the call and then provide the existing franchisees with the responses to the questions. Further, the franchisor should not participate in or facilitate any earnings claim discussions during the call.
6. Thou shalt use smart communications during the sales process.
I spend considerable time with franchisors on the importance of understanding and utilizing smart communications. A poorly-written letter or a failure to communicate clearly or effectively is at the core of many franchise disputes. Smart writing does not come naturally. Franchisors, therefore, are encouraged to emphasize and train their personnel on smart communication techniques.
A principle that at times is easier to state than implement is that every individual should communicate what they mean and mean what they communicate. The clarity of writings is critical, whether it is formal correspondence or notes from an internal meeting or phone calls. All writings will be analyzed carefully in any lawsuit. For example, if the franchise operations representative sends an e-mail that blames marketing for a franchisee’s poor operating performance or sends an internal memo that the franchisee should never have been awarded a franchise, the statements seemingly may protect the operations representative, however, they can be damaging to the franchisor in any lawsuit. Also, individuals must understand that not every communication needs to be in writing. Simply put, all franchisors should take a hard look on how they address smart communication issues in their organization.
7. Thou shalt not make any representation that the franchisor’s site survey constitutes any assurance of success.
The franchisor’s Franchise Disclosure Document and franchise agreement should squarely address this issue with statements that any franchisor survey or franchisor’s approval of a site or location does not suggest or guarantee success. This statement, however, potentially can be compromised out in the field when the franchisor representative is spending hours with the prospect looking at potential sites. A prospect surely is going to ask for the representative’s input on how site A compares to site B or what types of locations generate the highest sales in the system. An experienced representative who understands the legal pressure points will respond with answers that focus on whether or not a site generally meets the franchisor’s current criteria and underscore that, while location is important, the overall success of the business depends on the franchisee and the decisions they make in the operation of the business.
8. Thou shalt not make any representation that the franchisor will not allow the future development at a location that may have a negative impact on an existing franchisee.
This commandment focuses on impact/encroachment issues as franchisors build their brand and increase market share in a particular market. Every franchisee wants the franchisor to build the brand and add units, just not in their backyard. These issues are a higher priority with franchisors that license site-only locations with no or little protected area. Similar to the site survey commandment, a franchisor’s Franchise Disclosure Document and franchise agreement should address impact/encroachment related issues. Franchisor representatives will be asked direct questions on these points and they need to understand that their response may need to be that, Yes, we can put a new location anywhere we want at any time. A statement like Well, I’m not aware of any instance where we’ve opened another unit within two miles of a location for a least two years not only violates this Commandment 8, but also Commandments 3 and 6.
9. Thou shalt use some form of questionnaire to confirm no statements or representations were made during the sales process that contradicted the Franchise Disclosure Document or franchise agreement.
Few franchisor practices in the franchise sales process evoke more passionate debate among franchise lawyers than a franchisor’s use of a questionnaire or closing checklist. This is a document where the franchisor asks the prospect to answer key questions regarding the franchise sales process. The questions will focus on Franchise Disclosure Document delivery, a prospect’s review and understanding of the franchise documents, confirmation that no earnings claim was made by the franchisor (other than any in Item 19), and the like.
Franchisee advocates argue that use of this questionnaire/checklist is the franchisor’s attempt to whitewash any unlawful statements or practices. For example, their position is that even if a franchisor makes an unlawful earnings claim, the franchisor will refuse to award the prospect a franchise unless the prospect acknowledges that they did not receive any earnings claim information.
Advocating for use of the questionnaire, our position focuses on what it means to go through the franchise sales process and then have two parties voluntarily agree to enter into a long-term franchise agreement. The prospect and the franchisor are each investing considerable time, effort and money in the relationship. It is critical that a meeting of the minds exists at the time the agreement is signed. The terms and conditions of the relationship are reflected in the franchise agreement. From the franchisor’s perspective, this meeting of the minds is critical. If the franchisee is basing its decision on something outside the franchise agreement, then the franchisor has every right to know that fact at the time they sign the franchise agreement, not two years down the road. For example, if the franchise agreement explains that the license is for a site-only location with no protected area, but the franchisor’s sales representative has made statements that suggested something else, it is critical for both the franchisor and franchisee to discuss and resolve that issue at the time they sign the franchise agreement, not when the franchisor decides to open a new unit in proximity to the franchisee’s location.
The bottom line is that the use of this questionnaire or checklist should be considered by every franchisor.
10. Thou shalt seek guidance and advice from franchisor’s senior management and/or counsel if there is any doubt whether a particular act or course of action is legal.
Each franchisor establishes the culture for its entire organization. The stakes are high with franchise sales compliance issues, so franchisors should encourage their team to seek guidance and advice if any questions exist on whether a statement, an act or course of action is legal. Don’t let anyone believe they are better off by hoping that an issue simply might go away. This approach rarely works.
Understand the Do’s and Don’ts
Many people believe that the lawyer is a necessary evil in the franchise development process. Clearly, at times franchise counsel must step in and say No to a practice. However, the lawyer’s primary role in development is to get the job done in a manner that helps the franchisor meet its sales goals and minimizes potential legal liability. In order to do so, everyone in the franchisor’s organization must understand the legal do’s and don’ts of franchise development.
Ten Steps to Sell a Franchise to a Prospective Franchisee
These steps convey messages of confidence to future franchises and customers.
Retired Hall-of-Fame Dodger Manager Tommy Lasorda once said, There are three types of baseball players: those who make it happen, those who watch it happen and those who wonder what happens. In the world of franchising, only those willing to make it happen find the type of success Lasorda and his players always sought. The question is how does one make it happen, remain effective and close the deal?
The essence of success in franchising can be culled into 10 easy steps that are shared here. By following this simple guide, one can avoid getting bogged down and keep his head in the game.
Step One: Define the Customer
Who is the company looking for? Does it know? It’s got to be clear. If the company doesn’t know who its customers are, it can’t gear its message toward them. If the organization has the demographics, that is only half the story. It should know what publications its customers read, what inspires them, the organization needs to know at a base level what differentiates its customers from everyone else. Don’t rely on past studies and assumptions to define the customer, but really get to understand where leads are coming from, or who, based on the product Franchise Disclosure Document, will be most attracted to the opportunity.
Step Two: Consider the Best Vehicle of Lead Generation
While it’s certainly important to use all forms of lead generation, be sure it’s relevant to that defined target audience. Speaking to an investor audience is very different than speaking with an enthusiast of the brand venturing into franchise ownership purely out of passion for the product. And the ways to reach them, the vehicles that will work with each, are dramatically different as well.
The Internet is probably the most diverse and often a sure bet when trying to reach a variety of audiences from investors to aspiring entrepreneurs. But because of this vast difference in audience members, selecting key Web sites that reflect their lifestyles is important. Consider news sites and business sites that cater to the serious business professional. Whatever the direction online, be cognizant of quality. The site must communicate an efficient, effective voice in both appearance and navigation to reflect the company’s strength and make the buy worthwhile. And, don’t forget to advertise the opportunity heavily on the company’s Web site. The first thing an interested entrepreneur will do is check the Web site, and if the information there is lacking, so will prospect’s enthusiasm. It might seem obvious, but it’s an opportunity often missed.
While the major shows are important, the International Franchise Expo in Washington, D.C., the Franchise Expo South in Miami Beach and the West Coast Franchise Expo in Los Angeles”smaller franchise systems should carefully manage their dollars to participate in these events. There are other opportunities for entrepreneurial thinkers as well, such as franchise road shows. A franchise road show is an opportunity for multiple brands to come together to share costs and pull resources in the creation of franchising seminars that can provide flexibility, affordability and broaden the outreach of the brand and the brands of those who recognize the value of such cooperative branding opportunities.
When considering print advertising, national and regional publications, business-lifestyle focuses are the way to go. By focusing on national publications, companies reach a broad cross-section of potential franchisees. It is important to stick with publications that have in their audience not just the dreamer, but the serious investor as well.
Direct mail is an under-utilized resource, but the approach should be fresh when buying lists. Look to buy from affinity lifestyle lists so the prospects obtained share a similar interest or core value that is at the heart of the first step, which is knowing, unquestionably, the customer and his or her interests. Don’t forget to start with what is already in hand before venturing into the wider world. A lead lists from three or four years ago might offer prospects who were once wavering, but are now seriously committed to finding that perfect franchise prospect.
Step Three: Get the Proper Team in Place
Surround yourself with great people who are passionate about the brand. These are the people who will deal with the leads when they come in. And, if the advice above is followed, the prospective franchisees will come in charged with questions. Be sure to have a strong, energetic team in place to not only answer their questions, but to get them as excited as the team is about the brand.
At one franchisor, a team of these highly-passionate people are not referred to as salespeople, they are called a development team. Consider language and titles for the team that will seem more business-minded and less aggressively sales-minded, such as franchise development managers or franchise licensing managers.
Step Four: Develop the Relationship
A key step in the process, quickly developing the relationship with potential franchisees, communicates interest and the strength of the organization. The organization’s team must be available for candidates. Meet with them individually or at least communicate via telephone to help personalize the relationship. In this world of quick-moving communication, it has become all too easy to simply e-mail or text a note to someone. An important level of human connection is lost through these communication methods. While it’s a great way to share information, it’s not the preferred way of communicating with candidates on a regular basis. Remember the personal touch makes the difference.
Step Five: Showcase the Infrastructure
Ray Kroc, the founder of McDonald’s once said, None of us are as good as all of us. In the decades since Kroc helped bring franchising to the consciousness of millions of investors and dreamers alike, truer words were never spoken or were they more appropriate then in today’s competitive franchise market. Impress upon potential franchisees the organizational strengths, whether they be the size of the staff, their depth of experience or the personnel structure of support the franchise offers. Show pictures of the corporate headquarters. The clear message to be conveyed is that the franchise is established, on solid footing and offers a depth of experience that will help support the franchisees.
Step Six: Keep the Close Period to Less Than 90 Days
To keep the process moving, keep the closing period as short as possible. By working within a reasonable and concise timeframe, all parties remain motivated to achieve their goals in the closing process in a timely fashion. This reduces the risk of the sale lingering or derailing and maintains a level of positive motivation for the franchisee.
Step Seven: Track Metrics and Create Benchmarks
Goals are good and goals motivate. From the outset, determine what the return on investment should be and establish benchmarks accordingly. By challenging the organization to achieve these goals, and tracking the development of this process, it can ensure an efficient and effective application of time and effort.
Step Eight: Coach Them through the Entire Process
Responsiveness is the art of the deal. In a competitive franchise marketplace, often what can set a company apart from the pack is its the willingness and ability to respond to the concerns and situations that develop as team members work with potential franchisees. It’s important to remember that these aspiring entrepreneurs are almost always looking at a number of other franchise businesses and a system can distinguish itself by turning responsiveness into an art form. If the potential candidate feels the company is working with him at every step of the process, the firm can help foster a higher level of confidence both in the brand and organization that will help inch it closer to closing the deal.
Step Nine: Give Them Deadlines to Close
With a close in sight, it’s often helpful to foster a tangible sense of urgency that is beneficial to the potential franchisee. Motivated to maximize their advantage, potential franchisees provided with a substantive reason, or reasons, to close in a timely fashion will move to increase their advantage and establish a closing date. Tips to motivate them to move off the mark include scheduled increases in franchise fees, deadlines for the opening of peak or seasonal sales points, changes in equipment pricing, reduction or closing of territorial availability are all valid points that can affect the potential franchisee’s decision to commit to the brand.
Step 10: After the Close, Continue the Relationship
Remember that after the close, the franchise is only at the beginning of this important relationship with its new franchisee. These new franchisees are the brand’s best salespeople. These are the people with a fresh enthusiasm for the brand and are in the field with your second best sales resource: the customer. The importance of encouraging brand spirit with both new franchisees and customers cannot be understated. By demonstrating pride in the brand to these critical team players, one conveys a message of confidence that takes the game to the next level, influencing the current, and future, fans of the brand. Finally, always tell the truth. Not only is this the right action to take, but if you do not you will be buying problems and possibly litigation in the future.
Perhaps one of the most frequently asked questions in franchising is, How do I find franchisees? What some of my clients have in their head is a carnival type vision from their franchise youth — standing at a booth at a trade show, hawking like the barker with the too-small basketball hoop.
Today’s franchise sales process is, of course, much more sophisticated than this. The Internet generates most franchise sales leads — by some accounts, more than 70% — with public relations, print advertising, direct mail and referrals generating much of the remainder. But for many franchisors, trade shows and expos remain as relevant today as they did during their heyday.
Franchise Shows vs. Industry Shows
Before exploring the question of whether trade shows and expos are the right strategy for you, let’s draw an important distinction between franchise shows and industry shows.
Franchise shows, the most prominent of which is the International Franchise Expo, cater to prospects actively shopping for franchises, people looking to learn more about franchising, and people trying to sell products to franchisors. From the franchisor’s perspective, these events can be fertile hunting grounds.
Industry shows, by contrast, do not focus on franchise buyers, but instead on target audiences from a particular market in which franchises may be offered. The National Restaurant Association Show attracts over 70,000 restaurant industry professionals to a single site for four days. While most of these attendees aren’t thinking about franchising, about 3,500 of them reported they came to the show looking for franchise opportunities. This caused the International Franchise Expo has designated a separate Franchise Pavilion for franchisors to solicit their franchise opportunities.
The reason it is important to draw this distinction is that franchise shows are different from industry shows in a number of important ways other than their targeted audience.
Choosing Your Shows
First of all, most franchise shows tend to cater to a relatively local audience. So, if you aren’t targeting franchise sales in the area where the show is located, a franchise show in that particular market may generate few, if any, leads that will be of value to you. Exhibiting at franchise shows in registration states will probably require you to be registered. If you have any questions as to this, you should communicate with Mr. Kassoff.
Another factor to keep in mind is that at franchise shows, most of the action takes place over the weekend. Since most of these prospects are local, some franchisors will elect to stay an extra day to meet with their most qualified prospects or even to hold seminars to move the franchise sale along more quickly.
Industry shows, by contrast, often draw a national or even an international audience. Since they will often be held during the week, attendees are eager to go home following the show, so seminars, receptions or other activities scheduled for the day after the show will meet with a lukewarm response at best. Instead, such events must be hosted during the show itself.
Likewise, savvy franchisors know not to invite their pre-existing prospects to a franchise show, as this will only have the effect of exposing those prospects to their competition. With perhaps 300 or so franchisors exhibiting, if your prospects go to the show, they should find you.
Industry shows, by contrast, can be significantly larger and more difficult to navigate. The National Restaurant Association show, for example, has over 2,000 exhibitors, and your prospects will need to be in good shape to see everyone even if they spend all four days there.
Moreover, because these shows attract such a geographically diverse audience, they afford a great opportunity to meet face-to-face with prospects from around the world. And since industry professionals will invariably know about industry shows in any event, franchisors often promote these shows to their prospects.
Not Right for Everybody
As with most marketing strategies, trade shows and expos are not right for every franchise concept. Even if trade shows are appropriate, you must also answer the concept of which trade show is right for you.
In determining if a particular trade show is a good fit for your franchise concept, you need to start by understanding the particular buyer you are looking to reach. Virtually all trade shows track this kind of information, so it then becomes a matter of evaluating your target vs. these statistics.
For example, franchise shows do not tend to be a great match for franchise concepts that require a larger initial investment. The International Franchise Expo, for example, reports that 12% of their attendees have more than $500,000 to invest and only 6% have more than $1 million to invest.
If you are looking for an experienced restaurant operator for a franchise who can support a $1 million buildout, you can apply the show’s own numbers and your own estimate of restaurateurs in the crowd to guesstimate at the number of qualified prospects that might walk by, and make your decision based on that. Franchise shows seem to be most effective for franchisors with an investment requirement of $250,000 or less.
In addition to looking at the statistics from past shows, you should talk to past exhibitors to determine just how effective particular shows are. The fact is, some shows are better than others. Given the expense of time and money involved, it’s important to focus only on the shows that will generate positive returns for you. Most shows will pre-publish exhibitor lists, making a quick survey of exhibitors relatively easy even if references are not provided.
When it comes to franchise shows, geography will be an equally important consideration. While some shows command an international audience, for the most part, franchise buyers will be driving two hours or less to come to your show. So if you are not targeting franchisees within that radius, your marketing dollars may well be better spent elsewhere.
Trade Shows by the Numbers
The most important thing to remember at trade shows, is that these shows are about lead generation, not sales. While you want to do everything you can to build rapport with your prospects and to qualify them on the floor, a good show provides you with a constant stream of traffic. You must remember that traffic may walk by if you are too busy with a prospect to engage them.
One solution: Bring more people to help you work the booth.
While booth space will cost you several thousand dollars and up, numerous hidden costs need to be included in your trade-show budget. These costs should be included when tracking costs-per-lead and costs-per-sale. Perhaps the biggest cost is that of travel, food and lodging for those working the booth.
Another hidden cost is the cost of the material you provide to those who pass your booth. On one hand, you’ll be meeting with prospects who just met your competitor, so you want to put your best foot forward. On the other hand, with hundreds of prospects stopping by over a four-day period, you could go through a small fortune handing out brochures that you printed at $3 or more per piece. It might help to develop a small but professional flier or handout that you provide to all the bag stuffers who pass your booth. You should keep a supply of your full-sized brochures under the table to pass out to your most serious prospects.
You can probably expect to spend at least $10,000 on any given trade show. A good show will probably generate a couple of hundred leads, several strong prospects and, assuming you are handling the sales process correctly, one to three franchisees.
Some years ago, as the popularity of the Internet began to rise, trade shows and expos declined in popularity and foot traffic. In more recent years they have bounced back strongly. While trade shows and expos no longer generate the foot traffic they once did, trade shows and expos provide many franchisors the ability to get up close and personal with a specific prospect in a specific geography, which can be a strong combination indeed.
Using the Internet to Obtain Franchisees
For the last several years, record numbers of new franchisors have entered the marketplace, more than half the franchisors in the marketplace today are less than 10 years old.
In part, businessmen are becoming more aware of the power and the benefits of franchising. But beyond these factors, another not-so-obvious factor has instigated this explosion: the Internet.
The Great Leveler
Perhaps more than any single factor, the Internet has helped level the playing field for the new franchisor. Never before has someone been able to get the message of a new franchise to a broad market this fast.
Two decades ago, if you wanted to compete with the big boys you would need to advertise to get franchise sales leads. Back in the Dark Ages of franchising, about the only way to get any real exposure would be to run full-page ads in Entrepreneur magazine and two-column-by-three-inch ads in the Wall Street Journal. That kind of advertising commitment was simply not economically feasible for most startup franchisors.
Today, while the new franchisor has the same operational and legal costs to get into the marketplace, anyone with a credit card can create a first-rate franchise website in a brief time. Likewise, production and mailing costs for marketing materials are lowered as streaming videos and PDFs replace their traditional hard-copy ancestors. Especially in markets where there is not yet a well-established brand, new franchisors can dominate a new niche very quickly.
More Leads: Boon or Bust?
From the franchise buyer’s perspective, the Internet has also made shopping for a franchise significantly easier. During the Dark Ages, a buyer had one or two opportunities a year at trade shows to get a large amount of information on multiple franchises at one time. In those days, even many of the print directories that exist today were not available, and those that were certainly did not index the entire universe of franchise opportunities. So most buyers resorted to reading magazines, making calls and waiting to hear from the franchisor.
Today, gratification is instantaneous and easy. There are over numerous web portals that advertise franchise opportunities, all of which provide some degree of information about the franchisors they advertise. Most can be sorted based on categories like investment size, geography or industry. And in virtually every case, obtaining more information is as simple as a few keystrokes. Prospective franchisees can jump to a franchisor’s site and download a PDF of their brochure and maybe a streaming video to boot.
Website optimization is (at least in Internet time) the grandfather of these techniques, although effective optimization tactics change almost daily. Video is increasingly being used as a means of increasing click-through rates and capture rates (the number of site visitors who provide information to the franchisor), while lowering marketing costs. Internet auto-responder matrixes are increasingly replacing traditional autoresponders as a means of providing a targeted first touch and sorting through the plethora of new leads generated by the online media. Salesmen are instantly notified when a lead is received.
More than Just Sales
In addition to lowering the barriers to entry for new franchisors on the sales and marketing side, the Internet offers some significant advantages to all franchisors when it comes to communications, training and reporting.
Intranets have long (again, in Internet time) been a staple of the franchise community. They allow franchisors to simultaneously create a community and an educational venue. In addition to housing operations manuals, more sophisticated intranets will also house training materials, videos and tests that will allow franchisees to better replicate the franchisor’s system. If it’s done right, the net result can be better quality control and brand maintenance at a lower overall cost.
This methodology offers additional value that traditional training does not: It is both instantaneous and easy to sort. If franchisees have a problem installing a widget, with a few keystrokes and the right password, they can be watching a video on the subject over their PDA without missing a beat.
Moreover, because streaming video is such an inexpensive tool to use in the training process, brand maintenance can extend to lower levels of the organization than ever before. In the Dark Ages, companies had no choice when it came to low-paid, high turnover positions. Your only option was to train the trainer. But today, video supplemented by online testing can elevate quality control throughout the organization. Some franchisors are training crew level staff via podcasts and other remote media devices. And given the ease of digital editing, creating videos in multiple languages is only slightly more expensive.
The use of video and online testing has some legal benefits as well. By documenting that franchisees or your employees were trained and understood various elements of the system, you may be in a better position to enforce quality control provisions of your contract or avoid vicarious liability issues.
Don’t Ask the Internet to Do a Man’s Job
For all its benefits, it is important to also remember what the Internet is not.
An e-mail or an autoresponder is never a substitute for a needed phone call or a face-to-face meeting. And the written word, because it lacks tone and feedback, can be much more easily misinterpreted.
The Internet cannot sell. It cannot build relationships. It cannot measure quality at the unit level. It cannot build trust between the franchisor and its franchisees.
Building Blocks for an Effective Franchise Relations Program
Trust must be earned on a regular basis . . . over and over again.
The relationship that a franchisor has with its franchisees is important to the long-term growth and success of a franchise system. Relatively new franchise systems as well as mature franchisors find that establishing and maintaining a quality relationship includes several key elements. Specifically, these are:
The recruitment process
Management of the franchise relationship
Field presence and support
Continued efforts to grow the business
In large part, the success of the long-term relationship with the franchisee will be determined by the expectations the franchisee has when he purchases the franchise. To encourage the best possible chance for success, the franchisee’s qualifications should match the franchisor’s business model. For most businesses, the key elements of franchisee qualification are: the individual’s financial strength; personal attributes and previous business experience.
Both new and mature franchise systems must make sure that the franchisees they recruit have the capital requirements necessary to properly fund the business until it is reasonable to expect the business to be profitable. The franchisee also needs adequate financial resources to cover expenses until the business can provide this revenue.
A franchisor must maintain standards to ensure the goodwill of its brand name.
Equally important is that the background and experience of the franchisee match well with the talents necessary to manage the business. For example, a business that requires a pro-active sales effort should not be sold to someone who has an insurmountable reluctance to sell.
In the long run, selling the franchise to a prospect who clearly doesn’t bring the right attributes to the table will cost the franchisor more money and will harm the validation process for future prospects.
The initial training provided by the franchisor will help determine the speed with which a franchisee should become successful in the business. This training program should be well documented and taught by training professionals who have significant experience in the franchisor’s industry.
A franchisor also needs to provide ongoing training for franchisees to address changes in the business and to build the talent pool of their employees. The ongoing training curriculum should be determined with the input of franchisees to ensure that it is focused on the subject matter they need to succeed.
Managing the Franchise Relationship
There are several components to successfully managing the franchise relationship. These include:
Support vs. compliance
The franchisor should always strive to keep a balance between two conflicting roles, supporting franchisees and ensuring compliance throughout the network. On one hand, a franchisor must maintain standards to ensure the goodwill of its brand name. This is an obligation the franchisor has to all of the franchisees in the system. At the same time, the franchise organization must be an entity of caring individuals who are sensitive to the real world that franchisees live in. A franchisor who is overbearing and always focused on grading the franchisee at the expense of not showing concern and care for franchisees and their business will struggle with the relationship. Any police action taken must always have a specific purpose and benefit to the network as a whole. In making major decisions, franchise executives need to be clear whether they are serving as the salesman or the police officer in dealing with franchisees, and then act accordingly.
Allocation of resources:
As the franchisor begins developing its organization, it should have a good understanding of how it plans to deliver services and support to the franchisees. Will there be a central office that will house all support personnel or will the organization decentralize and have support people located through the country? How often will the franchisor’s staff visit the franchisee (once, twice or three times per year, and for how long, one or two days or just a few hours)? There are a variety of approaches to take, but the main issue is to ensure that the franchise organization is communicating with its franchisees and prospects as to what their expectations should be. These are just a few of the issues for the franchise organization to consider and communicate in a clear way, beyond what the franchise agreement might stipulate.
Most franchisees love to be recognized, and the franchisor should strive to create a competitive environment within the franchise organization. For example, the franchise can provide awards for top performers in terms of sales, productivity and giving back to the network. This recognition encourages further participation and striving for excellence.
Field Presence and Support
The franchisor’s field staff members are the eyes and ears of the organization when it comes to assessing the relationship between the franchisor and the franchisee. The franchisor’s representatives should visit franchisees on a regular basis to help assess the business and offer ideas for improvement. In addition to the specific duties associated with the visit, they should be receptive to input from franchisees on a variety of topics, and ensure that these views are communicated to the management staff of the franchisor.
Many organizations struggle with the decision as to when they should initiate a franchise advisory council (FAC). Admittedly, there is a fine line and this is a major decision that all franchisors must face at some point.
Ensure that the franchise organization is communicating with its franchisees.
It is important for smaller franchisors to avoid the formality, and therefore the bureaucracy, of forming an FAC too early in their maturity. In the early stages of franchising, it is important for the principals and executive management to be pro-active in seeking various franchisees opinions on any number of topics, and to not rely on too formal a structure.
Over time, as the franchisee population grows, it will be necessary to form committees and associations to create a structure for the continued exchange of viewpoints. Franchisors should not wait until such time as franchisees decide it is necessary to form an advisory council of some sort. At that stage, the franchisor has lost control of the process and will likely find itself mired in bureaucracy that may well inhibit the entrepreneurial aspects of the business that have led to its success.
There are other channels for providing open communication with the franchise community. The franchisor should allocate time at annual conventions and other meetings for open dialogues with franchisees. It is good for the franchisor to ask franchisees to bring issues to the table for discussion.
In addition, online systems such as e-mail bulletin boards can be provided so that franchisees can post questions of common interest to the network. If a particular franchisee posts off-the-cuff or inflammatory remarks, other franchisees often respond more effectively than the franchisor could. The franchisor also can use these vehicles to ensure timely delivery of new announcements to the franchise community.
Continuing to Evolve the Business
One additional building block to an effective franchise relations program involves the ongoing research and development of new products, new technology and new systems of doing business. This commitment is critical to the continued growth of the franchise business.
Franchisors need to understand that ultimately franchisees will know the business better than they do, and use franchisees knowledge to improve the business. While the franchisor needs to have standards and must require compliance in certain areas, the franchise organization also needs to grasp that franchisees work in the business on a much more personal level than franchisor personnel. Franchise systems can utilize the ingenuity and expertise of the top performers of their system, and ensure that the reasons for these franchisees success are clearly communicated to the rest of the network.
Ask franchisees to bring issues to the table for discussion.
Finally, franchisors should have an ongoing strategy for brand promotion. As a franchise organization matures and is less focused on selling new franchises, it is important to continue to promote the brand. Franchisors always want as much public view of the brand name as you can get.
These are just a few key elements to creating a solid franchisor- franchisee relationship. All of these issues revolve around the one key ingredient for success and trust. If franchisees don’t trust the franchisor, the franchise system cannot build a solid organization. Trust will help the franchisor sell franchises when prospects call franchisees validating the business. If franchisees don’t trust the franchisor, they won’t embrace new programs or products that are introduced to the network. If franchisees don’t trust the franchise system, they also won’t respond favorably to the feedback that the franchisor’s staff provides them during support visits, whether the issue is a compliance matter or pertains to increasing sales.
Finally, franchisors must recognize that trust must be earned on a regular basis, over and over again.
Training Your Franchisees and their Employees
Franchise operations have changed for the better. Today, it falls to both franchisors and franchisees to develop and implement a comprehensive plan for hiring, training and retaining the best of the best to achieve business success. This not only ensures the long-term profitability of franchises, but also provides franchisees with excellent training in business operations.
Finding the Talent
Successful recruiting can be a Catch-22 scenario the best people want to work for a company with an excellent reputation, but the only way a business can achieve a good reputation is by attracting the best people.
For successful recruiting, you need to start with the basics. Run a good place, a place where you get a good reputation, because people will want to work where they hear that employees are treated well.
One franchisor works with franchisees to create a family-like environment. In recruiting the best talent for their salons, they use a few standard techniques that can easily be translated to any franchise business.
Hire to the culture you want to achieve. The best shops are the places that look and feel like a family. Make sure the people you bring in fit into your extended family.
A key to successful recruiting is to know how to interview people. Good interviewers know what to look for, what to ask, how to elicit the kind of information that would indicate that this candidate is a solid match for the organization. Smart businessmen also need to know who and what they want when they go into the interview.
Know what kind of team you are going to put together. Before you begin interviewing know what skills you are looking for, and most importantly, what kind of personality best fits the established company culture. Often, a company can teach the skills later.
It’s also important to learn about a candidate’s goals. Look at the candidate’s short- and long-term visions for themselves. If he wants the same things for himself that your company wants, then the fit will be great. Spend the time really listening to your candidate’s career dreams not just thinking about your company’s immediate need.
Another franchisor, created an interview-training program for franchisees. The company recommends using situational and behavior-based questions, which are particularly useful when dealing with young people who haven’t been through a lot of interviews. The more that an interviewer can make the interview sound like If you have this situation, what would you do? or Tell me about one of your biggest challenges and one of your biggest successes, the better one can effectively analyze the candidate’s likelihood of fitting into the company.
Incentives must be meaningful to have the desired impact
One franchisor, believes in finding employees who will grow within the company. Most of their managers started as line cooks or dishwashers, encouraging employees at all levels to succeed. Interviews are conducted to find the employee who reflects the culture. Recruiting often comes from referrals or looking inside the organization to fill a position. Our culture is to try to promote people from within, says this franchisor. When people learn our culture, they know what to expect and perform accordingly.
Finding the potential recruit demands visibility on the part of the franchisee. Participating in job fairs, schools, seminars and conventions, anywhere future job candidates can be found, increases the odds of finding the right person to staff the shop.
Keeping the Creme De La Creme
Now that you have them, how do you keep them? As difficult as recruiting can be, it can be more difficult to retain the great ones. Franchisees should consider taking a three-pronged approach:
Provide training opportunities that enhance their lifestyle,
Provide meaningful incentives that match the employees value systems, and
Create an environment where each employee feels valued and valuable.
Successful training programs must meet the needs of the trainees, be easy to understand and implement and provide strong follow up with the ability to track results. The best training programs go beyond the technical requirements of the position. They provide opportunities for employees to improve themselves and their lifestyles both in and outside of the franchise environment.
Franchisors have the responsibility of making sure that programs are kept current and competitive with what else is out there, not only in that industry but also in other industries.
One franchisor which invests $16 million in education, has 10 separate departments guiding and supporting its franchisees in areas of management and leadership styles for better employee retention. The company has more than 200 support people dedicated to helping franchisees and ensuring that salon associates, hands-on technical trainers, management trainers and market managers are trained in both technical and business education. In addition, the franchise provides an educational DVD program to all of its salons.
Providing non-technical seminars such as Dressing for Success and Dale Carnegie can also enable a franchisee to expand his company’s marketability and improve the professionalism of the staff. With this education, the staff will eventually command a higher salary and then a higher standard of living. Creating such long-term financial opportunities such as a 401(k) plan that matches each employee’s contribution encourages an employee to stay longer and think about retirement with the company.
This franchisor believes that Franchise Disclosure Document professional development opportunities helps retain the best employees. He supports his employees with seminars on communication skills and other professional enhancing skills, as well as human resource seminars to encourage development in a variety of areas from guest service to legal compliance. We are always open to suggestions from our people to seek training to meet their personal needs, says this franchisor. We help them develop themselves as they take good care of our business.
Incentives must be meaningful to have the desired impact. People need to feel that they are a part of something. Monetary incentives play a role but they’re secondary to feeling part of something. Employees want appreciation for who they are and what they do, they want to be in the know and understand their career track.
The culture of the franchise is a third element that directly impacts retention percentages and it begins with the owner. People want to work for someone who cares about his business, takes an active role in ensuring its success and, most importantly, care about his employees.
This attitude sets an example of accountability that permeates the entire organization. Giving everyone an understanding where their roles and responsibilities fit with the entire organization creates an all-for-one attitude, helping employees help each other to achieve goals and enhance the opportunities to make a great business. There is nothing worse than a manager with a bad management style or an employee who doesn’t want to contribute to a franchise’s success.
Simple things make a difference in the work environment.
Teaching people how to think like an owner is another excellent strategy. Some successful franchisees empower employees with information about store performance, such as the profit and loss statements to give each employee the information needed to make the store a success. This instills an understanding of just how important an employee’s role is when it comes to making each customer happy. It’s clear that an employee who knows the cost of running a business will also grasp the importance of each and every sale. With these successful franchisees stores, the staff is also encouraged by a bonus structure that is directly linked with a profitable store. When the stores are doing well, every employee profits.
Simple things make a difference in the work environment. Some people have found that other successful franchisees have created an important series of special employee holidays including Hair Stylist Appreciation Day where each store manager handwrites special letters of appreciation for each stylist. These owners also write a personal note of recognition to all of their employees on their anniversary date. These types of activities can be used in any operation as a way of demonstrating the owner’s recognition of the employee’s value and role in the organization.
Making sure the brand is respected and that people are treated well is the bottom line.
Measuring the Franchise Relationship
For franchisors, the issue of franchisee satisfaction looms large.
Maintaining constructive relationships with franchisees is a lot easier to talk about than it is to put into practice. For franchisors, this is an ongoing challenge. Several things can strain relationships. Among them are:
When people are stressed they get cranky and difficult to deal with. Whether you are a franchisor or a franchisee, financial and workplace pressures will always test your patience and resolve. If stress levels get too high they can cause erratic and hostile behavior which can lead to a breakdown in communication and relationships.
The ongoing changes that have been sweeping the world are also affecting franchise systems, resulting in a constant need to innovate. This means franchisees often have to adopt new systems, reinvest in their business and sell new types of products or services. Most people resist having change foisted upon them which can also create a strain in the franchise relationship.
The Law of Perception
A company may think it has clearly explained something, but people will always put their own interpretation on what they hear. The saying When perception meets reality, reality always comes out second best is very true. What the listener heard is more important than what was said. For instance, franchisees sometimes misinterpret a franchisor’s motives for taking certain decisions and this can undermine the trust so important for a healthy franchise relationship.
Insensitivity to the feelings of others
Whether it is called emotional intelligence, people skills or just good manners, franchisors should show their franchisees adequate respect and consideration. Leaders who are overly authoritarian or insensitive are likely to create a residue of resentment in their franchisees. At some stage this is likely to express itself as a relationship breakdown.
Franchisees expect to receive reliable support from people who know what they are doing. As a company grows it is not unusual for the franchisor team to find itself out of its depth in managing the more complex demands of a larger corporation. This can also undermine its credibility and put strains on the franchise relationship.
Why measure franchisee satisfaction
Many franchisors will have experienced problems with individual or groups of franchisees due to one or more of these areas. As a franchisor management team becomes more perceptive of these inevitable challenges they also become more capable of successfully managing them.
A good way to tackle this challenge is by applying the principle, If you can’t measure it you can’t manage it. In other words, measuring the state of your franchise relationships is good business practice. I’d suggest a thorough survey at least every two years.
There are three common myths that deter franchise systems from embarking on this journey.
Myth One: There are more important things to focus on.
Franchise systems that are plagued by poor relationships and do not face up to this challenge are not commercially sustainable. The cost of litigation, the distractions, the stress on the parties and the decline in customer focus inevitably takes its toll.
Myth Two: This stuff is too difficult to measure.
The fact is attitudes and feelings can be measured in a reasonably objective manner. This can be done by creating a forum in which people can give you feedback, either in the form of a survey, an interview or a focus group. What is essential, of course, is to ask the right questions and to listen to the answers with an open mind.
Myth Three: Asking them what they feel will just stir them up.
While seeking franchisee feedback can be challenging, it sends the right messages to franchisees that the franchisor is interested in their views. This in itself can prove to be a positive trust building initiative, especially if the feedback is acknowledged and the process is professionally managed.
How to find out what franchisees want
There are several ways to discover what franchisees want. Interview them individually or in groups and ask them questions about what they like and dislike about the franchise system.
Ask them to complete a survey of carefully-worded questions. To gain greater honesty it is preferable that the responses are anonymous. The use of an external consultant can ensure confidentiality.
There are two types of questions typically used in franchisee surveys. The first are open-ended questions such as:
What do you want and expect from your franchisor?
What’s good about being a franchisee with this system?
What would you like to change about how this franchise system operates?
The other type of question uses rating scales, which enable responses to be quantified. Results can then statistically be analyzed and compared with industry benchmarks. One question to ask franchisees is, If you had a choice, would you buy the franchise again?
Using open-ended questions and rating scales are both approaches that have unique benefits. Ask franchisees to rate both the importance of specific services provided by their franchisor and how effectively these services are delivered. This enables a franchisor to distinguish high priority services from nice to haves and to determine any significant gaps in how effectively the most important services are being delivered.
Help me develop my business
Not surprisingly, franchisees want their franchisor to negotiate deals with suppliers that will reduce their operating costs and to provide ideas and systems for enhancing productivity.
They also want regular access to useful and relevant business information that will help them grow their business and stay in control of their financial position. A benchmarking program that shares results on agreed key performance indicators is a great start.
While franchisors are often very effective in providing initial training, franchisees want more ongoing training to improve their skills in the areas of people management, business planning, goal setting and marketing. This is especially true of more mature franchisees who tend to become skeptical and dissatisfied if their evolving needs are not met.
Make my phone ring
Marketing is a broad term so let’s be more specific. Two important factors to franchisees are advertising that attracts new customers and a strong brand. In fact many franchisees buy a franchise on the strength of the brand.
Franchisees also want a well-thought-out marketing strategy that will give them an edge in their local market and help with the skills to convert inquiries into sales. And they expect ongoing innovation that will excite customer interest.
Finally, they value unique promotional tools such as point-of-sale signage, things they would not be able to source if they were on their own.
Listen to me
Franchisees often refer to the sense of security they get from being part of a united, cohesive group. In particular, they value the opportunity to interact with other franchisees at meetings and conferences. However, they frequently refer to a desire for meetings to be more interactive.
They also say they want more opportunity to have their ideas, questions and concerns heard by their franchisor through open forums and discussions.
The introduction of operational changes without adequate consultation is particularly frustrating and puzzling to franchisees who feel they have more insight about operational matters than their franchise system.
One theme to emerge from our research is that franchisors often have clear goals for the organization, but fail to provide franchisees with a sense of where they fit into the big picture. The result is that franchisees can feel threatened rather than excited by a company’s expansion plans.
Consistent with other international research on what people want from their leaders, franchisees expect the franchise system and foremost to be honest and fair in their business dealings. A competent management team is also seen as essential.
Loyalty from a franchisor is important. Having supported the franchise system over a period of years they expect this to be reciprocated. For instance, they may become resentful if they think the company has an unbalanced emphasis on attracting new people while ignoring the needs of longer-standing franchisees.
Getting on together
Most people dislike conflict. In fact, unresolved conflict has emerged in our research as a major reason why people want to sell their franchise.
This highlights the need for robust conflict resolution processes to be an integral part of every franchise system. It also highlights the need for members of the franchise system to be able to have conversations with franchise in which difficult issues can be discussed and resolved in a mature and respectful manner.
Show me you care
Franchisee advocates are vital for growing a franchise system. The strongest predictor of whether a franchisee will recommend a franchise to others is whether he feels the franchisor is genuinely concerned about his success.
Indeed, franchisees frequently say they would love to have their franchisor call, just to see how they are doing, without any ulterior motive.
On a related matter, quick response times to calls and e-mails are frequently rated by franchisees as vital.
What about the money?
Sometimes It’s assumed that because people are in business, everything’s about the money. While most might not like to admit it, most behavior is influenced by emotions not by logic.
While return on investment is one of the drivers of franchisee satisfaction, there are other issues such as feeling cared for, optimism for the future, confidence in top leadership and the relationship between a franchisee and the franchisor management team that are just as important.
While a profitable franchisee is no doubt more likely to be a happier franchisee, franchisors should not underestimate the power of good old-fashioned courtesy and respect in building a prosperous, happy and vibrant franchise system.
The Key to Happy Franchises
Happy wife, happy life is wise advice given to new husbands. The same is true of the relationship between a franchise system and its franchisees. Happy franchisees, happy franchisors. Both types of relationships take time, effort and energy to stay positive and healthy. However, discovering what makes a franchisee positive and healthy is simple. Bottom-line should equal profit and lots of it. Common sense dictates that the individual franchise owner’s unit economics drive the entire franchise system. A franchise system must regularly engage in a process that involves the measurement and sharing of key business metrics and best practices in a way that leads to healthy internal competition and growth within the system.
Great franchise concepts are plentiful. Some franchises have unique marketing campaigns. Others franchises have generated tremendous brand awareness with consumers. Still other franchises have catchy logos and jingles. These are all great features, but if a franchise company fails to identify a strategic advantage in the marketplace which allows its owners to generate more revenue than their competitors and then fails to focus on the operating model, they are not doing their job.
Franchisors should continually engage in this four-step, franchisee-centered process to generate healthy bottom lines.
1. Measure the Key Metrics:
What gets measured gets done. One might wonder why more franchise organizations don’t gather the key metrics of their business model and publish them to the system. At one franchise, numbers are gathered that are related to weekly sales, hourly rates and revenues, jobs per week and effective labor rates for every owner in the system. These are compiled into what is called a benchmarking study and published twice a year to the whole system. Franchisees can see where they stack up in these key categories and eyeball whether they are in the top, bottom or middle of the system.
In addition to sharing the numbers side of the business in the benchmarking study, the company makes it a practice to discuss this information positively every chance it gets through newsletters, the intranet, regional meetings and especially at conventions.
3. Relate Best Practices: Next, develop the best practices. Gather what is working extremely well across the system. An operations team should coordinate and manage the flow of information to get everyone on the same page and then in turn let the franchisees sell it to the rest of the system. This company utilizes a panel of the pros on conference calls and at meetings. Those owners who are exhibiting the best practices are asked to speak to those points resulting in owners learning best practices from other owners. The franchise organization uses two forms of surveys to communicate with franchise owners. Customer service surveys help franchisees assess their success and the franchise system surveys enable franchise owners to assess the franchise system’s service. The survey tells franchise owners whether they are making money and whether the system has helped them to do so. If results are poor, at least the franchise system is measuring them and now knows where to improve. Remember, what gets measured gets done.
An effective way to educate the system is by allowing successful franchisees to explain their success. There is a franchisee in the system who figured out an incentive system to up-sell his customers. After tracking it a while, he noted that it sent an extra 5% to his bottom line; needless to say, system franchisees were very willing to listen to him at the next meeting.
4. Inspire Internal Competition:
Gear all contests to continue to provide incentives to the franchisee and stimulate a little healthy competition among the franchisees. Design the contest to reward the behaviors that should be encouraged. Don’t just award the big guys; give it to those to who are big improvers. Healthy internal competition among franchisees can do wonders.
There are two other points that are not part of a continuous process, but the franchise system still must employ them:
As noted above, customer service surveys work two ways: to help franchisees assess their own customer satisfaction and also to assess their satisfaction with the franchise system’s customer service.
Sometimes there is a fear the numbers may not be good. There could be confusion between making an earnings claim early on in the franchise sales process and sharing numbers once a franchisee is in the system. What if the numbers aren’t good enough to share? Go back to the franchisees and have them assist in developing a strategic advantage in the marketplace as stated in paragraph two.
Missing the Point
A guy is driving around and he sees a sign in front of a house: Talking Dog for Sale.
He rings the bell, and the owner tells him the dog is in the backyard. The guy goes into the backyard and sees a Labrador retriever sitting there.
You talk? he asks. Yep, the lab replies. So, What’s your story?
The dog looks up and says, Well, I discovered that I could talk when I was pretty young. I wanted to help the government, so I told the CIA about my gift, and in no time at all they had me jetting from country to country, sitting in rooms with spies and world leaders, because no one figured a dog would be eavesdropping. I was one of their most valuable spies for eight years running.
But the jetting around really tired me out, and I knew I wasn’t getting any younger, so I wanted to settle down. I signed up for a job at the airport to do some undercover security work, mostly wandering near suspicious characters and listening in. I uncovered some incredible dealings and was awarded a batch of medals. I got married, had a mess of puppies, and now I’m just retired.
The guy is amazed. He goes back in and asks the owner what he wants for the dog. Ten dollars.
The guy says, This dog is amazing. Why on earth are you selling him so cheap?
Because he’s a liar. He didn’t do any of that stuff!
Obviously the owner missed the point. The dog was an amazing asset; no matter what he said. Never overlook or undervalue, even if it appears justified in doing so. What if franchisees give the system poor ratings? So what, it becomes an opportunity to improve.
Franchise organizations have to sell the sizzle and the steak. The dog has to be able to talk and have done all that he said he did and continue to do what he said. A franchise system needs to deliver on the promise.
Most franchise companies have seen systems that did not value the franchisee’s bottom line or input. When systems follow this process and view franchisees for their input and as an asset instead of just a revenue stream, the franchisees will be happy.
Happy wife, happy life means giving more than one thinks he should at times and, understanding more than one wants to because it may necessitate changing old patterns and practices and may involve an expense as well. All this is well worth the effort to avoid the huge cost of divorce in a relationship and a toll on finances and family. This is the same with a franchise system. Failures and closures are devastating to a system. The best way to avoid this is to keep franchisees happy and the best way to do that is to keep them profitable.
Recognize Outstanding Franchisees
Running a successful franchise company is not rocket science, but It’s not child’s play either. For franchisees, perfection lies in the ability to work hard and follow the same set of basic steps every day until it becomes art.
Likewise, the path to becoming a good franchise system is tough, but not complicated. It requires good listening skills and the ability to provide relevant feedback to franchisees, especially those all-stars with high sales and a complete understanding of the brand concept.
But how do franchise organizations go about discovering these top performers? Once they do, how do they recognize and reward their accomplishments in a way that encourages them to continue to contribute to their own success, as well as the success of the brand?
The key is communication. As a franchise company, the best way to discover star franchisees is to open as many channels of communication as possible and then simply listen.
Listen to all parties
Listen to franchisees. Listen to field service managers. Listen to customers. When you hear something good about a franchisee, recognize it and learn all you can from them. Then, spread the word throughout the system.
Get your ear closer to the ground and reward outstanding franchisees in ways that continue to help build your business.
Communication is not just about meetings and memos. Like a good sales professional, successful franchise firms are constantly developing new initiatives and ideas. Every interaction between the franchisee and the franchise organization can yield useful information to improve the brand or raise store sales.
Communicate daily with franchisees via an intranet system. It’s a great place for franchisees to find up-to-the-minute information on events, promotions, new product launches and new operational procedures.
Training creates connections
Another way to encourage communication with franchisees is through continued training. In addition to the initial training for new franchisees, the company is in the process of implementing a refresher course to help drive home the brand and concept. While practice always makes perfect, ongoing training also gives franchise systems an opportunity to learn from franchisees, giving them an opportunity to make suggestions about how to improve the system. This is a loyalty-building tool because it gives franchisees an opportunity to feel connected and take ownership of the brand.
Reproduce successful strategies
Another way to create a dialogue with franchisees is by observing how they work their business. As the company’s eyes, field service managers should be aware of any successful promotions or events that franchisees host and document them so they can be shared with fellow franchisees. Remember that intranet?
One example is when a franchisee decided to turn a one-week rain spell, normally bad news for those in the retail business, into an amazing memory point that was worth repeating system wide.
The franchisee bought two nice umbrellas and, when customers pulled up, the franchisee went out and escorted them from their car to the store and then back to their car at the end of their visit. The response, as relayed by a field service manager, was overwhelmingly positive. Since imitation is the sincerest form of flattery, the system immediately ordered a pair of umbrellas with the franchisor’s name for each of its stores and encouraged franchisees to follow their fellow franchisee’s example.
Those who followed the advice enjoyed a modest boost in sales, which illustrates another point. When interactions with franchisees are directly tied to their individual success, it really helps to build a foundation for their success.
Gauging and benchmarking success
Like field service managers, mystery shoppers are also an invaluable way of learning about outstanding franchisees. The key to using this tool effectively is to stagger mystery shopper visits so they not only gauge service during the busiest part of the day, but also monitor service during off-peak times.
Consistency should be the watchword of any good franchise system. The customer who arrives at 11 a.m. should receive the exact same service as the one who visits during the evening rush.
Also, for franchisees, benchmarking is also important. By seeing which fellow franchisees are consistently being honored with annual system awards, new and struggling franchisees can see how to become outstanding. For franchise systems, the way to do this effectively is to conduct annual inspections and then use that data to formulate awards for every type of excellence, from cleanliness to creativity to sales, to which a franchisee can aspire.
The award goes to?
In addition to presenting awards for benchmarking, also consider recognizing franchisees who are not afraid to take some risks regardless of their level of success. Think of it as a Turtle Award.
Most people think of a turtle as a slowpoke, but a turtle takes a lot of risks. They often stick their heads out not knowing What’s around the corner. Every good franchise company needs people to stick their necks out. They need those who think differently.
Speaking of awards, it goes without saying that franchise companies should do all that they can to sweeten sales awards by making them as appealing as possible. Try creating a special award for those who have increased their store sales by a certain percentage. An example would be that franchisees who have increased sales by 20 percent or more will win a free cruise.
PR as a Communications Device
Public relations are both a communications device and a way to thank franchisees for their efforts. Franchise organizations that engage a public relations agency to herald their franchisee’s newsworthy accomplishments are not only saying good job, they are also saying we appreciate the way in which you are reinforcing our brand.
Every time a franchisee develops a creative approach to running their business or raising money for a local charity, their efforts have the chance to appear in local community papers or on the local evening news.
By seeking out these opportunities and working with franchisees to develop newsworthy ideas, the company show franchisees that their efforts not only matter to the franchise system, but that they also matter to the community.
Other ways to reward excellent franchisees include inviting them to participate in the test marketing of new products or to use their locations as a staging area for special corporate announcements. It’s a way to honor them, as well as make them a partner in the combined success of the system and franchisee’s location.
By working with franchisees who consistently have good ideas about how to add depth to the brand, it provides a fresh set of eyes that could provide insights into the process or product that may have been overlooked. Once again, it is when franchise companies communicate to franchisees that their plans are tied directly to their success that everyone wins.
One final piece of advice on how best to recognize outstanding franchisees is to staff the corporate office with individuals who have had experience in the franchising sector. It’s important to speak the language and understand the unique concerns and challenges that come with operating a franchise concept. Those with previous experience in the business are your best link to recognizing and helping your franchisees become outstanding ambassadors of your brand.
Technology and Franchising
No one ever remembers the team that finishes second in the Daytona 500. The winner has the best memories, the most fun, and takes home the biggest prize. When people discuss brands, the market leaders are always the focus of the conversation. We all desire to see our companies name on top and I believe the effective use of technology can serve as a hidden force to help achieve that goal.
Franchising can revolutionize business as usual with the effective implementation of systems that allow people to do more of what they love and less of what they don’t. The effective use of technology is key to developing great companies that will provide an exceptional level of support for franchisees.
So, what do I mean by that? We have the ability to enable our staff and franchisees to increase their income while spending more hours investing in their dreams. We have the potential to eliminate the repetitive tasks and foster an environment of progress. We can disrupt the competitive balance in our market by using systems and technology to drive efficiencies within our business.
I have extracted a top ten list of Do’s to help you begin using technology to dominate your market and accelerate your business.
10. Anticipate change.
The fax machine is archaic and e-mail is being supplemented with a myriad of other communication choices. We rarely send faxes because we have the tools to change paper into PDF files. A handyman service is admittedly not the first place you would look for radical technology advances, but the key to our success is making one of the oldest professions more efficient with the effective use of technology.
9. Get your chalk out.
Benchmark, benchmark, benchmark. Especially outside your industry. Technology is not exclusive-similar systems can serve radically different businesses. Use other companies as role models for your business. They may play in a totally different segment, but they might very similar things technically which you can use for your business.
8. Make it visual.
Kids’ books are more fun, hold your attention, and are easier to remember than adult books because they are visual. Can you imagine NASCAR without the sea of logos and colors? I can hear the fans now, Oh, wow, did you see the move that grey car made? My point here is that we often remember to make something visually interesting for our external customers but forget that when it comes to internal ones. When was the last time you created a really cool intra-office memo or a visually interactive internal survey? Maybe start by painting some accent walls in your office a bright, cheery color and watch the smiles light up!
7. Cool counts.
Make it so life-changing for your customers that they rave about it. I am confident that if we didn’t offer the tools we do to manage the back-office activities for our franchise partners, they would not be as happy as they are. These folks wanted to simplify their lives. They have a passion for helping others by providing hands-on service in what is often a breeding ground for stress and tension-our homes and offices. Our passion is to enable people to do what they love and have the rest done for them.
6. Great marriages communicate.
Your IT systems should serve you, not the other way around. If you have systems that are linked using human touch, I would suggest developing plans to eliminate these circumstances. They are a breeding ground for unhappy staff and mistakes. Unleash many of the staff you have tied down around these systems and watch them grow!
5. Teach your IT team to speak in tongues.
Many of the executives running companies do not fully understand the value of technology projects partly because their IT team does not present projects in bottom-line terms. Your technical team should understand how their activities impact the financials. This will help them present their ideas and projections with clear financial implications.
4. Start a stretching routine.
Warning! You may not be as tech savvy as you think you are. Just as much as IT needs to learn a financial language, management must fully support technological innovation and be willing to stretch their thinking. Great leaders are grown within great companies. There is no space for complacent leaders if you want to have a great company. In today’s market, this means educating yourself on the opportunities associated with technology implementation.
3. Stop for directions.
Thank G-d for whiteboards! Before you write any code, give your developers some driving directions. Have you ever tried to use a really cool feature on-line but it was hosted on such a slow system that you left before you got started? If it made you say, Who on earth designed this, then they didn’t have a vision! When you set out to solve a problem, deliver a service, or initiate needed change, it is critical to clearly communicate the goals and objectives-the road map- for the changes to all involved in the project. If you fail to do this, the technology will not work correctly and the team will be discouraged because its creation sits unused on the corporate shelf.
2. Redundancy is for computers, not people.
No one enjoys inputting financial data just to keep things up to date and many people lack the discipline to do it in the first place. Build this sort of thing into your process so that these tasks don’t require a human touch. Think about all the back-office tasks that are very similar for most businesses: financial management, order processing, customer communications, internal communications, scheduling, supply ordering and the list goes on. Franchisors are in a unique position to integrate these services into their systems because the size and scale of the projects needed to do so are often more than a single-operator business could undertake. However, don’t sacrifice human interaction in the name of technology. Technology is an improvement if it enables your staff to add more human touch, not less.
1. Simplicity wins!
By its very nature technology is complicated, but our lives should not be. When you think of all the sources of stress in your life, all of them are surrounded by complexity. Ultimately, if we can enable peace in people’s lives by providing simple solutions, then we will win in the marketplace every time. If our advances in technology do not simplify our lives then they are a waste of time. Technology should be used to encourage the desired path and that path should be of the least resistance.
Trademark and Trade Dress Protection
Every business owner is familiar with the trademark protection available for the words and logos that identify a company’s products and services. Less well known, however, is that it is also possible to protect the packaging and format of a company’s products and services, under the federal law of trade dress.
The most famous example of trade dress is the Coke bottle. Apart from the trademark protection granted to the words, Coca-Cola or to the red and white design marks that accompany the product, is the fact that the shape of the bottle itself is protected by federal trademark law, under the doctrine of trade dress. Trade dress also extends to protect the packaging of many consumer products that are sold at retail.
The concept of trade dress extends beyond mere packaging, however. Restaurants, for example, have been able to obtain protection for various features of their business. In California, Fuddruckers’ restaurant was able to stop an imitator on this basis. In a case that went to the U.S. Supreme Court, the Taco Cabana restaurant chain was able to stop a competing chain, named Two Pesos, from imitating the Taco Cabana format. The court held that trade dress law protected the combination of a festive and vivid color scheme using top border paint and neon stripes in combination with bright awnings, umbrellas and other features.
In each of these cases, it was the non-functional, stylistic elements of the restaurants’ decor that was found by the court to serve to identify the restaurants and to distinguish them from competing restaurants. In other cases, even the exterior building design has been found protectible.
In all such cases, however, there is no trade dress protection for any features that are functional. As has been noted, free competition dictates free imitation with regard to functionality, at least with respect to trade dress law. In May of 2004, for example, a federal court rebuffed the attempt of Dippin Dots Inc. to prevent another company from selling flash-frozen ice cream in the shape of small spheres; the court found that the size and shape were functional for such a product. (Novel functional features may, however, be patentable.)
Thus, the heart of trade dress is that the features be non-functional, and distinctively identify the particular establishment so as to distinguish it from its competitors.
Trade dress protection can be asserted either on the basis of common law rights or through a registration with the Patent & Trademark Office. There are various legal and practical advantages that flow from registration, which apply both to traditional word marks as well as to trade dress. For example, registration creates legal presumptions that, over time, can become incontestable in favor of the registrant. Registration also provides the registrant with a powerful arsenal of remedies in an action for infringement, including treble damages, infringer’s profits and attorney fees. Also, one can use the symbol of an R inside a circle only if one has registered the mark.
The practical advantages of registration are sometimes even more helpful for trade dress claims, however, than they are for word marks or logos. When a business uses a unique word mark to identify products, other companies will readily recognize common law rights to exclusive use of that word, even in the absence of registration. In the case of trade dress, however, most business people assume that free competition dictates free imitation, and they do not carefully distinguish between the right to imitate functional features versus common law trade dress rights in non-functional features.
Thus, on a practical level it makes a world of difference when the owner’s cease-and-desist letter carries the imprimatur of federal law by including as an attachment a copy of the owner’s certificate of registration for the trade dress at issue.
Developing Effective Vision and Mission Statements
When used properly, vision and mission statements can be very powerful tools, especially for new and small firms.
In recent years vision and mission statements have become watered down in the corporate world to the point where they are essentially meaningless (bringing a case of beer along on sales calls may exceed customer expectations but not necessarily help a business achieve its goals). Because of this, vision and mission have been largely branded with negative connotations. However, when used properly, vision and mission statements can be very powerful tools, especially for new and small firms. Just as a successful coach has a vision for putting a team together and game plans for successful execution, vision and mission provide direction for a new or small firm, without which it is difficult to develop a cohesive plan. In turn, this allows the firm to pursue activities that lead the organization forward and avoid devoting resources to activities that do not.
Vision Statements for New and Small Firms
Vision statements and mission statements are very different. A vision statement for a new or small firm spells out goals at a high level and should coincide with the founder’s goals for the business. Simply put, the vision should state what the founder ultimately envisions the business to be, in terms of growth, values, employees, contributions to society, and the like; therefore, self-reflection by the founder is a vital activity if a meaningful vision is to be developed. As a founder, once you have defined your vision, you can begin to develop strategies for moving the organization toward that vision. Part of this includes the development of a company mission.
Mission Statements for New and Small Firms
The mission statement should be a concise statement of business strategy and developed from the customer’s perspective and it should fit with the vision for the business. The mission should answer three questions:
- What do we do?
- How do we do it?
- For whom do we do it?
What do we do? This question should not be answered in terms of what is physically delivered to customers, but by the real and/or psychological needs that are fulfilled when customers buy your products or services. Customers make purchase decisions for many reasons, including economical, logistical, and emotional factors. An excellent illustration of this is a business that imports hand-made jewelry. When asked what his business does, the owner replied, We import and market jewelry. But when asked why customers buy his jewelry, she explained that, They’re buying a story in where the jewelry came from. This is an important distinction and answering this question from the need-fulfilled perspective will help you answer the other two questions effectively.
How do we do it? This question captures the more technical elements of the business. Your answer should encompass the physical product or service and how it is sold and delivered to customers, and it should fit with the need that the customer fulfills with its purchase. In the example above, the business owner had originally defined her business as selling imported jewelry and was attempting to sell it on shelves of boutique retail stores with little success. After modifying the answer to the first question, he realized that he needed to deliver the story to his customers along with the product. He began organizing wine parties that included a slide show of the country of origin, stories of personal experiences there, and pictures and descriptions of the craftsmen who make the jewelry. This method of delivery has been very successful for his business.
For whom do we do it? The answer to this question is also vital, as it will help you focus your marketing efforts. Though many small business owners would like to believe otherwise, not everyone is a potential customer, as customers will almost always have both demographic and geographic limitations. When starting out, it is generally a good idea to define the demographic characteristics (age, income, etc.) of customers who are likely to buy and then define a geographic area in which your business can gain a presence. As you grow, you can add new customer groups and expand your geographic focus.
An additional consideration with mission statements is that most businesses will have multiple customer groups that purchase for different reasons. In these cases, one mission statement can be written to answer each of the three questions for each customer group or multiple mission statements can be developed. Also, as a final thought, remember that your vision and mission statements are meant to help guide the business, not to lock you into a particular direction. As your company grows and as the competitive environment changes, your mission may require change to include additional or different needs fulfilled, delivery systems, or customer groups. With this in mind, your vision and mission should be revisited periodically to determine whether modifications are desirable.
Franchise Systems Past the Start-Up Phase
For franchise systems that are past the start-up phase in their growth cycle and have some experience in managing a franchise system, issues related to relations between the franchisor and its franchisees often emerge as critical to the success of the system.
The strength of any franchised brand is dependent, in large part, on the degree to which the franchise system and franchisees can cooperatively exploit competitive opportunities, gain market share, build the value of the brand and enhance the profitability of operating units, whether franchised or company owned. A franchise system which is crippled by internal dissension, units that fail to present the franchised concept appropriately or have human and financial resources diverted to dealing with disputes, will probably be at a significant competitive disadvantage, as compared to systems with good relations and not facing those issues.
It is these hard-nosed business realities that ultimately justify concentration on the skills and resources needed to have good franchise relations, not simply a desire to feel good and have pleasant business relationships, as valuable as those may be by themselves.
Is Profitability the Short Answer?
For those franchising professionals who take a very bottom-line view of franchising, the answer is easy: profitability, initially at the retail unit level and ultimately at the entire system level, including the franchise system itself, is the essential ingredient in good franchisor-franchisee relations.
Experience indicates that while profitability is no guarantee of either entirely satisfied franchisees or good relationships in a system, it also teaches us that profitable systems almost always have lower levels of disputes and litigation than unprofitable ones. In that regard, common sense has it right: unit-level profitability is a primary driver in good business relationships generally and that generalization applies with equal force to franchise relationships.
Therefore, a decent argument can be made that job one for a franchise system is to constantly focus on enhancing and preserving unit-level profitability. Not only will success in that objective make it easier to succeed in all other business objectives, it will facilitate the task of building and preserving good relationships.
Why Are Relations a Never-Ending Issue, Even in Profitable Systems?
Enhanced profitability will not, at least by itself, do all that’s necessary to have good relationships within a franchise system. Those with extensive experience in franchising can all remember instances in which franchisees with very successful economics have been dissatisfied with their franchise system or of franchise companies managing systems which were successful by every economic standard, yet still had a number of franchisees with whom the relationship was far from rewarding.
Part of that phenomenon is probably endemic to franchising as a distribution and business model. After all, many franchise systems have a large number of franchisees (with many in the thousands) and It’s certainly unrealistic to expect that each of those franchisees will be the proverbial happy camper, or that the franchise system will not have issues with any of them.
More importantly, franchisees are, by definition, the owners of their individual businesses, will inevitably have different perceptions, interests and objectives than the franchise system and will not be reluctant to voice, and sometimes act on, those differences. Finally, psychological factors may come into play for some franchisees, and they may have a need to demonstrate their independence from the franchise system.
Consistency is the key, and a franchise company should set out the core values inherent in their system from the start, and explain it in the franchise sales process, as well as screening for candidates who share those values. While policies and implementation can and usually should change and adapt themselves to new challenges, core values should not change.
The question remains if unit-level profitability is a tremendous aid to, but no guarantee of good franchise relations, and good relations are possible in spite of the factors mentioned above, what is the essence of good franchise relationships?
The Essence and Some Examples
One suggestion is that the essence of good franchise relations is captured by the word attitude.
In franchising, as in most human relationships, the appropriate attitude to the other person, and particularly his perception of another’s attitude to him, is critical, and will go a long way to developing a productive relationship.
Attitudes clearly drive behavior, and most of us know, simply through having lived, that attitudes are usually a good predictor of behavior. We can generally tell if someone else has our interests in mind, or is driven entirely by a strategy of using the relationship solely for his own personal benefit.
Business, and the franchising subset of business, is no different. If franchisees perceive that their interests are of no real concern to the franchise system and will be sacrificed whenever those interests might be in conflict, building and maintaining good relationships will be extraordinarily difficult.
The appropriate culture for a franchise system pays real dividends for franchisors. Perceived concern by a franchisor for its franchisees success is a strong predictor as to whether a franchisee will recommend his franchise system to a prospective franchisee.
There are instances in which the interests of the franchisee and the franchise system may be in conflict, or at least are perceived to be so. For example, consider a food-service franchisee who wants to carry an item on the menu which is not authorized by the franchisor. On one level, their interests are in conflict, since the franchisee believes (possibly legitimately) that he will experience increased sales if the new item is added to the menu. On the other hand, the franchise system has legitimate concerns with maintaining consistency between all units, issues relating to appropriate standards for ingredients and preparation of a non-standard item.
What is critical for good relations is that the franchisee perceives (and that the reality matches) whatever the franchisor system’s long-term decision is regarding the proposed new item, the franchisor has an appropriate attitude. That attitude will include the franchise system listening to the franchisee’s desires for increased sales, acknowledging that they are legitimate and explaining that a decision to not accept the new menu item relates to the overall strategy and health of the system. The franchisor should also demonstrate it is focusing on the long-term benefits of each franchisee in the system, even when that means refusing a request that might give a particular franchisee a short-term benefit.
Another perhaps more challenging example could be the situation in which a franchise system operates a retail system where location is a significant factor in success and the system includes both company-owned and franchised units. Suppose that a new location becomes available and that the franchise system could either develop it itself or provide the development opportunity to a franchisee. Assume for this discussion that having the company take the location would not violate any territorial rights of any franchisee and would probably not significantly affect the results of any franchised unit, but that the new location could be effectively operated by an existing franchisee in good standing and without straining his operational or financial resources.
If the franchise system reserves the location to itself and does so on a regular basis and where awarding the location to a franchisee would be practical, that will probably send a message to the community of existing franchisees that the franchisor system’s commitment to developing the franchised side of the business and assisting franchisees in their growth is a lower priority than expanding the company-owned sector.
It is noted that the franchisor is not breaching its contract with the franchisee or violating the law in its actions. However, such an attitude will be perceived by franchisees as being one of bad faith. This perception will be present even if the franchise system does not have a long-term strategy of growing the company-owned side of the business at the expense of franchisees.
Therefore, the essence of good franchise relations may be the realization that attitudes and perceptions, whether accurate or not, affect the relationship in franchising. Also, if the franchisor believes that good franchise relations are important for hard-headed business reasons, then adopting the proper attitude is the place to start.
Attitudes, Internal Staff and Reality Checks
One place where attitude is particularly important is internally, at the level of the franchisor’s support staff. One major way this is incorrectly done is to allow staff to develop an us versus them attitude toward franchisees, with the staff often taking their guidance in this regard from top management.
Systems are successful in which the top management team clearly sends the message that franchisees are necessary members of the team to make the concept successful, that they are highly-competent and ethical and that their input is regularly sought and valued. Managing attitudes and perceptions and sending the right messages from top management to staff makes a difference for good business and economic reasons, aside from the benefit of simply creating a comfortable working relationship.
Another useful step regarding attitudes relates to the franchise system involves regularly checking with franchisees as to the state or the relationship and their attitudes. This can be done directly, or through third-party vendors of surveying services, with whom franchisees may be more willing to share their true feelings. While the feedback may sometimes be unpleasant, ignoring the state of the relationship usually results in even more unpleasant consequences.
The franchisor does not have to agree or acquiesce, but the simple fact of franchisees understanding that their views are respected and worthy of consideration goes a long way towards signaling the right attitude. In addition, the franchisor system might even learn something of value.
What About Franchisees?
Relationships, by definition, involve at least two parties, and if one of them does not take responsibility for his half of the relationship, and his own attitude, then the relationship will probably have problems. In short, attitudes matter, and both parties attitudes are critical.
Therefore, franchisees also need to do an attitude check from time-to-time, just as franchise systems should.
Part of that involves really internalizing a core truth about the relationship: franchisees, by the very fact of having joined a franchise system, have given up some independence and freedom in how they manage the business they own. They are part of a team, and they do not have the freedom to focus only on what they want from the business relationship.
The loss of a franchisee’s freedom is generally compensated for by the benefits of franchising: enhanced market presence, the potential for top-of-mind awareness among potential customers, participation in a brand with high-equity value, access to locations, supplies and other resources on favorable terms.
The franchisees attitudes must undergo a subtle adjustment consistent with their membership in the team. They no longer should think only of themselves, but also be mindful of their significant investment in a common brand and how they can enhance that investment through doing the right things as a member of that team.
By following these principals a franchisor will enhance its profitability and the support of its franchisees.
Increased Business Through Involvement in the Community
The success of a franchise concept often relies on the competency and skill of its system. Many franchisors underestimate the impact of community networking, and fail to recognize how powerful it can be in boosting a company’s bottom line and determining longevity in the marketplace. Not only can networking attract new business prospects on various levels, it can‚ embed a franchise in a community and turn it into a neighborhood landmark.
From selecting the right franchisee candidates to providing ongoing support from home office, a franchisor organization can assist its network to become leaders in their communities and provide helpful tools to get them started.
Choose the Right Franchisees
It is important to choose franchisees who are able to network in their communities and potential franchisees should be carefully‚ serve as ambassadors to the brand, evaluated on their character and networking capabilities by filling out personality profiles, conducting in-depth interviews and looking at current affiliations with various organizations. Selecting candidates who have positive references, and a detailed history and knowledge of the community are proven to be able to build solid business relationships.
A candidate with a positive and personable character can become a networking machine, especially if provided the right tools. Franchise systems should communicate early on to their franchisees that the majority of their time and effort as a franchise owner will be spent creating and maintaining these relationships, and that this activity is critical to their success.
Training and Motivation
Franchisee training is a great opportunity for franchisors to teach new members of the system how to market their business on a grassroots level, and coach on building and maintaining community relationships. New members should be trained to be experts not only in their industry, but to position themselves as experts in the community as well. Encourage new franchisees to join chambers of commerce and participate in other community organizations such as parent-teacher associations, little leagues, Boy Scouts, rotary groups and business-networking groups.
Franchise systems can also survey their existing franchisees regularly on their return on investments from networking, various business partnerships and philanthropic activities. Surveys provide helpful information on effective marketing activities in current markets, which can be used to educate new franchisees and make recommendations on becoming involved with specific groups in the community.
Lead by Example
Franchise organizations can also encourage franchisees to become active in their communities by creating programs that offer a matching fund for association involvements and sponsorships. This is a great way to motivate members of the franchise system and help them realize the benefits of community involvement in increasing business and good will in the community. Such programs often guide franchisees in launching their own philanthropic initiatives.
Set Requirements, Benchmarks and Goals
Franchise companies can further emphasize the importance of community involvement by making it mandatory. This is especially helpful for new franchisees who many not have previous networking experience. Requiring one charity partnership annually can get the ball rolling for franchisees, allowing them to see the benefits of such activity and motivating them to explore other partnerships on their own. As franchisees grow and become successful in their own markets, franchise systems can help them maintain their community relationships and create new ones by setting annual benchmarks and goals. Regular franchisee communication on the results of partnerships and reporting success from various campaigns is another way the home office can gain knowledge on what is most effective for their brand.
A Domino Effect
It takes one great effort to start becoming involved in local community work. As a‚ relationship to start a chain of community-networking opportunities, myriad of companies compete for market share, decision- makers are always more likely to give their business to well-known companies in the community. As business gets referred to other organizations, a franchisee can quickly become a mover and shaker and a leader in the community.
For example, you might want to donate some supplies to a local Boy Scout troop. This might lead to Boy Scout troops all over the region bringing you new business. Realizing the impact of this small philanthropic gesture, you might want to start attending charity events and to sit on the board of a few organizations. There you can meet high-powered business executives who are the decision-makers of large business institutions and might become customers
Think Beyond Your Niche
Franchisees should go beyond their immediate audience and build relationships with individuals and groups not directly related to their industry or products. Business referrals are often considered the best form of advertising. Networking in this way creates another domino effect of new customers and business prospects.
Franchise companies should encourage franchisees to partner with vendors and suppliers, as many marketing opportunities can arise from such relationships. Vendors often rely on the customer feedback of their larger accounts. In this case, a franchise system can offer valuable information from its organization in exchange for inclusion in various advertising campaigns, client testimonials, direct mailings and other marketing activities. In turn, franchisees can become a part of the vendors marketing campaign, and greatly increase their brand visibility among audiences they were not able to reach before.
As the number of competitors increase in the marketplace, franchise concepts can differentiate themselves and create a flourishing brand by continuously encouraging their franchisees to create a strong brand identity within their communities, through the power of networking.
The History, Rules and Regulations of Franchising
Franchising is a relatively new form of legal relationship. The modern era of franchising dates only from the mid-1960s. Yet franchising has become an enormous component of the gross domestic product and grows in its significance to the national economy in each year. It is estimated that there are more than 300,000 franchised businesses operating in the United States, generating $1 trillion in revenue and employing eight million people. Although there are a number of franchisors with hundreds, if not thousands, of franchisees, over 80 percent of all franchisors have 50 or fewer franchisees.
By the late 1970s, owing to the disparate bargaining positions between the franchisor and the franchisee, abuses in the franchisor franchisee relationship developed. These abuses came to the attention of the Federal Trade Commission (FTC) as well as state regulators. The FTC and many states promulgated rules and legislation that were meant to balance the bargaining positions and thereby prevent at least the most flagrant abuses.
Consequently, the offer and sale of franchises are actually more highly regulated than the offer and sale of securities. Whereas the fundamental policy underlying securities law and regulations is to cause issuers to fully disclose all material aspects of an investment, the fundamental policy underlying franchise law is to enable franchisees to determine whether the purchase and operation of a franchise is a good investment.
The primary responsibility of an attorney who acts as counsel to either a franchisor or a franchisee is to (1) recognize a legal relationship that is a franchisor-franchisee relationship; (2) know which government authorities regulate franchises and the regulatory scheme that each such authority administers; and (3) advise the client as to compliance with the applicable regulatory scheme.
Franchisor Franchisee Relationship. The root of the word franchise is the Germanic word frank, which meant free in the sense that in medieval Frankish Gaul only men who were Franks, as opposed to conquered peoples, were free (i.e., able to own property, bear arms and have the right of descent). The word frank was imported into English and came to mean free in the sense of being liberal or generous. The word evolved into franchise, which came to mean a royal privilege granted to a subject by the crown and then came to mean either a political franchise, which was the right to exercise political rights, or a commercial franchise, which was the right to use the property of another for commercial purposes.
There are two types of commercial franchises: public and private. A public franchise is the right granted by a government authority to a private entity to perform on a commercial basis a function that is otherwise a government function. Cable television, ambulance service and recycling services are examples of public franchises. A private franchise is the right granted by a private entity to another private entity to use property owned by the former private entity for a commercial purpose in exchange for a fee or percentage of revenues.
Franchise Defined. Only a legal relationship that constitutes a franchise relationship is subject to regulation. Therefore it is essential to understand the legal definition of a franchise as well as the legal nuances of the term. Every legal relationship that is a franchise relationship must comply with the FTC franchise rule and any applicable state franchise laws and regulations. The mere fact that parties did not intend or even expect to form a franchise relationship will be irrelevant in an enforcement action if the relationship satisfies the definition of a franchise.
Franchise is a defined statutory term. That definition is a functional definition that examines the legal and financial terms of the relationship and the conduct of the parties. Refraining from using the terms of a franchise will not exclude a particular relationship from the franchise regulatory scheme if the relationship satisfies the definition of a franchise. Although the statutory definitions differ somewhat from state to state, each definition contains, at a minimum, the following elements: (1) the franchisor grants the right to use intellectual property in combination with a business method or format such that part of the bargained-for exchange that the franchisee receives is a certain brand identification; (2) the franchisor maintains a measure of quality control and uniformity over the products or services offered for sale by the franchisee as a result of the use of the franchisor’s property or method by the franchisee; (3) the franchisor provides assistance to the franchisee in the form of common buying arrangements, site location, or cooperative advertising; and (4) the franchisee pays a fee to the franchisor that is not a de minimus fee (the FTC franchise rule and most state statutes define a de minimus fee as one that is $500 or less).
In determining whether a particular legal relationship satisfies the foregoing elements, courts and regulators will consider the following factors: (1) whether the franchisees pay fees on a continuing and regular basis; (2) the nature and extent of quality control that the franchisor exercises over the franchisee’s operation; (3) the nature and extent of the disparity of the legal and economic positions between the franchisor and the franchisee; (4) whether the franchisee has made a significant investment in the franchise such that the franchisee would stand to lose the investment if the relationship with the franchisor was terminated; and (5) whether within the ambit of the quality control exercised by the franchisor, the franchisee exercises the incidents of ownership and proprietorship.
Franchise Distinguished. Franchises can include distributorships, trademark or trade name licenses, partnerships and joint ventures, brokers and sales agents and business opportunity ventures.
- Distributorships. A distributorship is an exclusive right to distribute products or services within a specified geographical area or demographic segment as long as the owner does not control the method or means of distribution. However, where the distributor is granted the right to use the owner’s trademark or associate that trademark with the general business of the distributor, a franchise relationship may arise.1
- Trademark or Trade Name License. The primary difference between a license and a franchise is the extent to which the licensor exercises quality control over the activities of the licensee. A license that does not involve the right to use a trademark or a common business format will rarely be deemed a franchise. A license that involves the right to use a trademark or common business format will always risk being deemed a franchise because a certain but indeterminate amount of control is implied in any right to use a trademark.2
- Partnerships and Joint Ventures. A partnership is defined as an agreement between two or more persons to engage in a business for profit. A joint venture is a partnership that lasts for a limited time or to accomplish a specified business purpose. A partnership will rarely be deemed a franchise because the partners exercise joint proprietorship over the assets of the partnership and are jointly liable for the debts and liabilities of the partnership. Under a franchise the franchisee owns the business assets and the franchisor is not liable for the debts and liabilities incurred by the franchisee.
- Brokers and Sales Agents. Brokerage and agency agreements will rarely be deemed franchises because brokers and agents act either on behalf of a principal or on behalf of the transaction in exchange for a commission. The commission is usually a percentage of the value of the transaction and is paid only if the transaction is completed. A broker or an agent does not pay a continuing and regular fee.
- Business Opportunity Ventures. Business opportunity ventures are essentially enhanced distributorship arrangements, generally prepackaged business deals offered mainly to novice entrepreneurs through some form of public advertising. Such ventures include the sale of vending machines, pay telephones, telephone cards, amusement devices and work-at-home-with-your-computer deals. Although not franchises, these ventures are regulated by the FTC and many states in the same manner as franchises.
- Fiduciary Duty. A fiduciary duty in a legal relationship means that the parties owe such duties of trust and confidence that are not owed by parties dealing in an arms-length relationship. Fiduciary duties are not implied in the franchise relationship.3
Federal Trade Commission (FTC) Franchise Rule
The FTC franchise rule was promulgated in 1979 to regulate the offer and sale of franchises.4 The FTC franchise rule is cumulative with, but does not preempt or displace, state laws and regulations. Where the state law or regulation is more stringent than the FTC franchise rule, the state law or regulation will prevail within the jurisdiction of that state. Where the state law or regulation is less stringent than the FTC franchise rule or where a state has no such law or regulation, the FTC franchise rule will prevail. In October 1999 the FTC released a statement, Notice of Proposed Rulemaking, indicating that it intends to revise the FTC franchise rule substantially. The new FTC franchise rule became usable by franchisors if they chose on July 1, 2007 and mandatory on July 1, 2008.
Legal Obligations. The FTC franchise rule imposes the following obligations on a franchisor in connection with the advertising, Franchise Disclosure Document, licensing, contracting, sale or other promotion of a franchise.
- Disclosure Document. The franchisor must provide a potential franchisee with a document that contains the disclosures required by the rule or that satisfies the requirements of the Franchise Disclosure Document. The disclosure document must be provided at the first face-to-face meeting of the parties or 10 business days before any money is paid or any agreement is signed in connection with the franchise, whichever is earlier.
- Earnings Claims. If the franchisor makes earnings claims, whether historical or forecasted, the claims must have a reasonable basis and that basis must be disclosed to the potential franchisee in writing at the time the claims are made.
- Advertising Earnings Claims. If earnings claims are advertised, they must be accompanied by the number and percentage of franchisees that have achieved the claims and certain cautionary language.
- Agreements. The franchisor must provide the potential franchisee with the franchise agreement and each related agreement at least five business days before the franchisee executes any such agreement.
- Refunds. The franchisor must make any refunds that the franchisor commits to make in the disclosure document.
- Contradictory Claims. Any promotional or advertising material must be consistent with the disclosure document.
Penalties for Violation. The FTC is empowered to seek injunctions, asset freezes, civil penalties and monetary redress. The FTC can also seek remedies against individuals who are responsible for violations and impose personal liabilities on such persons. The rule does not authorize private actions to enforce the rule.
State Franchise Regulation
Prior to 1979 the states generally relied on their consumer protection statutes to redress any abuses by franchisors. Recognizing that such statutes were inadequate, most states have enacted some form of franchise regulation.
There are generally two types of regulatory schemes: (1) disclosure and registration and (2) disclosure without registration but with mandated termination and renewal provisions. About 15 jurisdictions require that a franchisor doing business in the jurisdiction or Franchise Disclosure Document franchises in the jurisdiction register the disclosure document with the attorney general of the jurisdiction. The rest of the jurisdictions require that a disclosure document be provided, but the document need not be registered. Moreover, a franchise can only be terminated or renewed as mandated by statute.
Registration. Maryland,5 Virginia6 and New York7 are among the states that require a franchisor who offers franchises in the state or who is located in the state to register a disclosure document with the office of the state attorney general. In Maryland and Virginia a disclosure document that satisfies the Franchise Disclosure Document requirements will satisfy their respective statutes. Although New York generally accepts the Franchise Disclosure Document,New York has certain additional requirements.8
The franchisor is prohibited from Franchise Disclosure Document or selling any franchises in those states until the disclosure document has been duly filed and accepted for registration. In this respect a franchise is treated like a security.
After the disclosure document is filed, the franchisor must amend it if there has been a material change in the information contained in the registered disclosure document. The disclosure document must contain an audited financial statement for the past three consecutive fiscal years. Changes in financial statements are deemed to be material changes. Therefore, as a practical matter, the franchisor must amend its disclosure document at least once every 12 months to satisfy the three-year requirement and the amendment must be approved by the state.
A franchisor may continue to offer franchises while the approval of an amendment to its disclosure document is pending. The franchisor may even sell franchises while the approval to an amendment is pending as long as the franchisor escrows any funds received from any franchisee, provides a copy of the amended disclosure document to the franchisee and provides a reasonable opportunity to the franchisee to rescind the sale.
Disclosure and Termination. Most jurisdictions do not require a franchisor to register its disclosure document. They either expressly require the franchisor to provide a disclosure document or coordinate with the disclosure provisions of the FTC franchise rule.
Many of these jurisdictions impose mandated termination provisions that require that the franchisee receive reasonable notice of termination and the cause for the termination. The term cause is defined as failure to renew at least 60 days prior to expiration, failure to comply substantially with the terms of the franchise agreement, lack of good faith in performing under the franchise agreement and voluntarily abandoning the franchise. The franchisee must also be afforded a reasonable opportunity to cure.9 The District of Columbia had mandated termination and nonrenewal provisions, but they were repealed in 1998.
Exemption From Registration. The jurisdictions that require registration exempt certain franchisors and certain types of sales from registration. Generally, a franchisor is exempt from registration if it has a net worth on a consolidated basis of $5 million or more according to its most recent audited financial statements, or if it has a net worth of $1 million or more according to its most recent audited financial statements and it is at least 80 percent owned by a corporation that has a net worth on a consolidated basis of $5 million or more according to its most recent audited financial statements. To qualify for the exemption, the franchisor must duly apply for the exemption and provide franchisees with substantially the same information as would a nonexempt franchisor. A franchisor that has a net worth of $15 million need not apply for the exemption, but still must provide the required information to franchisees.
Sales of franchises to banks or other financial institutions are exempt from registration. Isolated sales of franchises not made as part of a plan of distribution are also exempt. Sales not effected through a franchisor (i.e., sales from one franchisee to another) are exempt as long as the transferee franchisee receives the current disclosure document of the franchisor. Offers over the Internet are exempt under certain circumstances.
Penalties for Violation. The states are generally empowered to seek injunctions, asset freezes, civil penalties and monetary redress. The regulators can also seek remedies against individuals who are responsible for violations and impose personal liabilities on such persons. The statutes do not authorize private actions to enforce violations of the statute.
Antitrust Issues. In the typical franchise the franchisor limits the geographical area in which a franchisee can operate, restricts the types or products or services a franchisee can offer and requires the franchisee to buy from approved sources. In such an arrangement antitrust issues can easily arise. The courts have developed a substantial and complicated body of case law that adapts antitrust concepts to the franchise relationship.
- Territory Restrictions. A requirement that the franchisee operate only within a specified territory is not a per se violation of the antitrust laws. Such territorial restrictions will be analyzed to determine whether they are reasonable.10
- Restriction on Sale of Product and Services (Tie-Outs). The franchisor may impose restrictions on the categories of products and services that a franchisee is permitted to sell as long as the restrictions are reasonably necessary to assure quality and to protect the business format of the franchisor.11
- Tie-in Arrangements. The franchisor may require a franchisee to sell only products licensed by the franchisor or produced from ingredients supplied by the franchisor to assure quality and to protect the business format of the franchisor. The franchisor may also require a franchisee to purchase from approved sources as long as the franchisor sets standards and specifications and it is reasonably necessary to assure quality and to protect the business format of the franchisor. However, a franchisor cannot coerce a franchisee to sell the products of third persons to which the franchisor has no organic connection.12
Franchise Disclosure Document
(Formerly the Uniform Franchise Offering Circular)
The Franchise Disclosure Document (formerly the Uniform Franchise Offering Circular) was promulgated by the North American Securities Administrators Association (NASAA) in an effort to standardize the disclosure requirements for franchisors who offer and sell franchises in more than one jurisdiction. Most, if not all, of the jurisdictions, including Maryland and Virginia, which require registration accept the Franchise Disclosure Document, although some jurisdictions such as New York impose additional requirements. Therefore counsel must examine the disclosure requirements, which are usually contained in regulations rather than statutes, of each jurisdiction in which a franchisor offers franchises to be certain that the disclosure document satisfies each disclosure requirement.
Although the Franchise Disclosure Document satisfies the disclosure requirements of the FTC franchise rule, a document that satisfies the FTC disclosure requirements does not satisfy the disclosure requirements of the jurisdictions that require registration. If the franchisor is or may be Franchise Disclosure Document or selling franchises in any jurisdiction that requires registration, it should use the Franchise Disclosure Document and not merely rely on the FTC franchise rule.
Contents. The Franchise Disclosure Document lists 23 items, each of which consists of a description of certain types or categories of information that the Franchise Disclosure Document must contain. The disclosure document should be arranged so that each item is addressed. If the franchisor has no information that responds to a particular item or an item is not relevant, the Franchise Disclosure Document should affirmatively so state.
The following list is a summary of the information required under each item (refer to the Franchise Disclosure Document and the state regulations for a complete description of the information required): (1) description and identity of the franchisor, business organization, franchisor’s experience and predecessors and affiliates; (2) names, titles and positions of persons who have management responsibility for the franchisor; (3) civil and criminal litigation history of the franchisor and its principals; (4) bankruptcy history of the franchisor and its principals and affiliates; (5) description of initial franchise fees to be paid before the franchise operates, if they are deferred, when they are paid, whether any franchise fees are refundable and the terms of any refund; (6) description of any continuing franchise fees such as royalties, how calculated, when paid and whether refundable; (7) description in tabular form of the total investment that the franchisee must make in order to open the franchise, such as real property and construction costs, equipment and fixtures, initial inventory, to whom money is paid, whether refundable and whether financed by the franchisor; (8) description of the obligation of the franchisee to purchase goods and services from the franchisor or franchisor-approved sources; (9) description in tabular form of the principal obligations of the franchisee under the franchise agreement, cross-cited to the franchise agreement; (10) description of financing arrangements offered by the franchisor; (11) description of the franchisor’s obligations, such as site selection, training, assistance during operation and time for commencing operations; (12) description of exclusive territory, if any; (13) description of trademarks or service marks; (14) description of patents and copyrights; (15) description of the obligation of the franchisee to participate personally in or operate the business of the franchise; (16) description of restrictions on products sold, customers and sources; (17) description in tabular form with cross-references to the franchise agreement of the terms of termination, renewal, transfer and dispute resolution; (18) description of arrangements with public figures; (19) description of earnings claims, basis for claims and supplemental claims for particular locations; (20) number and locations of franchisees, terminations, cancellations, nonrenewals and reacquisitions within the last three years; (21) audited financial statements (income and balance sheets) for the past three fiscal years; (22) each agreement that the franchisee will be expected to execute, including leases, notes and development agreements; and (23) detachable receipt evidencing the fact that the franchisee received the Franchise Disclosure Document.
Negotiated Franchise Agreements. The whole purpose of the Franchise Disclosure Document and the registration of the Franchise Disclosure Document is to assure that the franchise deal is fully disclosed to the franchisee before the franchisee is bound by the franchise agreement. This purpose raises the question of whether the terms of a franchise agreement with a particular franchisee can be negotiated such that those terms deviate from the terms set forth in the registered Franchise Disclosure Document. Virginia and Maryland recognize the right of franchisors and franchisees to negotiate the terms of a particular franchise without requiring the franchisor to amend its Franchise Disclosure Document in each instance.
New York regulators took the opposite view. New York prohibited a franchisor from deviating at all from the terms of the franchise contained in the registered Franchise Disclosure Document. A court that interpreted the New York disclosure law rejected its position and permitted negotiated franchise agreements as long as the basic disclosures as to the identity, experience and business of the franchisor and the franchise are accurate.13
Following are the basic items that should be considered in a franchise agreement: description of the business of the franchise (business format); site location and approval (holding the business premises); term of franchise; initial franchise fee; recurring franchise fee (formula); exclusive territory; restrictions on categories of products and services offered; restrictions on purchase of products, services, equipment, ingredients and sources; proprietary marks (domain names); reports, records and documentation; right to estimate sales (placement of observer); training; insurance requirements; noncompete covenant; maintenance and protection of business format; termination, renewal and extension; definition of event in default; curing event in default; consequences of failing to cure event in default; remedies, limitation on liability and liquidated damage; holds harmless and indemnification; terms of transfer or assignment of the franchise; and personal guaranty of performance (payment).
Transfers. One of the most beneficial aspects of a franchise relationship to the franchisee is the potential to realize the appreciation in the value of a franchise. The franchisee will desire that its right and power to transfer the franchise be unfettered. However, because the franchisor has a legitimate interest in having able and competent franchisees, the franchisor generally imposes certain conditions on the right of the franchisee to transfer the franchise. The most common conditions are that the franchisor has the right of first refusal to purchase the franchise under the same terms offered to the transferee franchisee, that the transferee franchisee must be suitable or qualified and that any outstanding payment obligations to the franchisor must be satisfied prior to the transfer.
Although some states have enacted statutes that regulate the right of the franchisor to prevent a transfer, none of the area jurisdictions has enacted any such statutory scheme. The courts have generally upheld the right of a franchisor to impose reasonable conditions on the right of a franchisee to transfer the franchise.
The franchisor has an interest in having the right and power to transfer its franchises to another franchisor. The franchisor typically includes such a right in the franchise agreement. The courts have often imposed an implied covenant of good faith on the franchisor to prevent a successor franchisor from materially increasing the burdens on the preexisting franchisees. Although some states have enacted statutes that regulate the right of the franchisor to transfer its franchises, none of the area jurisdictions has enacted any such statute.
Franchising and the Internet
The issue that arises with respect to offers of franchises over the Internet is whether the franchisor must comply with laws and regulations in each jurisdiction in which any such offer reaches including those jurisdictions that require registration. Obviously, such a requirement would significantly burden franchisors.
In 1998 the NASAA adopted the Statement of Policy Regarding Offers of Franchises on the Internet, which exempts offers of franchises over the Internet from the registration requirements of jurisdictions that require registration under the following conditions: (1) the Internet offer indicates directly or indirectly that the franchise is not being offered to residents of the particular jurisdiction; (2) the Internet offer is not directed to any particular person in the jurisdiction by or on behalf of the franchisor or by anyone acting with the knowledge of the franchisor; and (3) no franchise is sold in the jurisdiction by or on behalf of the franchisor until the Franchise Disclosure Document is duly registered and provided to the franchisee in compliance with the laws of the jurisdiction. Most, if not all, of the jurisdictions that require registration have adopted the NASAA statement either affirmatively or impliedly.14
The courts are divided on the conditions under which a franchisee can use the domain name of a franchisor.15 Counsel are advised to address the issue in the franchise agreement like any other intellectual property. The law is still evolving on this issue.
- In re Matterhorn Group, 2000 WL 1174215 (S.D.N.Y. 2000).
- Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358 (2d Cir. 1959).
- McDonald’s Corp. v. Hinksman, 1999 WL 441468 (E.D.N.Y. 1999).
- 16 C.F.R. pt. 436.
- Md. Code, Bus. Reg. §§ 14-201 to -233.
- Va. Code §§ 13.1-557 to -574, 59.1-196 to -207.
- McKinney’s General Business Law art. 33, §§ 680-695.
- 13 N.Y. Code R. & Regs. tit. 13, pt. 200.
- See, e.g., N.J. Code §§ 56:10-1 to -7.
- Continental TV Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).
- Susser v. Carvel Corp., 332 F.2d 505 (2d Cir. 1964).
- Atlantic Refining Co. v. FTC, 381 U.S. 357 (1965).
- Southland Corporation v. Abrams, 560 N.Y.S.2d 253 (1990).
- See N.Y. Code R. & Regs. tit. 13, § 200.13.
- See Travel Impressions Ltd. v. Kaufman, 1997 WL 1068700 (E.D.N.Y. 1997); Hard Rock Cafe International (USA) v. Morton, 1999 WL 350848 (S.D.N.Y. 1999)