The Best Franchises

The best franchises are profitable.  Seems obvious.  Stay tuned……

Or, why not just save a little money?

            The Internet is a tremendous source of information.  A lot is written about franchises and franchising unfortunately, I am still waiting for the next gen to produce infallible Truth or Lies software.

            In the meantime it is all about Truth or Dare.  You can find a franchise agreement for any type of business somewhere in Cyberspace.  Anyone with a good grasp of the English language (sadly less common with our weakened education system) can change the wording a bit to fit a different business.  Sometimes they can get lucky and write a new paragraph that really says what they think it does and IT is enforceable–at least in most states.

            So often I get to read junk agreements all the time.  Some from prospective clients who used them to franchisor need them fixed, and–the most fun, from prospective franchisees who want to know what I think.  Would I think of the contract?  Of the franchise?  Of the deal?

            Here is what I often think:   this contract puts the foot of the franchisor on the throat of the franchisee. It is indentured servitude… pre-paid.

            Ironically, at least half the time the franchisor is a well-meaning entrepreneur who is determined that “his or her” franchisees will succeed.

            One of the many problems with cut rate or plagiarized franchise agreements is that the franchisors using them often don’t understand what the cloned agreement really means, nor the consequences of using it. I tell them, sometimes directly and sometimes through the client: “this is what your contract says you can do which makes your franchise a really bad deal.  Is this really what you would do to your franchisee?”

            Usually the answer from the franchisor is “of course not, but I was told by my lawyer that I need this language.” But if you don’t mean it, why say it?!  I take the tone of the franchise agreement as the tone of the franchise system.  Mean contracts make for an unpleasant, ultimately and trusting relationship.  Sticks and stones won’t hurt, but lousy your heartless contracts will do yourself a favor. If you care about your life savings, if you care about the success of your company, see an experienced franchise attorney.  This applies to both sides of the deal.

            By the way, there is a reason for the saying: you get what you pay for.

There are many things you should be asking a Franchisor about the franchise he sales.  Here are the Top Five Things to Ask Every Franchisor

1.  How long have you operated this exact business model you are franchising?

2.  What is your five year plan?

3.   What continuing assistance are you promising to give me while I operate this business?

4.   If the business fails and I stop operating the franchise, what happens?

5.   How am I protected from losing sales to other franchised and corporate businesses? 

Lately some franchise and business opportunities seem to be more like a lot of the mystery business web sites on the Internet. Can you tell who you are dealing with? Let’s start with the company. Where is it located? State and city? Can you even tell what country? Is it a corporation or an LLC?

Even more importantly who are the people? Running the business? Who are the decision makers? Is this a real biz or are they operating on smoke and a pretty web site? Is there a president of the company? A name and a face of the founder. Is the staff real? Is support and assistance really available? how long has the business been operating? How many names of real people?

Sad to say but there are also a number of mystery franchise services firms and websites out there that raise these questions as well. Who are the experts they claim? Any names? Bios? Where are they actually performing their services?

Bottom line: Give no one money and sign nothing without knowing who is taking it and ensuring that their part of the bargain is kept.

            We in the legal profession are often unjustly accused of being “deal killers” and of making things too complicated .  The real problem  frequently turns out to be the “fly by the seat of the pants” entrepreneur or business person who acts and reacts before thinking.   Then they call the lawyer!

            In franchising, however, I believe we do over-complicate matters, particularly on the transactional and operations side.  The legalities of franchising just aren’t that hard!¹  Part of this is the lawyer’s desire to impress and convey the value of his or her skills to the client by emphasizing the complexity of franchising and the need for special legal expertise. Many times a client or prospective client has told me how another lawyer quoted them a fee and bundle of services that would not only allow them to franchise but would get them registered in every state! 

            Perhaps it is my less than traditional background, starting out in the mail room of a franchise company before law school, but I think we as franchise professionals need to re-evaluate how we communicate and what we emphasize with our clients.  I tell my entrepreneurial clients that I come from the “KISS” school of law, “keep it simple, stupid.”  If they will follow a few basic principles and communicate with their attorney regularly, their compliance problems should be few and their legal bills reasonable.

            We will provide the best results for our clients, if we take a more holistic approach to franchise representation.  Too often we allow clients to treat us as a “lawyer in a box”, taking us out to answer a question or fix a problem and then putting us away until the next time.  Although this is true in many areas of practice, I feel it is especially true in franchising.  Allowing for economic considerations and determined clients, we can be more effective by seeking out the big picture.  Franchise lawyers should understand not just the legal issues, but the business dynamics and interpersonal relationships as well. By doing that, we are better able to identify and solve the real problem.  For example, a franchisee may have been defaulted not for breaching the contract, but because the CEO feels insulted when the franchisee did not keep a promise made to her personally.

From the KISS school of franchising:

Franchising is about relationships: franchisor-franchisee, franchisee-customer, franchisor-customer.  In each case, treat the other with respect, listen, respond honestly.

Advice for the franchisor client:

• Keep your promises.
• Undersell and overdeliver
• Take the time to think it through and do it right.
• Remember you are running two separate businesses, the franchised business and the franchise relationship.
• Things change, be flexible.
• Don’t take it personally!  Before you do, ask: is it business or is it ego?
• If franchisees put you on a pedestal, you are bound to fall–or be knocked–off.
• Attitudes come down from the top.  If you don’t respect and honor your franchisees and your commitments, then don’t expect your employees to do so.
• Make it fun!

Advice for the franchisee client:

• Your franchisor is entitled to make a profit–if it doesn’t, it won’t be around for long.
• Don’t surrender your judgment and critical faculties to your franchisor. 
• There really are no guarantees in any business, you are ultimately responsible to create a successful business for yourself.
• If sounds it’s too good to be true, it usually is.
• Do your homework, the franchisor’s promises are no substitute for researching the business and the franchise system.
• Don’t take it personally!  Your franchisor is not your mother.
• Management and ownership of the franchisor can change, but your contract won’t.

Fundamentals for the franchise attorney

• Create reasonable expectations:

            –about what franchising is

            –about the law

            –about what you will provide

• Listen first!  Be sure you understand what makes business sense for the client.
• Repeat yourself!  Management changes, and corporate direction changes.
• Understand your client; their attitude toward franchisees and their goals.
• Help your clients distinguish between the legalities and the realities–being right isn’t always being successful.
• Be a counselor first, lawyer second.  In other words, focus on solving the problem, rather than proving your client right.

            Of course, all of this is premised on the franchise concept being viable.   If the business doesn’t make money, then it shouldn’t be franchised.  If it is franchised, then our litigation colleagues will taking this to a less holistic level.

© K. Tidd, 2001,10

Feel the need to franchise your business?

FAQs answered.

I come from the Keep It Simple school of franchise law, and prefer to make franchising as uncomplicated as possible.  But it is still not something you should just jump into because you think franchising is a fast way to grow or a great way to easy money.   Simple doesn’t mean easy or cheap. Doing things right means taking the time to understand completely what franchising is about, what the choices are and how different choices have different legal consequences.

Here are some questions I often get from “tirekickers,” most of whom are not ready to franchise:

1.         What type of legal entity do you recommend I form as my franchise company?

I don’t believe in getting overly complicated in forming a business entity. A sole owner, or 2 or 3 “partners” typically only require a limited liability company or corporation.  Unless there are plans to go public or raise capital by offering equity in the company to multiple investors, it is more often a tax driven determination which form of entity better suits the owners.  It is all based on the circumstances and the needs of the individuals involved.

For purposes of maintaining the shield of a legal entity, LLC or corporation, be sure to have proper legal documents prepared and then operate the company and maintain the company records as instructed by your attorney.  Remember that doing it right helps protect the personal assets of the owners/officers of the company.

For purposes of franchising, it is unlikely to make any difference which entity you. It is possible that as more states look at taxing the royalties paid by its citizen franchisees that the form of entity might matter, but I doubt it.

2.         Should I franchise my business?

I do not necessarily recommend franchising.  It requires planning and legal documents that make the assistance of legal professionals essential.  No do it yourself kit or non-lawyer will give you the protections you need while ensuring that your franchise activities comply with all the federal and state laws involved.  You must investigate and decide whether the legal constraints and benefits suit your business model and goals.  You must also decide whether it is an acceptable way of doing business.

3.         Is the Business  Opportunity I Propose to Sell to Others Really a Franchise?

The FTC Franchise Rule is the overriding definition of a franchise on a national level. 16 CFR § 436.1 (h) of the Franchise Rule defines a franchise as the offer or sale of any business opportunity that meets 3 fairly simple elements.

Consider this – Does the business opportunity you propose to grant/sell to others meet these three elements as specified in the Federal Trade Commision’s Franchise Rule:

Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

(1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;

(2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and

(3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.

If the relationship you envision falls within this definition, then what you propose is a franchise by legal definition. Then the questions becomes, do you want to revise your business model to avoid being a franchise? This requires careful evaluation of what options you may have.

4.         What types of franchisors are there?  What would be best for my company?

Franchising and franchise systems can be structured in an enormous variety of ways. Without understanding with more certainty the business and how the principals/owners/founders want to operate their franchise system, it is an impossible question to answer accurately.  Some franchise advisers suggest multiple layers of franchise rights with goal of expanding nationally very quickly.  However, those layers usually create unnecessarily complicated relationships.  If there are any flaws in the business, the contract or the way the franchise system is structured, then “layered” franchises (such single unit/multiple unit/ area or master franchise area units) will magnify and enhance all of the legal liabilities and financial problems that result.

Picture the daily operation of you franchise company.  What do you think you need to do to be prepared?  If unsure, start looking for experienced professionals with experience in many types of franchising and business to get a clear picture of what your options may be.

What Is “The Best Franchise” to Buy?

Everyone wants to know the best franchise to buy, but it is really a meaningless question.  There is no such thing as best franchise or even worst franchise. The “question” covers a lot of ground.  The purpose of owning a franchise is to own a profitable business.  So what franchises are profitable? Some of them, sometimes.  As in certain to make money? None are a certainty.

What does the “top 10 hottest franchises” or the “10 best new franchises” get you?  The current winners in a popularity contest where the rules change and no one knows who makes the rules–or picks the best franchises or the hottest franchises.  Just because the sheep follow the leaders over a cliff, doesn’t mean you have to. 

Even the most solid of business concepts, the most thoughtful and most comprehensive in training, systems and support can result in a failed investment. 

Here are five reasons a franchise fails:

*life cycle of the business model is nearing its end (used records, video rentals,

*wrong location/wrong demographics

*underestimating the various ways the business can be affected by competition

*overestimating the market for the service or product (especially true in this economy)

*bad operator (you need to have confidence in your abilities, but few are good at everything they try)

  No franchise is certain to succeed – even the largest franchise systems in the country have far from a perfect track record– there are some that seem virtually certain to fail. 

Here are some red flags:

1.  the business being franchised has not been operated long enough to do much more than make a profit but it is promoted as a proven concept.

2.  the founder of the business has either: started the business for the sole purpose of franchising it and has no real passion for the business or decided to franchise without understanding how to be a franchisor and has focused on selling franchises and–more or less–getting them started rather than a small core of truly successful franchises

3. franchisor has no money, no ongoing business advisors

4. franchisor uses a franchise “packager” to put together its franchise documents who profits primarily from the start up package and/or sale of franchises, but not from on-going counseling of being franchisor, or….   

5. franchisor copies the franchise documents of a similar business concept to cut costs which means they are basically clueless about the whole business

6. when franchise fees/royalties/mandatory purchases are added to operating costs, the probability of the business being much better than a low paying job  

7. the franchisor cuts corners on legal compliance because it’s too expensive           

The best franchise is the franchise that will be profitable for you, achieves breakeven at a point in line with your expectations  and is supported by a franchisor that meets or exceeds the expectations they create.

When you think about buying a franchise, you need to investigate the franchise carefully.  One of the most important things you should do is talk to other franchisees.  Listed below is a list of questions to get your evaluation of the franchise or business opportunity started:

1.         How long have you been operating this business?

2.         Did the cost of your start-up fit within the initial investment numbers set out in the Offering Circular you received?  

            — if not, what was different?

3.         Did the training program prepare you adequately to open and operate your business?

            — if not, why not?

4.         How would you describe the quality of the training program? the instructors?

5.         Did the training meet your expectations and the description given in the Offering Circular? given by the franchisor’s representatives?

6.         How long from the time you signed the franchise agreement and paid the franchise fee until your business opened?

7.         How long did it take you to reach breakeven (or enough positive cashflow to pay your operating expenses for a period of  consecutive months)?

            –including a salary for yourself?  – how profitable do you believe this business can be in one year?

8.         What kind of help did the franchisor give you in actually setting up and opening your business?  and how many days was a representative present at your opening or start-up?

9.         When you opened, do you feel you were prepared?

10.       How did you choose your location or territory, what help did you receive and are you satisfied with it?

11.       If an advertising fee is required and/or advertising support promised, is it what you expected?

12.       What do you think of the management of the franchising company?

            –are they good leaders for the franchise system?  –do they do what they say?

13.       How would you rate the financial stability of the franchisor?

14.       How responsive is the franchisor to your requests for help? 

15.       If you purchase supplies or inventory from the franchisor or required suppliers, do you feel the prices are fair and the quality competitive?

16.       If you have an exclusive territory or other exclusive marketing or customer rights, are you truly protected from other franchisees?       Are your exclusive rights adequate to protect you?

And the closer, when you have nothing left to ask:

17.       If you had the choice, would you buy this franchise again?  Do you recommend it?

By Kat Tidd

Developing An Identity

Choosing the right name for a business is a challenge under any circumstances. Does it convey the right message? Is suitable for the nature of the business? Is there anything similar being used? Is it available for use? What kind of exclusive protection can be obtained to keep anyone else from using the name?

Different kinds and degrees of exclusivity can be obtained for the name of a business, its products and services. Making the right choices will ensure the greatest measure of protection and exclusivity for that name. These choices become even more critical for a business that chooses franchising as its method of growth and expansion. The name chosen for the business–and its products and services–is the glue that creates a unified identity that will support and bind together a network of independent franchised businesses.

If a sufficiently unique name is not chosen or the appropriate protective measures not taken from the inception of a business venture, those past oversights may limit the franchisor’s ability to expand or to use a single, identifiable name for franchising. For example, not obtaining trademark protection or doing sufficient research before starting a franchising business may result in someone copying the name, using something similar, or–worst of all– having used the name first.

If a “prior user” exists, then the franchisor may well be prevented from using the name it has invested so much in developing and marketing–perhaps only from that market, perhaps completely, or perhaps “only” from obtaining federal trademark registration.

Protecting The Name

A corporate name is merely that, the name of a legal person that is a corporation—and it is nothing more. No other company or business entity formed by a state’s authority will be granted the same name, but that is the only protection given.

Obtaining a federal trademark registration is constructive notice, as of the filing date of the application for registration, of the registrant’s ownership of the mark. This preserves the right to use and protect the registered mark in future geographic marketing areas. Application for federal registration can be filed based on one’s mere "intent to use," rather than "actual use," of a mark. The date that an application is filed will constitute use of the mark in all 50 states for "priority" purposes.

What exactly is a trademark?

A trademark is a symbol, word or words, or design used to distinguish a company’s products or services from those of its competitors. It is not the company name. Trademarks are registered in different categories:

• As service marks representing the services of a company (and its franchise system), e.g. Burger King restaurants; and

• As trademarks representing the products of the company, e.g. Burger King hamburgers..

What makes a good trademark?

Finding a unique name that is acceptable for registration by the U.S. Patent and Trademark Office is often a difficult process and one that can conflict with personal and marketing preferences. If it is generic, or too commonly descriptive, the PTO will not authorize registration. The generic name is the common name (noun) of the product or service identified. Think of the trademark as an adjective that must be used with a noun. For example, Mrs. Fields (adjective and trademark) cookies (generic noun). Too often entrepreneurs insist on using a name which, if registrable at all, is so descriptive it’s given limited protection even as a trademark.

What rights do franchisees have to use a franchisor’s trademarks?

Franchisees are licensed to use franchisor’s designated name as a trade name and as service marks to market and represent the services offered by the franchised business. Also, franchisees are given the right to market and sell franchisor’s trademarked products. (Another term for trademarked is “branded”.) The franchisor may or may not license the right to apply any of its trademarks, including its logos, to products or tangible items. Often that right is reserved for the franchisor who will sell the products to its franchisees, which they may be required to purchase under specified circumstances.

It is important that the franchise system’s customers know that trademarked products and services are of an established and consistent quality. It is equally important that trademarks be used consistently and correctly in order to ensure that trademark rights in these marks remain enforceable.

Correct and consistent use of the trademarks strengthens the franchisor’s identity and goodwill, as well as contributing to the overall strength of the national system.

To Build a Strong Identity

Making the right choices in the beginning saves a new franchise venture more time, money and energy than can be imagined at the outset. Choosing and registering the right name in the proper trademark classes is an essential step to building a strong and highly recognizable franchise system with goodwill on a national scale.

Recently I could not resist jumping in on what turned into a debate on the right way to practice franchise law. Long story short, a colleague maintained that in franchising, attorneys have to "pick a side." The franchise lawyer/litigator claimed one could either represent franchisors, or one could represent franchisees–but never both without, apparently, being morally deficient.

As someone who spent the first 10 years of her practice representing exclusively franchisors, I strongly disagreed and here is what I said:

My franchisor clients are quite comfortable with my franchisee representation and vice versa. When we are discussing choices/decisions, I offer them the arguments and positions I could take from "the other side."  This allows them to make better informed decisions about the potential consequences.

Of course the larger franchisors are most likely to say pick sides, because they are more likely (in a broad sweeping generalization) to say my way or the highway.  They don’t have to care what the law appears to say, just get it done their way–except for fear of consequences. Smaller franchisors can’t afford to pick unnecessary fights and are often more amenable to radical concepts like "fair" and "balanced." 

Of course franchisors want "mere technical violations" to be deemed inconsequential while franchisees feel violations of the law call for consequences.  As franchisor’s counsel does that mean we can tell our clients it is OK to ignore franchise laws and regulations? That it will be niggling and unreasonable of a franchisee to want a remedy in such a case?

There is always a juggling of business practicality versus the legal consequences.  Who chooses what?  Where are the ethics in that?

Isn’t it  unreasonable of the cop to give us a ticket for going a mere 65 in a 60 mph zone?  So what if the speed limit is 60 mph.  Who’s on the dark side?

I have seen a lot of small start up franchisors poorly served by developers/advisors who come from the "think big" "ramp up big" side of franchising, all packaged with franchise agreements that keep the franchisor’s foot on the throat of the franchisee and do not reflect the intent or desire of the entrepreneur, but they train the founder/newbie franchisor to view their franchisees as the enemies to be kept in line and slapped down "as deemed appropriate" "in their sole discretion."   Then when the novice franchisors stumble, as they inevitably do, they are surprised by the hostility and unreasonable expectations of their franchisees.

My first years of practice were all for franchisors, and I count my blessings that I landed in private practice and have counseled advised and fought for and with so many franchisees while still working with entrepreneurs to build their franchise systems. I am still learning all the viewpoints. Holistic, not antagonistic.

Bad guys show up every day on both sides.

It’s OK to choose plain vanilla, but I like the rainbow, sometimes with a large dose of problem-solving, and that’s OK too.

It doesn’t always have to be easy.

I also think my way gives a balanced, more fairly reasoned approach to decision-making for my franchisee and my franchisor clients. Happily, I heard from many colleagues who applauded my rebuttal.