Franchising Realities & Remedies: Page 5
By Harold Brown ©1999
Reprinted with Permission
A. The New Franchisor
1. Putting Together a Good Business
The most important asset of a new franchisor is its development of a successful business. If it has accomplished that goal in the marketplace, it can turn to franchising as one of the best ways to distribute products or services. When a franchise system is properly put together, it can be an ideal relationship for all who are involved, including the franchisor and every franchisee.
2. Putting Together the Documents and Getting Clearance
The two essential documents for a new or revised franchise system are a franchise agreement and a pre-sale disclosure prospectus. While there is a basic disclosure format, there are no standard forms for either of these. They have to be professionally prepared to suit the needs of the particular business and the franchisor’s established operations.
Some franchisors or their attorneys believe that these documents should be drafted with terms that reserve most powers for the franchisor and supposedly protect it from being successfully sued. Many grant the franchiser significant discretion in the relationship by use of the often repeated statement that every important decision “is in the sole discretion of the franchisor.” The wisdom of such decisions varies between franchise systems. For some, an alternate goal may be to apply standards that provide fair and reasonable terms, assuring that the parties will concentrate on joint business goals which are designed to benefit the franchise system.
3. Primary Goals
Primary attention has to be given to promoting the marketing system of the franchisor. It requires skill to meet that fundamental goal while recognizing that reasonable treatment should be accorded to the franchisee. With their investment of substantial time, money and effort, each of the dealers is like a joint venturer or partner. Each of them cannot be guaranteed business success. A franchisor should strive to provide each franchisee with a reasonable opportunity to succeed, however. The franchisor should not act in reckless disregard of the franchisee’s welfare. Similarly, franchisees must understand that sometimes their individual interests must be subordinated to what is best for the franchise system.
4. Disclosure and Registration
A majority of the U.S. population lives in states where registration and prior clearance and presentation of a prospectus are required before the sale of a franchise. Preparation of these documents and their clearance require skill and experienced counsel to satisfy the needs of the particular franchisor, often involving states reaching from New York to California. In the remaining non-registration states, it is necessary to comply with the Federal Trade Commission’s Pre-Sale Disclosure Rule. A great deal of accommodation and cooperation has succeeded in simplifying these legal obligations, often by use of a single Franchise Disclosure Document (FDD) which was revised recently by the FTC.
5. Recognizing Concerns of the Franchisees
Some of the principal concerns of franchisees have been previously discussed. Simplified requirements include:
- a franchise with an established record of success (a well known name)and a financially sound franchisor;
- an original business plan that is not simply a copy of someone else’s documents and activities;
- a sufficient number of local franchise or company stores to sustain shared advertising and promotion;
- training by experienced personnel, with valuable material that is reasonably sufficient to introduce and guide the operation of the local business;
- Fair standards, policies and procedures for the operation of the franchised business;
- site locations that meet proven criteria;
- A reasonable royalty or other fees that recognize the franchisee’s need for a fair return on his investment;
- avoidance of a resale pricing structure that may injure competition;
- reasonable policies for the selection of sources of supply for products and services and the use of standards and specifications for obtaining approval of other sources;
- allowing the use of alternate credit resources to provide normal business support;
- use of fair procedures to resolve disputes, to select the governing law and to fix the site of the proceedings;
- avoidance of unreasonable post-term non competition covenants if they are overbroad as to time, distance and the protection of a franchisor’s existing business interests in the local marketing area;
- trade secrets that are genuine, provide business advantage, are kept secret, and are based on proven development;
- reasonable standards governing termination, transfer, and renewal of the franchise except for good cause.
Such a list is not exhaustive, but it amply illustrates legitimate goals for all of the parties to the contracts and to their mutual performance over a long period of time. Very successful franchisors have demonstrated that these needs can be reasonably respected without interfering with the important concerns of the franchisor.
B. Complying With Federal and State Laws
There are numerous federal and state laws that must be observed both for the benefit of franchisees and prospective franchisees. Such compliance can help to shield franchisors from the high cost of litigation and potentially significant monetary damage awards.