Thursday, April 23, 2015

Ohio State Bar Assn - Franchise Law Seminar

If you are in the neighborhood (Columbus or Cleveland, Ohio that is) on May 13th and want to pick-up a few franchise pointers, I will have the privilege - along with my colleagues Judy Marsh (Vorys), Herb Hedden (Vorys) and Brian McMahon (Shumaker, Loop) - of presenting "Franchising in Ohio: What Every Lawyer Needs to Know" at the Ohio State Bar Association.

Judy, Herb and Brian are among the best franchise lawyers in the nation and willing to generously share their knowledge ... me, not so much. See you there!

Here is the promotional spiel:

4.0 total CLE hours

CLE Program 15-218 |
This dynamic and interactive program will educate Ohio Lawyers on the nuances of the patchwork quilt of federal and state franchise/business opportunity laws with an emphasis on representing Ohio-based franchisees from the time of purchase to dispute resolution. The presenters will focus on the Franchise Explosion, Overview/History of FTC Rule, Ohio's Business Opportunity Law, representation of Ohio-based franchise purchasers and dispute resolution involving Ohio-based franchises. With their extensive and varied backgrounds in franchising, the presenters will offer an experience-laden, fast-paced, practical workshop. The panel will weigh-in on all topics for a lively and multi-dimensional presentation.

Monday, April 20, 2015

Expansion Temptation!

From time to time, business owners visit with me and ask about expanding their businesses through franchising. That's good, they're in the right place. And, then they inform me that their interest was triggered by a visit from a solid business person who wants to open a unit in RUSSIA or some other international location. Of course, the business owner is gun-ho to get the deal done.

Now mind you, they have only one location, have not opened any other units and have not offered a franchise domestically. In other words, they do not have a proven concept. They have not trained a single franchisee.

So my answer is NO!

While international expansion through franchising is do-able  - legally and from a business standpoint - international expansion is NOT the way to gain your franchise-chops. Resist this urge.

Indeed, I often advise new franchise systems to expand slowly, with a deliberate plan and with great caution. Why?

First, you do not want to expand beyond your support infrastructure. Especially with your initial core group of franchisees. They need support and you need to provide it to make them successful. And, if they are successful, you will have your best sales tool to sell additional franchises.

Next, you have a lot to learn: standardized operations, training, local suppliers, demographics, marketing and legal requirements for you and the franchisees. It is difficult to learn from your franchisees if they are 10,000 miles away!

Of course, there are many more reasons why you should not jump into the international pool before you launch a domestic franchise program ... but you get the picture.

So resist the temptation to go international too early. In fact, develop a solid domestic expansion plan and stick to it. You will succeed by first helping your franchisees succeed.

Thursday, April 2, 2015

Janitorial Franchises - Is it just a Job?

It is seldom that I "call-out" an entire category of franchised businesses but commercial janitorial franchises have grabbed my attention. And not because I believe they offer a great investment opportunity.

To the contrary, I am calling them out because low-cost commercial janitorial franchises raise a number of concerns. Of course, I cannot paint a dire picture of every buyer of these franchises (and I am sure there are successes) but, based on my experience with a number of clients, I must say there are grounds for caution.

And apparently the State of California and others agree with me. California has published the California Brochure on Buying a Janitorial Services franchise. I have never seen a state focus on an industry like this. And, the typical structure of janitorial franchises and the perceived "unfairness" have spawned a number of creative lawsuits.

With some janitorial franchisee clients I have seen:
  • sales made without disclosure documents being provided
  • poorly drafted franchise agreements
  • assigned accounts drying up shortly after start-up
  • franchisor control over accounts and receivables 
  • high royalty or "administrative" fees, and 
  • non-payment by the franchisor or sub-franchisor to franchisees on collections
Typically, the folks who buy these franchises cannot afford to hire a lawyer, have no business background, are minority individuals or new to the country and really just want a job. But, the buyers have one thing in common: they are hard-working individuals trying to get ahead. To some degree, I believe this makes them more vulnerable to the lure of these low-cost investments.

Unlike other franchise opportunities where franchisees are trained, set-up with a location and given operational control - janitorial franchisees do not control their accounts or paydays. The usual set-up is that the franchisor gets the accounts, bills the accounts and collects the accounts. The franchisee does the grunt work and looks to the franchisor - not the customer - for its "pay." Is this a business or a job?

This system of "franchisor controlled customers and proceeds" has led some courts to declare these janitorial "franchisees" to be "employees" rather than "independent contractors." The case of Awuah v. Coverall ultimately led to numerous court proceedings and a settlement after a lower court in 2013 rendered a $4.8 million judgment against Coverall.

The reason these types of suits occur is that lawyers seek creative ways to challenge franchise abuses when traditional approaches fail or may be economically impractical. (Did this trigger the current NLRB's General Counsel's opinion that franchisors may be "joint employers" of franchisees's employees? Click here for a related post)

Bottom line: Buyers should proceed with great caution. Janitorial franchise systems should clean-up their act and the International Franchise Association and other franchise systems should pressure them to do so - they are giving franchising a black eye!