Leasing Your Location - Prepare for the Wait

With patience and due diligence it has taken you six month or more to lock-down your franchise. But are you ready for stage two of opening your business?

After discovery days, contract signing, training and other assorted preliminaries, you are eager to set-up shop. The franchisor has given you some guidance and criteria to select a location but now you are on your own. But, before setting you free, the franchisor, as a reminder, pointed out that clause in the franchise agreement requiring you to lease a location within 180 days. At least there is no pressure!

But prepare yourself ... this process of finding the right location, at the right price, and negotiating the lease could take longer than you think - perhaps longer than buying the franchise. I have had a number of clients go through this drill. It is a frustrating process.

So the best thing you can do is prepare yourself in advance that this going to take time and effort OR just wait until you are under the gun and be driven by panic.

But, here is the real dilemma: Do you look for possible lease locations before deciding on a franchise or get the franchise and then start the hunt? (many horse-and-cart and chicken-or-egg cliches could be inserted here but I'll spare you ... or not)

It seems difficult to look for a location before you have the franchise - too many unknowns: what is the business, where is it best located, what does the franchisor require, what territory in the franchise system is open, etc. etc? However, you can scout the potential areas you are interested in before you decide on the right franchise. Educate yourself. Learn the leasing market. Contact a commercial realtor. Develop some idea of the cost and availability.

Although some franchise systems are intensely involved in the selection process, most leave the ultimate responsibility of selection to the franchisee (franchisors disclaim responsibility for the profitability of a location). So get ahead of the curve and bone-up on the leasing market in your areas of interest.

You might even impress the franchisor.

5 Mistakes Start-up Franchise Systems Make

Starting a new franchise venture is exciting – the anticipation of building a system, helping others succeed, financial success … all fueled by entrepreneurial energy and adrenaline!

But nothing can put the brakes on an otherwise enthusiastic and formidable franchise start than the following five missteps:

1. Failing to secure and register the trademark – the essence of franchise success is uniformity and brand identification. Your trademark is your identity. Do you have a trademark or service mark that is unique, protectable and able to be registered with the United States Patent and Trademark (USPTO)? This is a federal registration that will protect you and allow you to ward off poachers – but not all names or marks are protectable. The USPTO registers allowable trademarks that are not already registered, not descriptive for the goods/services, a geographical term or a surname. To determine if your mark will qualify for registration (i.e. protection), you need the services of an experienced trademark or franchise counsel.
 

2. Using a “reactive” development strategy – allowing franchise buyers to control where you will locate your units is a huge mistake. Careful and determined placement of your franchise locations is a must – be “proactive” not reactive. I see too many start-up systems that attempt to sell nationwide – the result is a far-flung, unmanageable system that lacks geographic synergy and brand identification. Concentrate, concentrate, concentrate. A statewide or regional development approach makes better sense than “going national.”

3. Failing to retain experienced franchise counsel – because franchising is a “regulated” business process (similar to selling securities), retaining inexperienced legal counsel is risky and costly. Preparation of a fully-complaint Franchise Disclosure Document, as required by the Federal Trade Commission and franchise registration states (approximately 15 states), as well as thoroughly-drafted agreements, is not for neophytes. My recommendation is to select a member of the American Bar Association’s Forum on Franchising, the preeminent national association for franchise attorneys. Forum members are exposed to constant legal updates, attend national conferences, write informative franchise articles and maintain a national informational network. Using inexperienced counsel can set a system back to the very start.

4. Improper franchise sales training – selling a franchise is tricky business. Some of the issues include: knowing registration requirements, having the correct documents, knowing when and how to deliver disclosure documents and final agreements, knowing the rules about financial performance representations – just to name a few. Flawed sales can lead to major legal problems. Make sure you and your sales personnel know what you are doing. For a great sales guide, consult my friend Warren Lee Lewis’s The Franchise Seller’s Handbook. (warren.lewis@akerman.com)

5. Selling to the “wrong” buyers – just as a “reactive” geographic development strategy can set a new system on the wrong path, so too can poor franchisee selections. The first few franchisees are the most important. Take your time and make sure you are choosing the best “partners.” You don’t want just anyone, you want the best ones. Before you meet with anyone, develop your ideal “franchisee-profile” and then see how your candidates stack-up against your standard. Develop a solid franchise application, check references, vet personalities and capabilities. Engage in proactive due diligence.

Get your system off to a strong start – match that enthusiasm with solid preparation by avoiding the five basic mistakes.

The Aging Workforce: A Challenge for Franchise Systems?

Franchise systems employ over 8.5 million Americans – with more than 20 million employed in related and supporting businesses, resulting in 15% of all U.S. private-industry jobs. That’s a lot of people!

But how many of them are getting older? Well everybody … but the largest segment of our society will soon reach traditional retirement age and may continue working. This may present some unique challenges for employers. Franchise systems are not immune from this trend.

With the advance of years, come physical and cognitive limitations that can affect an employee’s performance. So when this occurs franchise-system-employers can just get rid of the faltering employee right? Maybe not.

While “age discrimination” may be the most obvious concern, amendments to the Americans with Disabilities Act (“ADA”) substantially broaden the protections available to aging employees (actually any employee) who develop a “disability.” With these new protections come expanded burdens on employers which may have a profound effect on how employers deal with their older employees.

A brief overview may help franchisors AND franchisees avoid unwanted legal claims.

The Americans with Disabilities Act

• The ADA applies to employers with 15 or more employees;

• The ADA applies to employees with a “disability.”  In the simplest terms, anyone who has a physical or mental impairment that limits their normal lifestyle or major life activities, will be deemed to have a disability;

• Only a disability which affects job performance or the ability to perform any aspect of a job is relevant;

• Once identified or obvious and a determination is made that a disability affects job performance, the employee or their representative may request a “reasonable accommodation” as necessary to perform their job to the satisfaction of the employer. The request for an accommodation must be made by the employee or their representative unless it is obvious that the employee is unable to make the request on their own behalf.  As a practical matter, however, when  a disability is obvious to an employer, it is recommended that the employer take affirmative steps to ask the employee if they want an accommodation;

• When the employee requests accommodation, the employer may ask for reasonable documentation to support the request.  Doctors’ reports, medical instructions or other supporting documentation may be requested. Documentation can come from a health care provider or rehabilitation professional. The request  must be limited to the disability and the accommodation issues (not all medical records);

• Once the documentation is obtained or the employer is otherwise adequately informed, the employer should meet with the employee and conduct an interactive meeting to discuss possible accommodations that may work for the employee and be satisfactory to the employer (the EEOC offers this explanation: The employer and the individual with a disability should engage in an informal process to clarify what the individual needs and identify the appropriate reasonable accommodation. The employer may ask the individual relevant questions that will enable it to make an informed decision about the request. This includes asking what type of reasonable accommodation is needed);

• The only statutory limitation on an employer's obligation to provide "reasonable accommodation" is that no change or modification is required if it would cause "undue hardship."  "Undue hardship" means significant difficulty or expense and focuses on the resources and circumstances of each employer in relation to the cost or difficulty of providing a specific accommodation. Undue hardship is determined through a “circumstances” test which considers not only financial difficulty, but whether reasonable an accommodation is unduly extensive, substantial, or disruptive, or would fundamentally alter the nature or operation of the business.

Again, while there are many nuances associated with the above factors and each case is different, the basic steps outlined above generally apply to any circumstance involving a disabled or aging employee. Please keep in mind that your state may also provide protections for disabled employees.

Given the complexity of workplace protections today, it is always wise to consult your legal counsel before a simple employment matter spins out of control.

Brand Enforcement Redux

This week I was planning to write about Financial Performance Representations (the subject of FDD Item 19) when a funny thing happened on the way home from bocce last night (that's right I play in a bocce league!)

I asked my friend Nick (the driver) to stop at a Burger King so I could pick up a Whopper with cheese. Yes I know they are not particularly healthy but I like them. And, look at them, they are irresistible ...

So we pull up to the electronic menu board and after about 2 minute wait (literally) I shout my order from the passenger's side. This is about 8 PM, the parking lot is empty. With one car ahead of us at the service window, my mouth is watering and I figure we are well positioned for a quick grab and go!

Nick pulls up behind the waiting customer and we wait ... and wait and wait. We wait for at least 5 minutes with no human appearing, no service to the guy in front of us. Completely frustrated as I can easily become, I exit the car, look in the service-window and chat with the waiting car-customer. The single visible employee is at the main customer counter taking a new in-person order. I turn to the waiting car-customer (who must have been waiting at least 10 minutes), and he says. "I think he's the only guy in there, making all the food and taking orders!"

Returning to the car, I tell Nick to forget about it. Being far more patient than me, Nick waits another 2 minutes and with no action for the waiting car-customer, I finally persuade him to leave.

No Whopper with cheese, no service, no more Burger King.

I do not know if this was a corporate location (I doubt it in the middle of Ohio) or a franchise location but does it matter? No. As I wrote a few weeks back (see the post here):

Every location is an animated billboard for your brand, your business. And, I am not talking just to franchisors here. Franchisees, it is your brand as well! Think of it. Every time a customer visits ANY franchise location, it is a reflection of EVERY location in the system. To keep the system-wide impression sterling (not Donald), you must do your part.

Franchisors and franchisees UNITE and enforce your standards, your brand image and your system - it is your most important asset!

It is Big Macs for me from here on out.

Could Mediation Remove the Blind Spot?

Full disclosure: I recently started mediating franchise disagreements and other commercial disputes (see my post announcing my mediation services). So far so good...

Because of this new dimension to my practice, I stay alert to articles and blogs discussing litigation and settlement, especially the psychology of the process. One blog is the Persuasive Litigator written by Dr. Ken Broda-Bahm and his team. Last week's article was "Look for the Dunning-Kruger Effect."

The main finding of the Dunning-Kruger study (done in 1999) - when it comes to self-assessing one's own skills, competent individuals were able to accurately assess their own relative ranking, but incompetent people consistently overestimated their's - did not draw my attention as much as an analogous connection mentioned: that attorneys can be poor predictors of the outcome of their own cases.They have a blind spot.

While surely this does not apply to my ability, the article makes the case:

Cases fail to settle, or settle at an inappropriately late hour, often due to the parties' failure to accurately assess their case. The attorneys, the research supports, can also be surprisingly poor predictors of their own case's prospects. The advocate's role in seeing the best in their own case, the "partisan distortion," can serve as a barrier to settlement, as well as a barrier to the kinds of honest assessment that sets the stage for the best strategy in trial. Advocates' best bet is to obtain as many neutral, or neutralish assessments as possible -- including from mock jurors -- in order to get a realistic grip on the case.

Mock juries are good if you can afford one (none of my clients have been able to); but when I have my litigator hat on, I know that I am a partisan, biased in favor of my client's case. Call it human nature, borne out by the research. Some mediators have helped me and my clients come down to earth, to better assess our chances.

While mediation may not settle your case, it may help you and your client "get a realistic grip on the case." In the franchise arena, where many options are available to settle a case, mediation may solve your dispute or open your eyes to a better strategy. And, the synergistic mediation process may lead to an outcome not previously considered. This just occurred in a mediation I conducted, where a party's creative suggestion broke the logjam.

Remove the blind spot.

Franchisees' Employees Not Franchisor's

Just finished reading Kaufmann, Gildin & Robbins LLP's (led by David Kaufmann) article: A Franchisor is Not the Employer of Its Franchisees or Their Employees, published in the American Bar Association Forum on Franchising's Franchise Law Journal (Spring 2015).

Kudos to David and his colleagues (Breton Permesly, Felicia Soler, and Dale Cohen) - not only have they taken on this controversial issue (triggered by the NLRB General Counsel), but have produced a virtual treatise on the historical evolution of franchising and its legal underpinnings. Long story short - the NLRB's General Counsel's Complaints lack substance, completely ignore the role of the Federal Trade Commission in franchising and likely will not survive "judicial scrutiny."

While the article is at times a bit strident, the grounding of the requirements for "franchisor control" in the Lanham Act (the U.S. federal law for trademarks) is superb and indisputable.

This is the keystone to the defense against the "joint employer" position. Franchisors have no choice but to require uniformity to protect their most precious asset - their trademark. If franchisors (or any trademark owner) fail to control the quality of the goods and services delivered under their mark, they risk losing the mark.

David and crew offer a number of other reasons why the NLRB position is indefensible: the FTC's 35-year jurisdiction (which the NLRB General Counsel did not seem to review or understand), the definitions of a "franchise" under numerous state laws and the overwhelming legal holdings of most courts that a franchisor is not the employer of its franchisees or their employees.

The control dichotomy franchisors face must be resolved in favor of franchising and franchisors.

While I challenged the hyperbole used by the International Franchise Association when addressing this issue (see this blog post - NLRB Ruling Impacts Franchising - Existential Threat?), the Kaufmann, Gildin & Robbins LLP-article articulates all the reasons why I declared: franchisors need not panic. A legal day of reckoning will see franchising prevail. And most of the persuasion can be found in the Kaufmann, Gildin & Robbins LLP-article.

And, just as I closed my prior blog on this topic, "So, for everyone in a panic out there, I quote Aaron Rodgers ... 'Relax'"!

Brand Enforcement

Is Brand enforcement important? Is this a trick question or just a stupid one?

During the day-to-day struggle of competition and the occasional tug-of-war between franchisors and franchisees, we may forget that brand enforcement is THE most important element of the franchise relationship.

Every location is an animated billboard for your brand, your business. And, I am not talking just to franchisors here. Franchisees, it is your brand as well! Think of it. Every time a customer visits ANY franchise location, it is a reflection of EVERY location in the system. To keep the system-wide impression sterling (not Donald), you must do your part.

Franchise agreements in all systems require uniformity, standards, inspections, and compliance. But the key is enforcement. If the franchisor does not enforce the agreement, uniformity and standards can slip radically...and the animated billboard paints a negative picture.

This is especially important for new franchise systems. Both "partners" need to live and breath the standards. Franchisors: inspect frequently, communicate clearly and enforce regularly. Franchisees: know the standards, embrace uniformity and look forward to inspection - feedback is important. Everyone has a stake in keeping the brand positive.

As a franchise lawyer, I often encounter brand enforcement in notices of default, in an arbitration or mediation and in the courtroom, Commonly, this is too late. Franchisors need to be fair and consistent but must constantly enforce. Franchisees need to remember that they joined a system and that all efforts are "common efforts" to please customers and improve the system..

With that said, franchisors MUST maintain an open, clear and sincere dialogue with franchisees, deliver the enforcement message with care and professionalism, and remain flexible enough to act on legitimate suggestions for change.

Franchisees must provide constructive comments in a non-confrontational manner - in a setting that is outside of an active inspection. Your message will carry more weight when you are in a positive mode rather than a defensive one.

Keep the billboard shining brightly!