Franchise Programs for Veterans

As franchisors look to recruit new franchisees, one viable segment of the population is veterans transitioning out of active duty. The International Franchise Association (“IFA”) has established the VetFran program that links veterans with franchisors willing to offer discounts and incentives to veteran franchisees.

If you, as a franchisor, are interested in participating in the IFA’s VetFran program, you must be a member of IFA. All members of IFA are eligible to participate and there is no fee to be listed as part of the VetFran program. If you are already a member of IFA, you can sign up for the VetFran program by going to: http://dev.vetfran.com/franchisors/signup/.

While there are no fees directly associated with joining the VetFran program, there are requirements that a franchisor discount fees. Each franchisor must offer an incentive to veterans of no less than a 10% reduction on the initial franchise fee. Beyond that, there is no restriction as to what types of discounts and/or benefits are offered to incentivize veterans. Several franchisors eliminate the franchise fee entirely or offer a lowered royalty rate.

Once the franchisor is part of the program, the franchise system is listed in a directory of franchise opportunities. If you desire to have a more prominent listing, for an additional fee, a franchisor can have their franchise system featured prominently in the directory and in certain advertising. It should be noted that the VetFran website receives over 40,000 hits per year and the IFA is constantly working to establish relationship with national veterans programs and groups to bring this program to their attention.

The advantages to joining VetFran are several. The franchisor is able to use the VetFran logo on all promotional material and can use it on their letterhead and website which can be a helpful marketing tool to let the public understand the franchise system supports veterans. It is a minimal investment (through membership in IFA) to have access to a group of prospective franchisees that may otherwise not be as accessible. In addition, the franchisor can create a “calibration” assessment to help the VetFran program locate ideal franchisees. The assessment helps match a prospective franchisee’s skills and experience with a particular franchise opportunity. Lastly, VetFran is part of the Veteran Job Bank that allows veterans to search for veteran-friendly job opportunities upon transitioning out of service.

Once a part of VetFran, there is no prohibition against the franchisor making direct contact with veterans programs to promote the franchisor’s discount and veteran-specific offering. A franchisor is not restricted to using only the advertising made available through the VetFran program.

Should you desire more information about the VetFran program, you can find information on their website at: www.vetfran.com.

(This blog post is provided for informational purposes only and is not legal advice or an endorsement of any product, service, group, organization or program.)

Managing the Seasonal Franchise

Both service and product related franchise systems and small businesses often have to navigate the seasonality of their business. As an owner of a seasonal business you are likely constantly facing the off-season revenue cliff and trying to figure out ways to keep the business stable during the off-season.

This post offers a few tips on helping you overcome the off-season revenue cliff that can help sustain your business year-round.

1.    Modify your labor costs to reflect the applicable revenue season.

As a rule of thumb, your labor costs should not exceed 20% - 30% of your revenue at any given time. As a seasonal business your labor costs need to adjust up and down depending on whether you are in the high or low season of your business. This means having fewer employees when you are bringing in less money. Decide which employees are necessary for operations and stick with that smaller scaled-down staff during the low season. 

1.    Try and modify your lease agreements.

Many landlords are willing to work with the seasonal business to allow for higher rents in the high season and lower rents in the low season. The landlord that understands the nature of your business and the flow of revenue during different times of the year is often more likely to work out a solution that will benefit both you and the landlord.

The same could be said of vehicle leases. If your seasonal business is reliant on company vehicles, work with your lender to come up with a viable solution to accommodate the flux in your revenue stream.

2.    Adjust inventory levels.

This seems common sense, but many seasonal businesses forget to adjust their inventory down during the low season. If you operate a year-round business that has a high and a low season, you will need to adjust what inventory and even what offerings are available during the low versus the high season. Take time during the low season to create different purchasing matrices that can be used during the different revenue seasons.

(helpful article by the National Food Service Management Institute) 

3.    Find new revenue streams.

This is not as easy as it sounds, but it is a worthwhile practice. As a seasonal business, you do have an advantage in being able to take time to evaluate your business and to streamline the offerings and decide if adjustments in low season offerings can and/or need to be made. Use this time to plan ahead for how to attract new business and customers during the peak season and how to maximize your profits once the high season hits.

This can also mean trying to diversify what you offer your customers. Examine your business and decide if your offering easily crosses into an off-season offering. This is often easier for certain industries. For example, it is more logical for a landscaping business to cross into the snow removal business than for an ice cream establishment to cross into another industry. Be creative. There may be something your business can succeed at with little cost or effort during the low season to help sustain the business and keep the revenue flow moving in a positive direction.

There are several other helpful articles available to the small business owner. Speak to others in the industry and take time to analyze your business. You may be able to save on costs or create new revenue streams in ways you had not previously thought possible.

  

Franchisor Control and Liability Issues

One area of a franchise system that must carefully be examined by franchisors is the amount of control exerted over both franchisees and the franchise system. Courts are increasingly finding ways to impose liability on the franchisor for the actions or omissions of the franchisee. As a rule of thumb, a franchisor is able to exercise the amount of control necessary to protect the brand, goodwill, trademark and quality control of services and products. Overstepping this can lead to devastating consequences.

When examining the possibility of imposing liability on a franchisor, the courts look at both the franchise agreement and the actions of the franchisor. The greater the level of control in the day-to-day operations or the details of the franchisee’s business, the greater the likelihood of imposing liability on the franchisor. For example, becoming involved in the hiring and firing of a franchisees employees can lead to imposition of liability, dictating the exact method of how floors should be cleaned, at what times and with which products can lead to liability, as can having security cameras on the franchisee’s premises that the franchisor continually monitors.

There are generally three types of liability imposed: vicarious liability, liability in a co-employer relationship, and liability in that the franchisor acts as the actual business instead of the franchisee. For the last type of liability, the courts looks at whether a franchisee can and will reasonably and justifiably believe the franchisor actually controls the operations of the business, and not the franchisee.

Avoiding the above-types of liability and other possible liabilities requires a franchisor to make careful considerations. Clearly maintaining a level of control is a necessity in a franchise system. However, the issue of control and the imposition of liability will continue to be a litigated issue. Franchisors should exercise caution when expanding controls, and should speak with a qualified franchise attorney to help them understand if the controls exerted stay within the acceptable levels of control or if they carry with them the possibility of liability. 

Helpful Resources:

Franchisor Liability for Franchisee Actions

Franchise Registration Process

Initial Registration

For new and existing franchise systems, registration states can create a headache if the registration process is not handled correctly. The process can be time consuming and expensive, especially if not handled correctly the first time.

There are 14 registration states: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. The initial registration fees vary from $125 to $750. In each of these 14 states, a franchisor must not only comply with the FTC Disclosure Rule, but must also comply with the individual state rules which often impose additional disclosures and restrictions on the franchisor. Simply put, if you are interested in taking your franchise system into one of the above 14 states, you are restricted from offering or selling to either an individual residing in that state, or to an outside individual looking to franchise within that state.

As a baseline, all franchisors must comply with the FTC Disclosure Rule and have appropriate and compliant documents before offering or selling a franchise. From there, a franchisor can add state-specific addenda or create a state-specific FDD for registration purposes.

Depending on the registration state, registration is either immediate (meaning once the state receives the FDD packet and required documentation, the franchisor can begin to offer and sell in that state) or the registration will take time, after an examiner has reviewed all the provided documents to make sure they are compliant with state law. Often a state examiner will provide the franchisor with a list of issues that need to be addressed and corrected (a “Comment Letter”) before the state can register the franchise for offers and sales.

Renewal

Once a franchise is registered in a state, that registration is generally effective for a one-year period, after which the franchise must be renewed, for a fee, in that state in order for the franchisor to continue to offer or sell there. However, not all registration states count this “year” in the same way. Some states have an expiration one year from the date of registration. Other states have an expiration date of 90-120 days from the end of the franchisor’s fiscal year end. Your registration letter will provide the date of expiration. You should calendar this date and be aware that it might be sooner than expected.

Renewal is also required in all non-registration states. The difference is that once the disclosure documents have been updated (including an updated audit) then the franchisor can generally begin offering and selling franchises in non-registration states. (The one caveat here is that if the state is a business opportunity state, you must make sure you file the appropriate exemption before selling in that state.)

Exemptions from Registration

Both the FTC and Registration States provide limited exemptions to registration. These vary from state to state. In most instances, the exemption only removes the registration requirement, not the disclosure requirement. You will still need to have accurate and up to date documents, and to comply with the timelines for disclosure.

If you are looking at taking your franchise system into a registration state, you should speak with a knowledgeable franchise attorney to ensure compliance with state-specific laws and regulations.

Food Trucks -Part II: Franchising

Last week we posted on the food truck revolution in the United States. The post dealt with broad issues related to the food truck industry. Today’s post is about the food truck in the franchise context.

The Pros and Cons set out in last week’s post (Food Truck (R)evolution) all apply in a franchise setting. The ability to test a market, the advantage of the travelling billboard and ability to move to the customers all are advantages to a franchisor. However, determining whether or not a food truck can and should be a part of your franchise is something that takes a lot of consideration and analysis. This post is meant to give a few ideas on how a food truck could work into your existing franchise system, or how it can become a franchise system all on its own.

The existing franchise system can use the food truck in a number of ways. The most apparent way, at least to me, is to add a food truck as a separate franchise offering. Instead of offering a restaurant franchise in the traditional store-front sense, you can offer a prospective franchisee to become your food truck franchisee. The advantage is potential cost savings with lower overhead and start-up costs for the franchisee. If you do decide to go this route, you have the option of either wrapping in the food truck concept into your current Franchise Disclosure Document (“FDD”), or to have a separate FDD for the food truck concept. The decision on which route to take should be made with your qualified franchise attorney.

If you do not want to add the food truck as a franchise offering, you could purchase a franchise truck (or several), outfit it, wrap it and offer it for ‘rent’ to your franchisees in an area so that they can use it for special event purposes. This increases your exposure and helps to reach out to an audience that might not know your restaurant exists. This also is a great add-on benefit to your franchisees that are looking for ways to increase business and to get their name more fully into the community.

A new restaurant concept that starts as a food truck could expand their food truck business by offering food truck franchises. Unlike an existing restaurant franchise system, this type of franchise is limited to just the food truck. The advantage is that it potentially keeps franchisee costs down and gives someone the option for a (often seemingly) part-time business that the traditional store-front restaurant often does not allow for.

No matter how you choose to incorporate the food truck into your business, always talk to a qualified professional, including attorneys, and those in the industry, who can help you decide the best option for your business. 

The Food Truck (R)evolution

The food truck business has been around for decades. In recent years we have seen the food truck evolve from the ice cream truck to the truck with gourmet and specialty food offerings. Even television has picked up on the trend with the Food Network offering a reality show called The Great Food Truck Race.

Many have stated the food truck is a fad, but from what I have read, it appears that this next generation of food truck trend is here to stay. Many franchises are taking advantage of this trend and opting for a mobile expansion as part of their franchise offerings. Other food service businesses are opting for the straight food truck model forgoing the traditional brick and mortar location. There are pros and cons in determining both if the food truck business is right for you and whether it is a good business move for your business.

Pros

The biggest pro to the food truck option is the lower overall cost. A food truck is going to cost a lot less than a traditional storefront space. In addition, there are typically fewer employees and lower utility costs. And since location is everything in a business, the food truck can easily pick up and move its location to one that will better capture the market share. Food trucks also offer a level of convenience that many traditional restaurants struggle with.

This type of business is also a traveling advertisement. The traveling billboard saves on marketing and advertising dollars that a traditional restaurant would have to invest. With the growing interest in food trucks by the public, and the wider variety of food options offered by food trucks, free or low cost social media marketing was made for this type of business.

Food trucks also offer the customer a different type of food experience and because of the small size, it can provide for a more personal interaction between the owner and the customer. Businesses can engage the customer in a new way that may prove highly beneficial.

Lastly, the food truck offers the opportunity to test a market or location, without a lot of risk. If you are considering opening a traditional restaurant in a specific market or location, the food truck can help you determine relatively quickly and easily if there is interest in your concept.

Cons

If you think that a food truck will be an easy and simple business that you will only have to run 2-3 hours a day a couple of days a week, you are probably in for a big surprise. While open for businesses only 2-3 hours at a time, the successful food truck business can take up many more hours in a day. It has been referred to as a part time business requiring a full time effort.

The food truck that cannot get its food delivered quickly and efficiently to the customer, will fail. A food truck’s menu has to be compatible with the smaller layout and the different format for preparing and serving food. In one food truck experience I had, I waited for 35 minutes in 105º weather. Needless to say, they lost a customer. The business needs to be structured in a way to meet the expectations and needs of the food truck customer.

There are also more permits that may be required from the state, county and city/town which can often cost more in terms of time and money. 

Protecting Your Brand -Trademark Registration

When it comes to branding your business, your trademark should be at the center of the discussion. A trademark or service mark can be a word, a logo, a slogan, a color and even a sound. And making sure your trademark is registered is of primary importance to ensure that you retain full rights in your name, slogan, logo, etc. Protecting your trademark, protects your business.

Broad Spectrum Registration

While many people understand the importance of trademark registration with the United States Patent and Trademark Office (“USPTO”) for their business, most forget that the trademark or service mark (“Mark”) should be registered for all uses of the mark. In other words, if you have a registered Mark for restaurant services, but not for clothing and apparel, arguably, those shirts you are selling with your logo are not protected; anyone can use your trademark on clothing and apparel or any other use that is not a restaurant service. Multiple registrations for different classes of goods helps protect your valuable Mark. (A good example of this is McDonald’s mark in “I’m Lovin’ It®”. They have registration of this in 4 classes of goods).

Use it or Lose it

You need to be actively protecting your Mark and using your Mark. If you have a registered Mark that you stop using, you will lose your rights. The same goes for not protecting your rights –if you don’t try to stop infringing users, you may lose your rights to stop that user from infringing on your Mark. Regular searches on search engines such as Google and Bing, as well as looking at the USPTO registry, and on YouTube, Facebook and Twitter can help alert you to those users who are infringing on your Mark.

Success in Franchising

When I tell someone that my business law practice focuses on franchising, I will at times get a blank stare. This is where I explain that franchising is a concept where a person licenses out their brand and business system to another person in order for that person to operate a similar business under the same name. If I am still getting a deer-in-the-headlights look, I will say, you know, like McDonald’s. Once the golden arches are mentioned everyone understands.

 

However, I was recently reading an online article from Entrepreneur Magazine about the top franchises[1]. The surprise I took away from this article was the fact that Subway outranked McDonalds on the list of America’s top 10 franchises and the top 10 international franchises.

 

I don’t know the exact ingredients that Subway has combined in order to make their franchise even more successful than the most well known franchise in the world. If I were to guess, I would not bank it on the popularity of Jared as a spokesperson, $5 footlongs, or the innovative and newest sandwich. Instead, I would guess that, in some way, Subway’s franchisees are making more money than McDonald’s franchisees.

 

Whenever I meet with a new startup franchisor, the number one thing I like to emphasize is that a successful franchise brand is one in which the franchisees are successful. There are other issues to consider for success, but a franchise system in which the franchisees have the ability to make money will grow. Successful franchisees will tell others about the franchise and franchise sellers and brokers will feel comfortable pushing the franchise brand over other brands.

 

Some other factors that go into the success of a franchise business include: having a teachable system in place; providing the proper amount of support to the franchisees; excellent training; creative branding; and good marketing. All of these things will help the franchise system grow. But when you really focus on these additional items, they all boil down to the same goal: helping the franchisee turn a profit.

 

So the next time you want to brainstorm about expanding your franchise business, first look to your system and see how you can help your franchisees increase their profits. This will help you increase the number of franchises in your system. Maybe one day your system will be even more recognizable than the golden arches.

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[1] http://www.entrepreneur.com/slideshow/222422

Franchisor Duties: Protect the Brand

Recently the Quebec Superior Court ruled that Dunkin’ Donuts’ master franchisee had failed to protect and enhance the Dunkin’ Donuts brand in Quebec in violation of its contractual obligations under the franchise agreement with its Quebec franchisees. The Superior Court noted that this was one of the franchisor’s few duties under the agreement and its failure to do so led to 200 store closures.


This is a chilling reminder to all franchisors of their duty to protect the brand. In the Dunkin’ Donuts’ case, the franchisor claimed that it was competition from another brand that hurt their system. But the court showed that the franchisees had alerted Dunkin’ Donuts of the competition back in 1996 and asked for some sort of plan to respond to the effect the new competitor was having on their sales. Unfortunately, Dunkin’ Donuts did nothing to try to counter the negative effect this new competition was having on its franchisees.


This is just one example of how a franchisor can fail to protect the brand. The franchisor needs to be constantly aware of its brand and protecting that brand in the market. Some of the areas the franchisor needs to monitor to protect its brand are as follows:

• Make sure that franchisees are using the brand only as directed by the franchise agreement and operations manual. Franchisees that do not follow the system and operate under the brand name can effectively hurt other franchisees.

• Monitor the use of the trademark to ensure that others are not using the marks or marks that are significantly similar to the franchisor’s mark. This can dilute the marks, cause confusion in the market and ultimately hurt the value of the brand.

• Monitor competition with the brand and come up with ways to counteract the effects of competition on the brand. (This is the Dunkin’ Donuts example.)

• Review the brand to ensure that the brand is current for the marketplace. This may mean updating the brand so that it appears fresh and continues to draw old and new customers.

Vicarious Liability and Franchisors

A rising concern for franchisors is being found vicariously liable for the acts of its franchisees. Previously, when a franchisor was sued, the franchisors could cite the fact that the franchisee’s business was “independently owned and operated” from the franchisor’s business to be removed from the lawsuit during summary judgment and escape being dragged into trial to determine liability. However, in the last 20 years courts have looked to the controls of the franchisor over the franchisee’s business to deny summary judgment and allow a jury to find the franchisor vicariously liable.

This leads the franchisor with the unclear position of trying to determine how best to keep its system uniform and protect its trademarks through controls and yet not cross over this hazy line to be found vicariously liable.

The nature of the franchise business is a long term relationship that needs uniformity and flexibility. To meet these objectives, most franchisors exercise controls through an operations manual. The courts not only look at the franchise agreement to determine liability, but they also look to the operations manual. This is a very broad test of control. The concern about such a broad control test is that almost every franchisor has very significant controls through their operations manual in order to maintain uniformity and protect their marks.

Recently, some courts have been more specific about the controls they look at to determine vicarious liability. The controls must be related to the matter that was the cause of the injury. Just because the franchisor gives guidance and controls over a majority of the franchisee’s business, that is not enough, unless the franchisor had the right to control the particular activity giving rise to the claim. Even if the franchisor gives direction and guidance regarding the direct activity that caused the injury, there may be some additional hope for the franchisor. In Ketterling v. Burger King Corporation the fact that Burger King’s operations manual specifically stated that the franchisor did not have control over the day to day operations of the franchisee made the court find that the franchisor could not be vicariously liable and allowed summary judgment.

When drafting an operations manual, the franchisor should consider the following:

1)         Does the control lead to an obvious potential vicarious liability claims? If so, consider the following question.

2)         Are the controls necessary for protecting the franchise system and trademarks? If not, the franchisor may not want to include such controls. If so, the franchisor should consider the following question.

3)         Does the operations manual clearly and concisely state that the franchisor does not control the day to day operations of the franchise business? If not, the franchisor should include this in the operations manual and in the franchise agreement.

Tips On Being Ready To Franchise Your Business

Franchising your business is a great way to expand your business without the requirements of upfront capital that company expansion would require. Franchising may appear to be the “golden ticket” to financial security, but if you and your business are not ready to enter into the business of franchising, then the seeming golden ticket may end up being a mirage. This post is meant to give an overview of things you want to think about before taking the giant step into the world of franchising. Remember, if your business is not ready for franchising, pushing it there might result in ultimate failure.

What is your Golden Egg? The reason the golden egg was worth such sacrifice and effort to obtain in the fairy tale of Jack and the Bean stock, was because it was unique. Everyone can obtain a regular egg, but the golden egg? that was unique and difficult to procure on one’s own. If you are considering taking your business to a franchise business, you need to have that “golden egg.” You need to know what would draw a potential franchisee to not only consider your franchise concept, but pay you to be a part of it. This does not mean that your concept has to be a one of a kind or extraordinary concept or service, but the way it is done, or the manner it is procured needs to be something that would compel someone to buy. Closely examine your business to find out what unique element, idea or service you can offer your franchisees.

Is your business a proven concept? Another way to ask this question is whether your business has worked out most of the kinks and if your business is “turnkey” ready. A startup concept is typically not ready for franchising because the concept has not been worked out and tested in the market. Even if you have just a couple of stores or units open and operating, if they are successful and the public is accepting of the business, then your business model may be ready for franchising. There is no hard and fast rule as to how many stores or units need to be in operation before you are ready to franchise, but

Is your business easy to learn? A successful franchise concept is going to be easy to learn. Some franchising guides will ask if your business is easily replicated. You may be worried that if your concept is easy then others will steal the idea and leave you behind. This is a risk with any business; but remind yourself of the first point above. A unique business does not have to be difficult to explain or replicate –it just has to be unique in some way. You want your franchisees to be able to understand the concept immediately and to feel comfortable that they can be successful. A business model that can be easily taught and duplicated for your franchisees is a key element in being ready to franchise.

What is being sold –you or your business? Take a step back and determine whether your business is successful because of your stellar salesmanship, or the location, or another extraneous factor, or is it successful because of the concept meaning it can be successful if run in most locations and by most people. Of course this is generalizing things, but the point is, the concept itself needs to be saleable. If you take the super star location away or the super star salesperson away, will your concept still work. If the answer is yes, then you are on the path to being ready to franchise.

Do you have the time to sell and teach your business? Franchising is a new business. You may have a successful business model for a store that you have been running, but franchising will take you away from that business and require you to focus on the new business of franchising. Some of the most successful franchises are those where the franchisor is committed to helping franchisees succeed and take the time to train. Most successful franchisors are dedicated to producing a symbiotic relationship with their franchisees.

Do you have sufficient capital? While franchising requires less capital than self expansion would require, franchising is a business in and of itself, which requires capital. Here are just a few of the areas you will need to spend a substantial amount of money on: 1) Attorney fees. There are many regulations and rules at the federal and state level that are imposed on franchisors. In addition, there are regulated documents that must be provided to each potential franchisee and the requirements for those documents are strictly enforced. 2) Accountant fees. Every start-up franchise will need to provide an opening balance sheet and in some states, an audited balance sheet is required. You will also want to work with an accountant to set up your accounting system for franchisees, including how royalties will be collected, and what line items should be included in the reporting by franchisees. 3) Staff. Franchising is a new business and requires staff with a different set of skills than you have probably hired for your own business concept. You will need sufficient support staff. 4) Advertising. Every franchisor needs to understand the value of advertising and marketing. You will need to promote your franchise in order to sell your franchise.

The above are just pointers and there are exceptions to most rules. However, by going through the list you can feel more confident in your decision to hold off on franchising or to move forward with franchising.