Fundamentals of the Franchise Disclosure Document

At the start of every franchise relationship, the prospective franchisee is given the Franchise Disclosure Document ("FDD") which discloses all the requirements in the pending franchise relationship. Often this document is difficult to navigate for both the franchisor and the franchisee. Over the course of the next several weeks, we will break down each item in the FDD and give a summary of what can be expected and what is required within the FDD.

The FDD came about due to the federal government's concern about fraud and corruption in the franchise industry. Accordingly, since 1979, the Federal Trade Commission requires all franchisors to provide a disclosure document to all prospective franchisees. In July 2007, the FTC updated their requirements and renamed the requirements as the FDD. The general purpose of the FDD is to require franchisors to disclose information the federal government believes will reduce fraud and assist franchisees’ in making informed decisions about whether to invest in a particular franchise. The FDD is broken down into 23 Items. Each item addresses a specific topic. With respect to each topic, there are two important perspectives to consider: first is the franchisee’s perspective and second the franchisor’s perspective. Each upcoming post on the FDD will take a brief look at each of the 23 Items from each of these perspectives.

We look forward to sharing our understanding and perspective on the FDD. 

Effective Communication with Franchisees

Creating effective communication strategies with franchisees is a vital part of franchise systems of all sizes. Today there are more communication tools than ever before and many are literally in sitting your back pocket, your purse or wherever you keep your smart phone. It is important to remember that when a franchisee succeeds, the franchise brand and system succeeds, and communication is a tool to that success.

A franchise relationship is like any long-term relationship. In order to succeed, both sides need to be willing to listen and to work together. Effective communication builds support and buy-in of new ideas and concepts. It also gives the franchisee a reason to share their ideas and thoughts. Remember, some of the most successful concepts, advertisements and services have originated from a franchisee. As a franchisor, you don’t want to lose out on taking the next big thing system-wide simply because you did not have an effective communication system in place.

If you are a franchisor, ask yourself these five questions to find out if your communication needs some reworking:

1. How often do you communicate with your franchisees? Once a week? Every month? Only at the annual conference? The more often you communicate, the more your franchisees will see and come to believe that you are truly invested in their success. The franchisee has invested their own money and time and they want to know that the franchisor is as invested as they are.

2. Is your communication in the same format each time? Are you a one-trick-pony communicator? If so, switch it up. There are a multitude of technologies available to you from webinars to surveys to conference calls. Don’t just send out emails. Invite groups of franchisees to participate in a web conference;

3. When was the last time you sat face to face with a group of franchisees and just listened to what they had to say? Often, as a franchise system grows, those at the top stop spending time with their franchisees and stop hearing what they have to say. Just because the system is expanding it does not mean that everything is going well and that franchisees are happy. And even if they are happy, it is still a good idea to sit down every once in a while.

4. Are your franchisees able to openly communicate with one another? You should encourage your franchisees to share their success stories and best practices with one another.

5. Do you know if your franchisees understand the mission and vision of the company? If the last time you shared your vision of the company with franchisees was at initial training, it might be time to get your franchisees excited again. Help your franchisee to become your cheerleaders. They are out there every day and working with the public. If they know the mission and vision and are excited about it, the public will be able to feel it.

Taking a page out of the Dunkin’ Brands CEO’s playbook, franchisors need to remember that franchisees are their customers. Just as good customer service is vital for the success of a franchisee’s business, good customer service from the franchisor helps the franchisor’s business thrive.

Reader Topics

Dear Reader,

First we would like to thank you for reading our blog and supporting The Franchise Business Law Group. 

Second, in an effort to make sure that our blog addresses not only the most current topics in franchise and business law, but to make sure we are addressing those topics and subjects relevant to our readers, we are asking for your help. What would you like to read? Is there a topic that you would like us to address or to provide more information on? Simply comment to this post or send an email to either kmartin@toolaw.com or christiant@toolaw.com. We will select a few topics and make them the subject of upcoming blog posts.

Again, thank you for reading and we hope you come back often to find information on franchise and business law. 

New gTLD's and the Trademark Clearinghouse

In 2012, ICANN (Internet Corporation for Assigned Names and Numbers) announced that companies and individuals would be able to customize their top-level domain or “gTLD” (the part coming after the ‘dot’ in a domain name). This customization costs $185,000 per domain. In order to protect federal trademark owners from infringement, cybersquatting and other illegal acts by those seeking to obtain a customized gTLD, ICANN created the Trademark Clearinghouse (the “TMCH”).

Starting on March 26, 2013, federal trademark holders are able to register their trademarks with the TMCH. This registration will give the trademark owner protection from another user obtaining a customized top-level domain using their trademark (i.e. instead of just the .com, .net etc., the gTLD can be customized, such as .cocacola, .pepsi …).

The TMCH is limited trademarks that fall into one of three categories: 1) to those with federal trademark registration here in the United States, or the equivalent in another jurisdiction; 2) those who have had the mark validated by a court proceeding at the national level; or 3) those protected by statute or treaty. Both trademark owners and valid trademark licensees have the right to place a trademark on the TMCH.

However, as with anything, there are exceptions to the above rule, and the registration does not come without a price.

First the exceptions. Several trademarks, even though they meet one of the three above criteria, will not be eligible for registration with the TMCH. The main reasons creating ineligibility are: 1) the trademark contains a design element where the words are not the predominant part of the mark and where the words are not easily separable from the design; 2) the trademark contains a '.'  (dot); or 3) the trademark contains an unusable character in the name, such as & or other symbol. If any of the above apply to your mark, you will need to re-apply for federal trademark registration in the modified form.

The price tag is also a hurdle to overcome. For a one year registration, a trademark owner or licensee with an eligible trademark can file with the TMCH for $150. The three-year fee is $435 and the five-year fee is $725. This fee is per mark that is registered. If you file for what turns out to be an ineligible trademark, at this time the fee is not refunded. There are discounts offered for registrations done through Trademark Agents, but you will have to pay a fee to that agent.

If you are interested in registering, or learning more about customizable gTDL’s, you can visit the Trademark Clearinghouse website at: http://trademark-clearinghouse.com/, or the ICANN website at: http://newgtlds.icann.org/en/.

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.)

Business and Franchise Tips

Over the past month, our office has gathered some basic information that relates to businesses and franchising, and more specifically to franchises in the restaurant industry. The basic information below is meant to help franchisors plan for the year and future growth and expenses. While some of the information has been taken from various publications and resources, some of the information is our opinion. The below is not legal advice or our promotion of any products or services and should not be construed as such.

1.    Bernstein Research in New York expects a 4% growth in restaurant sales in 2013—assuming the economy remains about where it is now.

   2.  OBAMACARE –the below are some statistics that are meant to help you understand the possible impact of the health care mandate.

a.    The Hudson Institute (for IFA) estimates the health care mandate will cost the franchise industry $6.4 billion dollars.

b.    McDonald’s estimates that it will cost $10,000 to $30,000 per store.

c.    Jack in the Box estimates the cost to be $10,000 per employee, but that the cost can be covered by a 1% increase in menu prices.

d.    Most sources and experts are recommending a price increase over cutting working hours, but that is in flux. Each franchise system needs to balance the fear of backlash relating to cutting working hours versus the fear of backlash relating to increased menu prices and/or loss of menu items.

e.    GE Capital believes the restaurant sector will ultimately weather this and will be able to cover the increase in costs through price increases alone. However, the amount of price increases and the public perception of an increase as the economy remains slow was not specifically addressed.

3  3.  CONSCIOUS CAPITALISM BY JOHN MACKEY

This book may be a helpful read to franchisors and business owners in all sectors. We have not read the book but several articles have referenced both John Mackey and his book in recent publications. John Mackey is the founder of Whole Foods. His basic theory is that the owners of a corporation should view the business as an opportunity to create value for the owners, employees and the communities where they do business. Value is defined in many different ways. In the long run a company that creates value will do far better because doing so changes the way the managers and other employees view what they are doing. However, it is important that the value created needs to become a central part of the corporate culture if this Whole Foods model is to succeed.  The book questions the traditional “profits and all costs” model as being often counterproductive and one that can readily create enemies.

4  4.  RULE OF THUMB FOR EQUITY CAPITAL –For Investors in a restaurant system

As a typical rule of thumb for restaurant acquisitions, the equity capital investor is looking for:

a.         $750 per square foot in sales;

b.         $300 per foot cost to build;

c.         18-20 percent unit level cash flow;

d.         Cash-on-cash return on investment of at least 40%

The above points and tips hopefully will help you in your business whether it is in creating growth, in creating a new corporate culture or in preparing your business for acquisition by another individual, company or investment firm. 

Preparing Your Business Tax Filings

We are well into tax filing season and small business owners have the added pressure of filing not just personal taxes, but business taxes as well. While we are not tax attorneys or tax specialists, we have gathered some useful tips over the years to help our small business clients better prepare for tax season and to help them with accurate filings.

1. Keep on top of important filing deadlines. Most of us know the looming April 15 “Tax Day” deadline for personal tax filings. However, you need to be aware that some business taxes and returns must be filed as early as mid-March. Talk to your accountant or tax specialist for more information on deadlines in your state and for your business.

2. Review your financial reports. Prior to submitting the information to your accountant or tax specialist, you will want to take a close look at your profit and loss statements and financial reports. Specifically, you want to review those areas of gross income that may trigger different taxes. Additionally, review your payroll taxes and make sure you or your payroll company are taking all the appropriate deductions.

3. Review your business receipts. Tracking receipts and keeping a filing system up to date is often difficult, but this is an area ripe for an audit. Look over your receipts and make sure they are properly noted to document the business expense, who you were with and what it was for, and scan the documents. A paperless receipt filing system is easier to retain and store than a file folder with hundreds of loose receipts.

4. Review elections and deductions with your accountant or tax specialist. Make sure you are properly itemizing your capital expenditures. Knowing the difference between what does and what does not qualify as a capital expense. Also, don’t forget to track all your available reimbursable expenses and to ensure that you are taking your available deductions, such as automobile deductions.

5. Give yourself plenty of time. If you have not already started preparing your business tax filings, do not put it off another day. There is a lot of work and preparation that goes into your business filings and you do not want to be left spending all day and night in the days before the filing deadline. Additionally, some tax professionals will charge a premium to prepare your business taxes in the days leading up to the filing deadlines. Preparing in advance can save you both in time and money.

6. Post-filing review. While it is nice to breathe that sigh of relief once the filings have been sent in, take some time to review what worked and what did not work in your tax preparation. Use the time to set up better filing and retention practices, to review whether your gross income is coming from the sources you thought it was (or should) be coming from. And take time to make sure that in the future, your tax preparation can be as seamless as possible.

Any U.S. federal tax advice contained in this communication (including any attachments or links) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Some helpful articles:

http://www.startupnation.com/business-articles/1169/1/AT_Tax-And-Bookkeeping-Mistakes.asp

http://www.nolo.com/legal-encyclopedia/top-tax-deductions-small-business-30176.html

http://www.squidoo.com/top-5-tax-tips-business-taxes-2013