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

Trade Secrets In Your Business

When it comes to trade secret, most of the public would be able to point to the Coca-Cola or the KFC secret recipes. It is common for many businesses to hold secret and confidential information that is not known to the public. In order for this information to rise to the level of a trade secret a two-prong test must be met: the information must be kept secret through reasonable efforts, and an economic value must be derived from the secret information. If both these prongs are met then you are likely dealing with a trade secret.

Trade secrets are valuable intellectual property because they never expire (so long as the information is kept secret) and unlike a patent, no disclosure to the public is required. In the United States most states, and the District of Columbia, have adopted the Uniform Trade Secrets Act (the “Act”), or have adopted a version of the Act (Massachusetts, New York and Texas have not adopted the Act but have their own trade secrets acts).

What is a Trade Secret?

Most states adopting the Act define a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

     (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
     (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (See Utah Code Ann. § 13-24-2(4)).

Ultimately courts will look at six general criteria when determining if information constitutes a trade secret:

1.   Is the information claimed to be trade secret known outside of the business?

2.   Is the information readily known and available to most employees in the business?

3.   Is the information labeled as “confidential” or “trade secret” and are steps or measures taken to maintain the secrecy of the information? (also with this, courts will look at if employees are told certain information is protected trade secret).

4.   The amount of money spent by the business in developing the trade secret.

5.   The economic value derived from maintaining the information as secret.

6.   The difficulty or ease of discovering the secret.

A trade secret must be identified with reasonable particularity. In other words, claiming all documents created in a business are trade secret is not sufficient. Businesses should take steps to identify what they believe is trade secret and determine why it is trade secret. If it meets the definition and would pass the court’s scrutiny, then reasonable efforts should be immediately taken to protect the information as a trade secret.

Remedies

One of the tricks in trade secret protection and litigation is that the mere taking of information does not necessarily rise to the level of trade secret misappropriation. Another difficulty is if an employee or person is given access to the allegedly secret information, but is not told it is secret and given instructions on how to protect the secret, the information may have lost its trade secret status.

If you are able to show that the misappropriator used the secret information, and they had actual or constructive knowledge that the information was secret, then the courts can grant injunctive relief and can grant damages and attorney’s fees in some states.

Ultimately the burden rests on the business to prove trade secret protection. 

If you have a business that allows its employees to have access to confidential and trade secret information, you should develop a clear policy that prohibits the information from being stored on personal computers, taken from the office without prior authorization, and that requires any copies made to be immediately returned to the employer. These and other steps can minimize the exposure of a trade secret inadvertently (or purposefully) leaving the business and in turn lowering the amount of protection afforded to that information. 

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.

A Primer on What Employers Should Know About Social Media Policies

In its third report of 2012, on May 30, 2012, the National Labor Relation’s Board (“NLRB”) further narrowed the scope of what would be construed as an acceptable employee social media policy. If you are an employer and want to restrict your employee’s social media use, you will want to read the Report (found here: NLRB May 30Report –click 'Operations Management Memo'). This latest report clarifies how various policies can be found to limit an employee’s Section 7 rights (read the National Labor Relations Act here) and are therefore unlawful.

The basic rule derived from the various NLRB reports is that an employer will be liable for social medial policies and rules that “would reasonably tend to chill employees in the exercise of their Section 7 rights.” However, if your social media policy provides rules “that clarify and restrict their scope by including examples of clearly illegal or unprotected conduct, such that they would not be reasonably construed to cover protected activity, [the rule is] not unlawful.”  

Essentially, three main points were made in the May 30 report:

1.   Do not be over-broad in your policies. Be specific. If you do not want employees sharing personal information of other employees, be sure that you are not limiting the employee’s right to discuss labor conditions, salaries and wages, etc.

2.  Give clear examples. Tell your employees what type of conduct is not allowed (i.e. discriminatory, harassing, obscene, malicious, threatening, disparaging, etc.). If you do not want confidential information to be disclosed to the public, tell your employees specifically what type of confidential information is included. Remember, it cannot include those items that are covered by the Act.

3.   General disclaimer or “savings clause” does not cure the over-broad portions of a social media policy. In other words, if your policy is full of over-broad policies and you fail to give limiting examples and clarifications, your statement that the policy will be administered in compliance with all applicable laws and regulations, will not overcome the problems.

The Report gives several examples of poorly written policies and why they were found unlawful. However, it also gives employers the opportunity to view a policy that was found to be compliant with the act. Wal-Mart’s policies were found to be in compliance and are provided for readers starting at page 22 of the Report.

If you are writing or revising your employee manual’s social media policy, make sure that you reference the NLRB reports. And ask yourself if your policy leaves any question as to whether or not such lawful activities such as discussions on wages, working conditions, labor unions, etc. are somehow restricted.

This blog post is not meant to be an in depth examination of your duties and responsibilities as an employer in formulating a social media policy. Nor is it meant to cover all examples of how to avoid liability. You should discuss your social media policy with a qualified attorney or other qualified resource.

Top 10 Mistakes Made by Small Businesses

To succeed in business you need to have a passion for what you do, failures cannot defeat you, and you must be  determined, optimistic and patient. Yet even with all these attributes some business owners still fail because they do not learn from the mistake of others. Below is a list of the top 10 mistakes made by business owners of small businesses and how to avoid them.

1)  Wrong Business Entity Choice. Which to choose? An LLC? A Corporation? An S-Corp? Choosing the right type of business entity can affect everything from management and ownership voting to taxes and personal liability.  Consult an experienced business attorney to determine which type of entity is best for your company.

2)  Under Capitalization. Most new businesses are underfunded because the business owners underestimate the cost of start-up and running the business and have unrealistic expectations of revenues from sales.  Most businesses take 1-2 years to turn a profit.  A business owner should expect to invest double what he originally anticipates. SBA loans are a great resource for start-ups and other small businesses.

3)  Lack of an Effective Business Plan.  Starting a business without a business plan is like starting a trip without a map. If you do not know where you are going, you will never get there. You can purchase inexpensive business planning software from most business supply stores. 

4)  Failure to Market Effectively.  Many small businesses waste money with ineffective marketing techniques. Be creative and utilize the internet and other forms of media. Make sure you have a good website that can be found. A marketing consultant may be beneficial as your business grows.     

5)  Lack of Necessary Agreements.  An operating agreement, bylaws, employment agreements and buy sell agreements are essential to your business. In addition, many business owners are victimized by having their brilliant ideas and business concepts stolen by employees, independent contractors and even business partners.  If you have employees, partners or consultants, these agreements are a must.

6)  Over-expansion. Do not confuse success with rapid expansion.  Focus on slow and steady growth.  Grow regionally first, build your brand identity and then expand out.

7)  Owners Lack Basic Accounting Skills.  Educate yourself on how to balance your books.  Well kept accounting is essential to any business. There are many self-help resources available and many competent accounts that can help. 

8)   Under Insured.  Businesses often fail because they lack the proper insurance. Insuring a business is less costly than most people think.  Obtaining proper insurance needs to be a priority.

9)  Businesses Try to Do It All by Themselves.  Most businesses do not take advantage of outsourcing.  Being a jack of all trades and master of none can keep your business from getting off the ground.  Know what you do well and seek help in the areas where you need it.

10) Wrong Choice of Professional Help.  Many small businesses think attorneys are an unnecessary expense.  However, many law firms offer special rates for small and start-up businesses.  In addition, an experienced business attorney can help a business owner avoid many of the problems that it has seen other businesses make. Investing in legal advice upfront starts a business off on the right foot and protects against costly legal trouble in the future.