Dawn Johnson, Beata Krakus, Susan Meyer, Abby Risner, and Leonard Vines recently attended two virtual franchise programs – the International Franchise Association Annual Convention and the American Bar Association Forum on Franchising.
Some hot issues discussed at the programs included:
Sound Advice for New Franchisors. Consistent with recommended advice we give new franchisors, this included:
- start expanding close to home - close enough to drive home and back in one day;
- be selective when approving franchisees - almost every franchisor has approved early prospects they regret. Avoid the temptation to sell just because you will get some ready cash; and
- grow in clusters - concentrate on areas that are close together. You don’t want to be traveling all across the country to support a few franchisees here and there.
FPRs. Pulling your hair out about how to prepare your financial performance representations this year? You are not the only one. Franchisors struggle with how to (and if to) use 2020 data and if that very unusual year’s data really gives prospective franchisees a good idea for their potential future performance. Rethink whether to show annual averages, or maybe do quarterly or even monthly averages instead. Consider using geographic subsets to address different performance results in different parts of the country. And talk to your franchise attorney early to make sure that the revised FPR complies with the FTC Franchise Rule and NASAA guidelines.
Advertising. Hot topics in advertising for franchisors:
- social media influencers: Use care with advertising through social media influencers. Many franchisors are exploring this area, but they must take care to seek legal guidance to ensure compliance with the legal requirements and evaluate risks associated with social media influencers, including guidance from the FTC; and
- cause marketing: Ensure you are aware of whether the states where you are considering launching cause marketing regulate the cause marketing you are planning, including whether the state dictates what you must include and specific steps that you must follow.
Insurance. Maintaining, reviewing, and updating your insurance coverage cannot be overstated. Franchisors often overlook important types of coverage, two of which are:
- Directors and Officers Liability Insurance, which covers the franchisor, its officers and directors for mismanagement, illegal acts, fraud, etc., and
- Franchisors’ Errors and Omission Insurance, which covers errors and omissions in connection with franchise sales and disclosure.
System Changes. Changes to the system are inevitable in a healthy franchise, and the failure to change will result in stagnation. However, prior to initiating changes, the franchisor should devote sufficient resources to effectively implement the change and make the franchisees aware of why the changes are important for their future success. Franchisors should also consider various assistance programs (i.e., financing and leasing programs, special terms from designated vendors, and internal support) to help minimize the burden on the franchisees and gain their support.
Dispute resolution. With many courts closed or operating virtually most of the past year, and now facing backlogs of cases, franchisors should consider using mediation as a way to resolve disputes with franchisees more quickly and less expensively than arbitration or litigation, even if the franchise agreement does not require mediation. Moving forward out of the pandemic, practitioners expect that virtual mediations will continue to be used in some cases to reduce travel and related costs for the parties and/or mediator.
Struggling franchisees. During the past year, franchisors have used a variety of methods to help franchisees through the pandemic, including helping renegotiate lease terms, extending the terms of area development agreements, easing brand standards, and forbearing or forgiving royalties. Although some of the franchisee assistance has been done on “handshake deals,” it is usually better practice to get written releases for major events or changes to avoid future problems when things return to “normal.” For those franchisees who cannot survive, franchisors should help facilitate transfers to new franchisees where it is important to keep units open, waive transfer fees, consolidate into multi-unit franchisees or even consider allowing the franchisees to leave the system.