Franchisors: We Offer The Following Prescription for Your Consideration

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Fox Rothschild LLP

Recently we discussed the headwinds that remain for the franchise community as a result of policy changes coming from Washington and the various state capitols.  What should franchisors consider as they swim in this sea of dangerous uncertainty? Unsurprisingly, there is no clear path; decision-making in the fog of the unknown is risky. That said, we suggest that fanchisors might consider the following to avoid the most severe effects of these possible outcomes:

  • Reduce employment control factors to the minimum and tie operational standards closely to brand quality in franchise agreements and brand quality manuals.
    • Downside: Many franchisees want operational and employment guidance from the franchisor.
    • Downside: Unclear whether quality control required by the Lanham Act will preclude application of an ABC test, or vice-versa.
    • Downside: Loosening control risks loss of mark.
  • Train field personnel to focus on brand compliance only, consistent with franchisor’s focus.
  • Encourage/require franchisees to operate as corporate entities.
  • Raise wages and benefits in franchisor-operated locations, to avoid joint liability with its franchisees in wage and hour complaints.
  • Seek out potential franchisees in radically different businesses, who can treat franchise outlets as portfolio assets, e.g., private equity investment entities, companies with multiple brand or business operations; or who can operate a franchise outlet as an adjunct to their regular business, e.g., supermarkets, universities, multi-brand concessionaires, or gas stations.
    • Downside: Lesser control over franchise operations.
    • Downside: Divided loyalties of franchisees.
  • Grant franchises in nontraditional venues over which franchisor has little or no ability to control work conditions, e.g., sports arenas, university campuses, convenience markets, supermarkets, recreation areas.
    • Downside: Lessor control over franchise operations.
  • Reassess/change the system financial model to anticipate increased expense and risk.
  • Require franchisees to escrow funds (e.g., equal to quarterly salaries).
  • Increase royalty payments or other fees.
  • Require additional or greater levels of insurance (e.g., EPLI).
  • Require irrevocable letters of credit from franchisees.
    • Downside: Franchise agreements may not permit.
    • Downside: Many franchisees will be priced out of the relationship; favors multi-unit franchisees.

The search for a redemptive path for franchisors is no longer urgent. Judging from the current pace of activity, legislative and regulatory outcomes will be slow to develop. And maybe, just maybe, the franchise industry will emerge (relatively) unscathed.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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