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National Franchise Law Blog

Due diligence tips for international franchise opportunities

For readers who have traveled overseas, coming across certain American franchises may be a welcome reminder of home. Brands like Starbucks or McDonald's seem to have a ubiquitous world presence.

Indeed, franchising can now be found in over 160 countries, involving more than 70 business sectors. Many U.S. franchisors recognize the new opportunity that international franchising might provide, and consequently have turned to international franchise attorneys to understand the legal mechanism for launching their expansion. That process may require the franchisor to obtain a master license, as well as an understanding of the law of the foreign nation where the franchise will be located.

Arbitration clauses might be buried in contractual fine print

This blog has often emphasized the need for due diligence before entering into a franchise transaction. Without understanding all of the contractual language, a potential franchise buyer may inadvertently sign away some of his or her rights.

For example, arbitration, a type of alternative dispute resolution, is a common clause contained within many franchise contracts. However, it can be important to understand your rights in this type of forum. One such right is typically having representation present during the arbitration. Another key point is whether the arbitration is binding or can be appealed. A recent story underscores the need to read the fine print.

A lawsuit filing might be a smart franchise negotiation tactic

Due diligence may go a long way toward protecting an investor’s stake in a franchise, but a recent example illustrates that disputes may still arise.

Specifically, Time Warner Cable recently agreed to settle a dispute over franchise fees with a city in Virginia. The original contractual language stated a franchise fee of 3 percent of Time Warner’s annual gross revenue. However, federal law permits the city to charge up to five percent.

Issues to consider before growing your business into a franchise

Many of our franchise law posts focus on legal tips to consider when buying a franchise. However, an established small business owner may also benefit from an attorney’s counsel when he or she is considering an expansion into the franchising arena. Becoming a franchisor involves a unique set of issues.

First, an attorney can help clarify a business owner’s desire to franchise. One benefit is that franchising may allow expansion without a corresponding increase in up-front capital. Ideally, having more units will boost profits and create additional economies of scale.

Is franchising the key to the American dream?

Will a franchise make you rich? According to one entrepreneur, dubbed the “franchise king,” the franchising industry is his preferred way to attain the American dream.

In a recent interview, the businessman described how franchises helped him grow his wealth. It started small: after graduating with an electrical engineering degree, he decided he wanted to buy a Kentucky Fried Chicken franchise. His parents invested in the opportunity with him by mortgaging their house, and he obtained a one-store license for a downtown Atlanta KFC location. He now has a franchise empire comprising 80 units and 14 brands, mostly in the fast food industry. In addition, he has a management company and a $50 million private equity fund.

Could a franchise help you start your own business?

If you’ve dreamed of starting your own small business but have hesitated because of certain issues, a franchise might be the answer. Indeed, a franchise can provide an opportunity to work in an industry in which you have interest, ability and knowledge, while at the same time offering a safety net.

Specifically, the protections offered by a franchise may include an established business solution. In fact, for someone who wants more training on the business side of things, many franchisors offer that option. A franchise generally has established business systems, including an approach to marketing, that provide an invaluable crash course in small business operations. Similarly, other franchise arrangements may give a franchisee the option of managing daily operations personally, or hiring a manager for those duties.

Does your franchise contract limit the franchisor's interference?

Although franchise negotiations can become heated, a recent story illustrates this potential taken to the extreme. Specifically, a franchisor locked himself inside the franchisee’s business premises, prompting police to report to the scene. The franchisor had arrived early in the morning and changed all of the building’s locks. Yet no arrests were made, nor was the franchisee granted access inside. 

The reason for this outcome is contractual: The franchise owner claimed he was within his rights, pointing to a clause in the franchise agreement that authorized possession for the franchise in the event of financial problems. Notably, the landowner agreement also contained that clause. The franchise only rented the property where it conducted its business. 

What is refranchising?

In the restaurant industry, selling franchisor-owned restaurants to local franchisees, or refranchising, seems to be the latest rage. Consider the recent example of McDonald’s. The restaurant chain hopes that refranchising will reduce its annual general and administrative costs by around $500 million in the next few years.

There are several reasons why a franchisor might seek to refranchise. A franchisor that owns its own restaurants is responsible for every aspect of those local operations. Just as with home remodeling, restaurant décor must keep up with the times, in addition to ongoing upkeep and maintenance. McDonald’s has launched a store improvement plan that includes features such as faux leather chairs, wooden tables, and other amenities. 

Should prospective buyers be wary of franchise growth estimates?

Although the entertainment industry may be unique in many ways, it still operates under franchise law concepts applicable to any industry. In any industry, a prospective franchise buyer should be wary of overly confident valuations, or unsupported estimates of future growth and profitability. 

A recent example is the release by Warner Bros. of “Batman v. Superman: Dawn of Justice.” The producers apparently bet heavily on the movie’s ability to spawn a franchise, as its $400 million production and marketing budget gives it the dubious distinction of being one of the most expensive movies of all time. By one projection, producers hoped for a franchise of two new movie releases per year for the next five years. Yet reviews of the movie have been unfavorable, and a poor opening weekend could prove fatal to the entire investment.

When does a franchisor become a joint employer?

Contract law cannot usurp federal or local laws, of course. Yet when a potential legal infraction is identified, who is the responsible party? A recent administrative lawsuit seeks to hold franchisor McDonald’s responsible for some alleged violations of federal labor law.

According to the National Labor Relations Board, both the franchisor and franchisee should be held equally liable in this case. If the administrative court agrees, some commentators believe the decision could change the franchise industry, including the rights of franchise workers. Specifically, the decision might give workers the right to unionize against the franchisor. 

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