The first step in creating or renegotiating a supply chain is understanding its component parts, and the roles each part plays: Producers, Manufacturers, Distributors, Retailers, and Consumers. These roles are not exclusive. For instance, the producer of a raw good, such as milk or software code, may also be the manufacturer of the finished good or service (in either case or collectively, a “supplier”), and manufacturers often handle distribution themselves, especially if the franchisor is the manufacturer. A franchisor could theoretically be the producer, manufacturer, and distributer all at once, and the distributor could also be the retailer if the franchise offers just-in-time direct delivery to customers. The exact structure of the supply chain and its elements thus depends on the nature of the franchise system. The consumer naturally stands apart and is the final stop and ultimate driver of the supply chain.

The end goal of the supply chain is to ensure that each element achieves service consistency and quality control as the strength of the brand depends on these. It is therefore critical to pick the right vendors. The selection process usually begins with a request for proposal (“RFP”). The RFP, which is driven by businesspersons, typically includes key elements of performance, leaving particulars to the eventual written agreement, which is often drafted by lawyers. Nonetheless, a savvy franchisor will communicate deal-breaking issues at this early stage. Other key concerns in the selection process are geography and reliability/quality control.

In creating the supply chain, franchisors should anticipate and plan for hypothetical events. What happens if the supplier does not deliver? What is the backup plan? What if the franchise system outpaces the supplier? What are the supplier’s financial limits? A franchisor could find itself in dire straits if its chief or sole supplier gets into financial trouble, including going out of business. It may make sense to build competition into the system, or at least experiment with this idea, but franchise systems might want to avoid dependency on a single supplier. Having multiple suppliers creates an internal market, gives the franchisor bargaining leverage, and provides a backup plan. That said, some franchisors have successfully and profitably used a single supplier for decades. It depends on your system’s desires and needs. Incidentally, it should not be a major problem for suppliers to guarantee or indemnify their services, and a franchisor should be wary of any supplier who refuses to do so.

While the rest of the presentation addressed key terms of supplier (pricing) and distributor (inspection rights) agreements, the speakers made special note of the need to address ownership of intellectual property in supply agreements. The bigger the system, the greater the chance that a franchisor will create new technology that offers benefit to the whole system. Franchisors should make certain that their ownership rights are clear from the agreement. Another oft-overlooked concern, for both supply and distributor agreements is licensing. If any role-player in the supply chain is not properly licensed to exist or to move or offer certain goods or services, it could shut down the entire chain pending legal and/pr regulatory compliance.

The IFA Legal Symposium occurred May 7-9, 2019 in Washington, D.C. Several attorneys attended this event and took away numerous tips. This post is one of a series of posts reporting from this event and summarizing details from the sessions. This post is based on the session entitled Supply and Demand: How to Negotiate Supplier and Distributor Agreements and Work with Franchisees Regarding their Implementation, presented by David B. Ramsey (Kaufmann Gildin & Robbins LLP), Curtis S. Gimson (Arby’s Restaurant Group), and Robert G. Huelin (Wireless Zone LLC).

In a recent post, I expressed the view that no-poach clauses in franchise agreements are unlikely to violate the antitrust laws. Recent activity, however, has given me a “maybe yes, maybe no” on my prediction.

First, two recent rulings offer differing views on the issue of the appropriate standard to apply to the antitrust analysis. The possible standards of review, from the most lenient to the most demanding, include per se (automatically illegal), quick look, and rule of reason. On August 7, 2019, in Conrad v. Jimmy John’s Franchise, LLC, No 3:18-cv-00133 (S.D. Ill.), the Court refused to grant the franchisor’s request for an interlocutory appeal from a prior order of the Court allowing the employee’s per se pleading to stand. By contrast, on July 29, 2019, in Ogden v. Little Caesar Enterprises, Inc., No. 18-12792 (S.D. Mich.), the Court dismissed the complaint, with particularly strong criticism of the employees’ attempted application of a per se or quick look standard. The Court additionally commented that the “plaintiff has not made a serious effort to state a case under a rule-of-reason antitrust theory.”

Second, several New England states, including Massachusetts, Vermont, and Rhode Island, have enacted wage limitations on an employer’s right to require non-compete agreements from employees. Essentially, employers are prohibited from asking low paid employees to sign non-competes. Similar legislation has been introduced in several other states.

The two cases cited above, both obviously at an early stage, made me reassess my optimism. However, the procedural setting of the Conrad case (which began life with a Sylas Butler as lead plaintiff) leads me to believe that my now-cautious optimism is reasonable. The Court’s original ruling was issued in July 2018, by a now-retired federal judge. In the most recent opinion more than one year after that ruling, the newly-assigned judge viewed the ruling as “law of the case,” and that the franchisor had not demonstrated clear error. That’s not a ringing endorsement of the applicability of the per se standard, particularly in comparison to the language of the Court in the Ogden case. Action by state legislatures to curb the use of non-competes, however, may moot these judicial pronouncements.

I was absolutely correct in one comment in the prior blog: if you have franchisees or dealers in Washington, all bets are off. The state of Washington has reportedly entered into settlements with four additional national chains prohibiting the enforcement of “no poach” contract provisions.

As I said before: if a no-poach clause isn’t really necessary, why run the (however small) risk?

The 2019 “Best and Worst Franchise” rankings have been published by Forbes. The franchise analytics firm, FRANdata, was commissioned to apply a methodology that ranks franchise brands on “health and appeal,” from the perspective of a prospective franchisee. This is the fifth report FRANdata has produced for Forbes, this time using information spanning the five-year period between 2013 and 2017. While the rankings are interesting, the methodology used by FRANdata must also be considered because the interests of franchisees buying into a franchise system may be very different than the interests of lenders, investors, and competitors.

Over 3,000 brands had to be considered, but FRANdata would consider only franchisors that had a least 20 franchise units at the beginning (2013) and the end (2017) of the examined period. The brand needed to demonstrate it had been actively marketing franchise opportunities and enough performance history over the five years to be considered. These brands needed a sufficient number of franchisees to demonstrate that the business is adaptable to different geographic markets, and that their performance could be replicated.

The five criteria used for evaluation were: (1) system sustainability; (2) system demand; (3) value for investment; (4) franchisor support; and (5) franchisor stability.

Success is built on the sustainability of the system. Fast growth and demand for franchises is effectively only a snapshot of the value of that brand, in terms of business opportunity and consumer perspective. Fast growth only has value if that growth is health and sustainable. Sustainability was weighed more heavily to emphasize the importance of a healthy system to the long-term success of franchise business owners.

The primary measure of an investment is return on investment. The value of investment criterion assesses and rewards brands that allow transparency into franchisee unit earnings data in the Franchise Disclosure Document. This metric assesses and highlights brands that allow transparency into this data, have sound unit economic performance, and offer operators a possibility of achieving financial success.

Franchisor support and franchisor stability also are of great importance to potential franchisees. Support is important because it has been shown that the amount of initial and ongoing support provided by the franchisor directly correlates to the success of franchise units in the system. Additionally, one of the benefits of joining a franchise system is the level of operational and financial knowledge and support a franchisee can derive from the franchisor.

The criteria did not list certain other issues that lawyers might consider as important, such as litigation and bankruptcy history of the company or its key employees, balance sheet contingencies, trademark strength, and trends in the marketplace that might affect future operations or profitability, such as labor or finance costs.

For the franchise buyer, the decision often is made on culture and lifestyle, rather than plain metrics. The buyer needs to invest themselves into the brand and be proud of its investment. The same is true of any other investor into a franchise company. The brand is everything, and you must adopt the brand to be successful. It is good to see that so many brands are growing through strong franchisee and investor interest.

The Pennsylvania Restaurant and Lodging Association provides many benefits to its hospitality industry members.  One of those benefits is access to its interesting and useful webinar series.  This month’s webinar “Five Star State of Mind: Handling Online Reviews” was presented by Ali Schwartz of Yelp.   Unlike Yelp’s sales team, Ali is a member of Yelp’s business outreach team who focused on educating business owners on the free tools offered by Yelp that do not require any spending.

Yelp tests its reviews every quarter.  Despite most business owners’ somewhat begrudging tolerance of customer review websites, it turns out that the vast majority of reviews on Yelp are not negative.  According to Ali, for every quarter in the 15 years in which Yelp has been in business, almost 80% of reviews are positive or neutral, and Yelp has more 5 star reviews than 1, 2, and 3 star reviewed combined.  To increase the likelihood of positive feedback on customer review sites like Yelp, Ali recommends that franchise or company-owned locations do the following:

  1. Make sure the basic deals about your business, like hours and location, are up to date. Over 85% of your customers go online to find basic information like hours and location, so make sure those details are accurate .   Yelp allows businesses to post special hours for holidays and other occasions.  The last thing a franchise wants is for a customer to have a negative experience because they traveled to a location and it was not open.
  2. Don’t limit your photos to stock images.  Think about the photographs that would make you smile.  What would make you want to go to a business?  Think about including the employee team in images or a manager giving a thumb’s up outside the location
  3. Be forward thinking when it comes to critical reviews. Ali breaks critical reviews into three categories and provides advice for responding to each type:
    • Legitimate.   A review may be negative because a franchise was understaffed or there was a hair in the food.  For legitimate critical reviews, Ali recommends writing a public comment response.  This shows off customer service excellence.  You are really writing for everyone else who is reading the review just as much as the patron who had a negative experience.
    • Inaccurate.  This often occurs when a reviewer is writing about the wrong business.  In this case, you want to set the record straight in a professional way
    • Rant.  This is what Ali refers to as the “shrimp salad people.” These are customer who, eat all the delicious plump shrimp in an entrée but still send it back.  In this case, Ali recommends not to “poke the crazy”.  Take the high road and send a private message.  Yelp users are smart and savvy and generally do not read beyond the first few sentences of a long rant.
  4. Amplify the positive.  For example, if a reviewer compliments the cocktails, then your response may include information on upcoming happy hours or special events.  From a tactical standpoint, using words “cocktail” “happy hour” will now appear on your page with searches.  It also encourages other writers to submit good responses.
  5. Don’t interfere with the natural flow of reviews by asking customers to writing good reviews.  Inspire great reviews organically.  You want customers to feel like they had a great experience because you have excellent customer service, not because you were trying to get a good review.

In my discussion with franchise systems, especially large systems in the hospitality (restaurant and hotel space particularly),   I know that many provide franchisees with “best practices” on responding to negative reviews as well as positive reviews.  As part of any system’s guidelines for customer service excellence, franchisees should ensure their staff knows what to do when something goes wrong and have guidelines in place to address issues.  This is an important part of maintaining the franchise system’s brand online.

The recent antitrust attacks on no-poach clauses encourage insomnia among franchise lawyers. But is the attack serious or just a flash in the pan, soon to be extinguished?

The insomnia began in the tech industry, where front-line players with huge market shares agreed not to poach each other’s employees. No-poach agreements among dominant market players, the Department of Justice opined, would have a significant depressive effect on employee salaries. The DOJ asserted that such agreements were per se illegal under the Sherman Act. The DOJ’s Statements of Interest in several cases attacking no poach agreements prompted several consent decrees banning the clauses.

No-poach provisions are a common feature of Franchise Agreements, so of course the DOJ’s actions caused a minor panic in the franchise industry, prompted civil lawsuits, and influenced enforcement actions by various state antitrust enforcement agencies. The state of Washington has been especially aggressive, extracting agreements to refrain from enforcing no-poach clauses throughout franchise systems. The DOJ, however, saw a clear distinction between no poach clauses in franchise agreements and those in other contexts. In franchise agreements, no poach clauses are ancillary to a business relationship in which the clause functions to support working relationships among those in the system.  This was the case in Deslandes v. McDonald’s USA, LLC, 2018 WL 3105955 (N.D. Ill. June 25, 2018).

As ancillary restraints, no poach clauses in bona fide franchise agreements are generally subject to rule of reason (“ROR”) antitrust analysis. ROR analysis analyzes in detail the actual competitive impact of the restraint in the affected marks. A per se violation, by contrast, is automatically illegal regardless of market impact. Market power is essential to a Sherman Act ROR analysis. The franchisor that enjoys dominance over a market segment is as rare as a white rhino. No market power, no Sherman Act violation. However, the State of Washington has not acceded to the DOJ’s view and may still pursue nationwide relief in challenging such clauses.

Bottom line (with some hazy crystal ball gazing): No reason to panic (unless you’re in Washington), but consider carefully whether a no-poach clause is critical to the franchise system. If not, why run even a small risk?

The Philadelphia Chapter of the International Franchise Association’s Women’s Franchise Network hosted its annual summer meeting this past week.   For those of you who do not know, the local chapters of the IFA WFN’s is a local community designed to create, promote and inspire a network of female franchise business professionals dedicated to strengthening the success of women in the franchise industry. 

Hosted by Rita’s Franchise Company at their company headquarters and training facility in the Philadelphia suburb of Trevose, more than 35 local franchisors, franchisees, and industry supplies came out to network as well as enjoy delicious and refreshing Rita’s treats.  It was the perfect way to spend an evening when temperatures in the region hovered around 90 degrees!

In addition to good company, the group had privilege of listening to Yvette Nunez, Vice-President of Civic Affairs for the Chamber of Commerce for Greater Philadelphia, speak about the current economic climate and potential issues in the Philadelphia area that could affect franchisors and franchisees alike.   She provided an engaging and educational discussion on the Chamber’s initiatives.  She also discussed what franchisors and franchise owners can do to support economic and job growth in the region and combat regulatory initiatives that may negatively impact business growth in the region.

Yvette’s call to action came at a perfect time as the IFA is gearing up for the Franchise Action Network Annual Meeting in Washington D.C. where IFA members will meet with Congressional representatives to discuss legislation impacting the franchise business model.

Yvette encouraged small business owners, especially franchisees, to participate in educating those working in City Hall on how certain legislation and local regulations may impact small business owners.  She used the example of City Council’s predictive scheduling law which requires certain industry employers to provide employees advanced notice of work schedules. It also requires employers in these industries to give employees predictability pay for specified schedule changes and requires employers to provide a minimum number of hours off between shifts and priority on open shifts. The Chamber supports the intent of the ordinance, which includes, for example, providing employees the opportunity to plan childcare during work hours.  However, unknown events, like bad weather or the Philadelphia Eagles winning the Superbowl, can require last minute changes to personnel staffing.

Yvette explained that it is harder to make an impact when only “big business” lobby City Council members.   Representatives are much more emphatic and open to hearing how these regulations impact the small business owner.    This is why it is critical for franchisees to be present, locally, regionally as well as nationally at the IFA Franchise Action Network Annual Meeting.  Franchisees need to remind governmental representatives that, although they many be associated with a large brand name, they are small business owners who are impacted by these regulations.

You can learn more about the Chamber of Commerce for Greater Philadelphia by clicking here.  To learn more about the IFA Franchise Action Network Annual Meeting click here.  Attendance at the meeting is free for franchisees.  Interested in joining the IFA Philadelphia Chapter of the WFN, click here.   The next meeting of the Philadelphia IFA WFN is scheduled for October 29th and will be hosted by CertaPro.

Approximately one third of all franchise systems in the U.S. are service franchises. Services franchises can offer business services (e.g. insurance, printing), services related to residential and commercial real estate and fixtures (e.g. landscaping, plumbing), or personal and consumer services (e.g. education, health care). As with all goods-focused franchise systems, the franchisee territory is often a  primary source of disputes between franchisees and franchisors. Service franchises, however, often contain a unique, territory-related feature: national account programs.

Service franchise systems use national account programs to serve customers who need consumer services across territories and often from multiple franchisees. The franchisor usually markets and negotiates such accounts, and it typically manages the relationship with the customer. The franchisor also can bill the national account customer on behalf of the franchisees and allocate revenues respectively.

National accounts can be a boon to a service franchise system in the form of additional and reliable revenue for franchisees and by creating association with other national brands. Service franchise agreements should thus anticipate national accounts and address certain issues that will arise. For instance, franchisors might consider obligating their franchisees to service national account customers, but could also impose limits on the amount of revenue any franchisee generates from such national accounts. The former term guarantees the customer will be serviced, and the latter reduces risk of franchise failure where there is too much reliance on one stream of revenue.

A good franchise agreement will also contemplate how national accounts can be generated. Though it will typically be the franchisor’s role (or even obligation) to market and develop national accounts, they can also come from franchisees. A franchisee will probably be territorial about its relationship with a national account customer it introduced to the franchise, and it may contest the franchisor’s management of the relationship. The sourcing franchisee could even rebrand and take the customer with it, at least within a territory, if the relationship becomes strong enough, such as when the majority of the franchisee’s revenue comes from that customer.

Franchisee sourced national accounts may also cause intra-system strife where a franchisee in a different territory bristles at servicing the original-source franchisee’s chief customer at a lower cost point, as national accounts will often be at a lower price point due to the large volume. Anticipating the unwillingness or inability of some franchisees to service certain national accounts, the franchisor could reserve a right to let outside franchisees service a national account customer in a territory where the host franchisee will not or cannot.

Franchisor sourced national accounts can also create tension. As explained above, the lower price point may not offset the value of an additional revenue stream for some franchisees. Conversely, some franchisees may gripe if they miss out on a national account due to their location.

On the whole, national accounts are a valuable, perhaps vital, aspect of service franchise systems, but franchisors should take special care in their franchise agreements to anticipate the potential pitfalls.

The IFA Legal Symposium occurred May 7-9, 2019 in Washington, D.C. Several attorneys attended this event and took away numerous tips. This post is one of a series of posts reporting from this event and summarizing details from the sessions. This post is based on the session entitled “Service Brands – You’re Not Selling Burgers” by Presenters: Grayson Brown (Neighborly), Kerry L. Bundy (Faegre Baker Daniels LLP), Ken Hutcheson (U.S. Lawns), Robert D. Rose (Dale Carnegie & Associates, Inc.)

A meal kit contains the ingredients necessary to prepare a meal, and many are intended to be balanced and healthy. Meal kits are being marketed for all occasions to provide freshly prepared meal options. Kits answer not only the question of “What is for dinner,” but also, “Do I have everything I need?” These kits also provide a solution to those who want to eat healthy, allowing them to customize their order.

The growth rate is staggering. From 2018 to 2019, the meal kit market has grown by 36%. Most of the customers have incomes of $100,000 or more, and tend to be between 25 and 44 years of age. Many meal kits are ordered on a subscription basis, for a week, primarily for the 35-44 year old demographic. But that is changing rapidly. Only 12% of consumers bought meal kits last year, but 23% say they will buy meal kits in the future. Sales are shifting from solely on-line ordering to also in-store sales. Combine that with third party meal deliveries on demand, expect exponential growth because of increased convenience.

In fact, in 2018, Chick-fil-A test marketed “Mealtime Kits” at 150 restaurants across the Atlanta-area. The pitch was that it makes it easy to cook your own meal at home in 30 minutes using a recipe card and fresh, pre-measured ingredients. The Mealtime Kits are picked up at any participating Atlanta restaurant. These kits do not include freezer or ice packs, however, so they must be refrigerated. Each Mealtime Kit serves two people, so additional kits are needed for any additional people. The Mealtime Kit recipes take approximately 30 minutes to prepare, and Chick-fil-A tested five different Mealtime Kit recipes.

Customers were able to choose two of the following options: (1) Chicken Parmesan; (2) Chicken Enchiladas; (3) Dijon Chicken; (4) Pan-Roasted Chicken; or (5) Chicken Flatbread.  Mealtime Kits cost $15.89 each, and all featured Chick-fil-A chicken. The Mealtime Kit recipes are not considered vegetarian, vegan, or gluten-free but each ingredient is individually packaged so a customer could customize the meals at home to exclude any unwanted ingredients. Consumers could order a Mealtime Kit at a local restaurant using the drive-thru, inside at the counter, or via the Chick-fil-A mobile app, Chick-fil-A One, and consumers are not required to call ahead to place an order. The Mealtime Kits do not replicate Chick-fil-A menu items, though they do include some ingredients you’d find in a restaurant, including the chicken.

According to their SEC filings, operating only six days a week, Chick-fil-A reported $3.0 billion in revenue in 2018, more than a 13% increase over 2017. With system wide sales increasing over 16% to $10 billion in 2018, the average mall store reported over $2.2 million in sales and non-mall stores reported over $5.7 million on average.

Chick-fil-A has a catering program that will bring ready to eat Chick-fil-A products to customers. The Mealtime Kits, however, fulfill a different need as they are convenient to prepare and as convenient as visiting the drive thru. Given that the best part of the day for Chick-fil-A is lunch, picking up a Mealtime Kit for dinner seems even more convenient.

Availability of meal kits is shifting from a subscription model ordered on-line to in-store supermarket space. Online subscription companies have partnered with brick-and-motor groceries and supermarkets to offer their own packaged options. You will see supermarkets making space or “stations” of in-store meal kits. The next step is like to be franchise branded kiosks offering franchise branded meal kits.

Market leaders in food delivery, DoorDash, Postmates, and UberEats, often partner with restaurants, and the restaurants have incremental sales increases, although the fees of the food delivery services continue to erode restaurant margins. Today, the restaurants pay the majority of the expense of third party deliveries, but this is likely to shift to the consumers as the costs are not sustainable for restaurants. With a likely increase in competition, this delivery expense could be driven lower. There also may be some savings or revenue opportunities through customer data-sharing and point of sale system integration that will make delivery even more ubiquitous.

Those under 45 are all about taste and convenience. They not only want their MTV, but also fresh, customized meals now, delivered to their kitchens. Look for franchise companies once again to fill that need.

Mark Siebert, CEO of the well-known franchising consulting firm iFranchise Group, authored a very interesting article in a recent issue of Franchise Times magazine about “influencers” in franchise sales. As a corporate and regulatory transactional franchise attorney, I represent both franchisors (in the sale) and franchisees, multi-unit owners and area developers (in the purchase) of franchise units. Helping a start-up franchise system navigate the sale of one of its first units is exciting as is providing the legal guidance to a prospective franchisee in deciding whether to decide a franchise unit.

77420569 – influencer marketing concept in business

I can educate a franchisee on the legal implications on signing on the dotted line and provide best practices to a franchisor on the offer and sale of a franchise unit in compliance with the FTC Rule and state law. However, as Siebert explains, franchise systems must be aware of the local “influencers” that drive the sale – that is the spouses, family members, business advisors, friends, bankers/lenders and accountants that drive the sale.   This is where Siebert recommends that franchise systems involve these influencers in the evaluation process to ensure that a sale doesn’t get derailed. According to Siebert “educate them on the offer. Involve them in the conversation. Invite their objections and explore their fears and concerns. Get them on the phone, share your marketing materials, invite them to discovery day. By involving them in the process, you communicate their importance to you and demonstrate your commitment to transparency.”

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To “win” over the business influencers, Siebert recommends having accurate and complete financial performance representations in Item 19 of the franchise disclosure document and providing third-party validation necessary to make the influencers comfortable with the offering.   I echo Siebert’s advice. I recommend to all of my franchise clients that they have strong Item 19 FPRs and solid relationships with their franchisees to ensure positive word of mouth.   I can provide the best and most comprehensive analysis of the legal terms of the franchise and other agreements and point out red flags and cautionary items in the FDD, but only current franchisees will be able to provide the needed first-hand validation and knowledgeable about the brand and its culture.  Often that is just as important to a prospect when making a decision.  To read the entire article click here.

On May 19, 2019, the North American Securities Administrators Association (NASAA) adopted new state cover sheets and state effective dates page for franchise disclosure documents. Beginning on January 1, 2020, the FDD must now include three specific cover sheets prepared in accordance with the instructions and samples promulgated by NASAA.

All of these new pages are required to appear directly behind the cover page of the FDD, before the main body of the FDD containing Items 1-22. The first of these new sheets, entitled “How to Use This Franchise Disclosure Document”, is a table that includes a variety of general questions a franchisee may have. The table indicates under which FDD Item the information can be found. For example, one of the listed questions is “Is the franchise system stable, growing, or shrinking?”, and the table refers the reader to Item 20 for the answer.

The second new cover sheet is entitled “What You Need to Know About Franchising Generally.” This page defines certain common franchise terms of art, such as “supplier restrictions”, “operating restrictions,” and “renewal.”  The final new page, titled “Special Risks to Consider About This Franchise”, and it appears to operate in the same manner as the prior state-specific disclosure page. For example, on this page, a franchisor must list whether the dispute resolution is out-of-state, whether another state’s law governs the franchise agreement, and any other state-specific risks that are required to be disclosed. Finally, franchisors must continue to include a page listing the effective dates of the states in which they operate.

Although none of these changes are drastic, franchisors will need to ensure they add these new pages in order to ensure they have a compliant FDD.