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.

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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.

The seeming confusion over Memorial Day, especially when we’ve lost almost 7,000 American servicemen and women in the wars we’ve been fighting in Iraq, Afghanistan, and Syria, and against ISIS, for almost two decades, bothers me. I respect and admire our Veterans, but their day is November 11th. And I have the utmost respect for all those currently serving in uniform, including a number of whom I count as friends. But Armed Forces Day was May 21st–did you remember to fly your flag and/or thank a service member?unknown soldier

Memorial Day, in contrast, is when we pause to remember, and honor, those who gave, as Abraham Lincoln so eloquently expressed it, the last full measure of devotion for their country. In this vein, the podcast 99% Invisible recently did a fascinating report on the history of, and the men who guard, the Tomb of the Unknown Solider at Arlington National Cemetery.  It is, in my humble opinion, very much worth a listen if you have some time this weekend.

So, before you head out to the white sales, auto lots, picnics or pool this holiday weekend, I kindly ask that you join me–and Fox Rothschild–in pausing to remember those who truly gave the last full measure of devotion to our Nation, so that we can enjoy its freedoms. As General Patton wisely noted, “It is foolish and wrong to mourn the men who died. Rather, let us thank God that such men lived.”

I recently attended the annual Franchise Times Finance and Growth Conference in Las Vegas. In addition to hearing dozens of emerging and established brands pitch their systems, one of the highlights of the Conference is certainly the Deal Makers Gala Awards Luncheon. This is where the Franchise Times recognizes those deals which “drive the capital the help build franchise empires.” The luncheon kicked off with a very insightful panel composed of three award winners:

  1. Greg Flynn, CEO of Flynn Restaurant Group discussing the acquisition of U.S Beef and its 358 Arby’s units;
  2. Heather Elrod, CEO, who detailed the sale of Amazing Lash to WellBiz Brands; and
  3. David Pipes, CFO of Inspire Brands, who closed two take-private deals acquiring Buffalo Wild Wings and Sonic.

Greg Flynn said the Flynn Restaurant Group’s success is looking for brands that are not frothy but solid. He acknowledges that Arby’s went through some hard times.  However, he is convinced that when you have a brand that well-known, it doesn’t take more than some improved management to turn things around.   In his opinion, buying brands at their peak, paying historically high multiples and ending up with a high cost basis just doesn’t make sense. Buying up units of solid and well-known brands, like Arby’s and other concepts like Applebee’s, at low prices, is a much better bargain and long-term bet. The price point coupled with the location of the units, business friendly Oklahoma and the Midwest where people love Arby’s, sealed the deal.

Heather Elrod spoke about the challenges in selling a service brand unknown to many in the male dominated private equity firms.   She focused on the white space available and the room for substantial growth in the eyelash extension market as over 91% of women in the markets where the units were located hadn’t tried the service. As someone with over 25 years experience in the wellness and beauty industry, Heather was skeptical of a service she thought only catered to a younger market. However, she was quickly sold when she realized there is a huge market to 40-50 year olds who use lash extensions as an anti-aging technique.

David Pipers discussed how there are many brands out there that need certain services and investments in technology that are costly but of ubiquitous need among various brands. Although Buffalo Wild Wings and Sonic were different in concept, David could leverage those important services across the systems in Inspire Brands portfolio. He also spoke frankly about the hurdles facing the Buffalo Wild Wings brand upon acquisition, including its attempt to shift from a sports bar concept to a casual dining concept, activist investors and a retiring CEO without any COO or succession plan in place. Notwithstanding those issues, David believes the loyalty among the Buffalo Wild Wings clientele are unparalleled and was optimistic about the system long-term.

It was a lively discussion with interesting takeaways and a great start to the Gala Awards Luncheon.

The long awaited ruling in Mission Products Holding, Inc. v. Tempnology LLC (In re Tempnology) has simplified the intersection of bankruptcy and trademark law, with the court holding that rejection “constitutes a breach” of an executory contract and not an irrevocable termination of the contract.

Tempnology licensed clothing and accessories to Mission Products, but Tempnology filed bankruptcy to, among other things, “reject” burdensome contracts such as that held by Mission Products. Section 365 of the Bankruptcy Code enables a debtor to “’reject any executory contract’ – meaning a contract that neither party has finished performing” Justice Kagan wrote in the majority opinion. Tempnology rejected the license so that it could, as a business strategy, jettison this burdensome contract, or perhaps resell or renegotiate the license. Mission Products argued that because rejection is considered a breach, traditional contract law would be kinder to the non-breaching party, and would allow the choice of retaining the rights granted by the breaching licensor or damages.

The Supreme Court held that outside bankruptcy, a licensor’s breach cannot revoke continuing rights given to the licensee, and that bankruptcy does not enlarge the debtor’s rights in its assets. To hold otherwise would do violence to contract right enforcement and would broaden Congress’ limits on unwinding pre-bankruptcy transfers that would undermine the bankruptcy process. The Court did recognize, however, that the debtor was not required to perform its obligations under the rejected contract and that this, too, could create damages in favor of the rejected licensee.

The Court rejected Tempnology’s arguments that the substantive law of trademark compelled the treatment of rejected trademark licenses as rescinded. A concurrence by Justice Sotomayor clarified that not every trademark license has the unfettered right to continue using licensed marks post-rejection. What remains undecided is whether, under the facts and circumstances in each case, a licensee’s rights would survive a breach under applicable non-bankruptcy law. Justice Sotomayor also noted that because trademarks are not defined as intellectual property in the Bankruptcy Code, a trademark holder’s rights in bankruptcy might not be as limited as a rejected patent holder’s rights would be. For example, rejected patent licensees who choose to retain their rights must pay royalties, but trademark holders may be able to set off post-petition royalties against damages.

Justice Gorsuch explains in his dissent , however, that the bankruptcy case had been fully administered, so there was no live case or controversy, and, therefore, this was a moot decision not within the Court’s jurisdiction. The majority did address the mootness issue to show that this decision was not simply an academic exercise.

Franchisors that have filed bankruptcy have previously used the strategy of rejecting area development agreements with the plan to renegotiate or resell those areas. Following this opinion, this strategy will no longer be available and will require termination of the development agreements on the merits to proceed with the same strategy.  In this area and others, pre-bankruptcy planning respecting trademarks will take on much greater importance for franchisors contemplating the filing of a bankruptcy petition.

We previously discussed the split in the Circuit Courts of Appeal that led to the Supreme Court decision here.

A wage and hour case before the Ninth Circuit Court of Appeals, Vazquez v. Jan-Pro Franchising International, is the latest front in the joint employer battle.  In Vazquez, unit franchisees of a janitorial service system alleged that they were employees of the franchisor.  The District Court granted summary judgment to the Franchisor, based on a prior decision from the First Circuit.

On appeal, the Ninth Circuit first decided that the First Circuit decision—a class action–was not res judicata for the action before the District Court.  The reason was that the Vazquez plaintiffs allegedly were not “adequately represented” in the prior case.

Copyright: stocksolutions / 123RF Stock Photo

The next big issue was whether the California Supreme Court’s recent decision in Dynamex Ops. W. Inc. v. Superior Court, which adopted the “ABC Test” for whether workers are independent contractors or employees, applied retroactively.  The Dynamex question was huge.  As the Ninth Circuit noted, prior to Dynamex, the standard applicable to determining whether a franchisor is an employer of a franchisee was unsettled in California.

The prior employment test came from a case called Martinez v. Combs and set forth three alternative definitions of “to employ”:  (1) to exercise control over the wages, hours or working conditions, or (2) to suffer or permit to work, or (3) to engage the person to work.  The Ninth Circuit recognized that Jan-Pro franchisees did not qualify under prong 1 or 3 of the Martinez test.

But Prong 2 is where Dynamex comes into play.  Dynamex significantly expanded the definition of “suffer or permit” under California law by adopting the so-called ABC test.  Under this test, a hiring entity must establish three elements to disprove employment status:

A.  that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact;

B.  that the worker performs work that is outside the usual course of the hiring entity’s business; AND

C.  that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

As the Ninth Circuit acknowledges, the ABC test is “exceptionally broad”.  I would add that Part B is exceptionally difficult for franchisors to meet.

As if the mere retroactive application and remand itself wouldn’t be enough to send a shiver down the spine of a franchise community, on remand, the Ninth Circuit further directed the District Court to apply Dynamex without regard to prior California cases respecting the “special features of the franchise relationship”.  The Appeals Court specifically stated that tests employed for vicarious liability in tort cases have “little to do” with wage cases and directed the District Court to ignore them.

But the Ninth Circuit didn’t stop there.  Instead, it highlighted for the District Court cases where courts applying the ABC test in other jurisdictions have found an employer-employee relationship between franchisors and unit franchisees.

These court developments bear close watch.  The shift of the battleground over the joint employer doctrine to the courts necessarily means that careful development of policy—as might be expected from the regulatory process—could get rushed, and judicial decisions may result that do not reflect the unique realities of the franchise model.

The female panelists at last month’s Philadelphia IFA Women’s Franchise Network Meeting provided so many great tips on how they utilize social media online to drive franchise sales that we couldn’t fit them into one blog post! Feedback from the 40 women professionals in the audience was overwhelmingly positive. Below are some additional takeaways from the day:

  1. Use an Outside Agency to Fill in Knowledge Gaps. The most frequently asked questions during the panel related to the use of outside agencies.   As Jena Henderson, Vice-President of Growth at Saladworks explained, everyone is an expert on Instagram now and we need more than a camera phone and photograph of a salad to sell the brand.   Ashley Mitchell, VP of Marketing & Communications at Soccer Shots recommended systems outsource to experts where internal marketing does not maintain core competencies. For example, Ashley recognizes she is not a digital optimizer so she is trusting her outside agency to do that.
  2. Remember Customers Can Be Franchises Too. Consumer marketing is not typically looked at as a component of franchise development but Saladworks found success in leveraging its loyalty app to convert customers to franchisees. The loyalty app reminds customers that Saladworks is a franchise.   Recently, the brand was contacted by a professional NFL player who grew up in the Northeast where Saladworks were prevalent and the brand was his go-to lunch spot. He played football in the south and decided he wanted to ensure that his favorite place to eat lunch was around.  Customer to franchisee success story!
  3. Consider Engaging Franchisees in the Discussion. Veronica McKee, Vice-President of Marketing at Philly Pretzel, says that a lot of their best marketing ideas come from franchisees and recommends engaging your system’s advisory council in brainstorming.
  4. Use Yext and Webpunch to Enhance Franchisees Profiles. Most of the panelists use sites like Yext or Webpunch to ensure that franchisee contact information across all platforms is constantly up to date and consistent among websites.  Frankly, there is one area where all the panelists agreed that outside resources are necessary because it is almost impossible to catch and update every website where a franchised unit is referenced.    For example, one of the panelists found that one unit location was listed under two different mailing addresses (one interstate street number and one local street name) which depressed its online presence and confused its hits on Yelp and Google. However, when it comes to Yelp, panelists recommended warning its franchisees against signing up for enhanced packages that do not provide a lot of additional value.   In fact, our panelists found that Yelp has a habit of contacting its franchisees to sell them these unnecessary expensive subscriptions.

If you found this information useful and are a franchise system, franchisee, area developer or franchise industry supplier in the Philadelphia, New Jersey or Delaware area seeking to join the Women’s Franchise Network, then click here.