Monthly Archives: March 2015

Do You Want a Controversial Franchise?

Tiger_grand_in_blue_trousersOnce upon a time there was a little boy in India who cleverly tricked tigers in the jungle into running so fast that they turned into butter instead of eating him. And once upon another time — 1957, to be precise — there was a pair of Italian immigrants in California who combined their nicknames (Sam and Bo) to create the name for a pancake house that used that story for branding. Sambo was the name of the little boy in a Victorian children’s book written by Helen Bannerman, and Sambo’s was the restaurant that offered a 10 cent cup of good coffee, delicious pancakes, and “tiger butter.” Local artists created murals of the Bannerman story on the walls of the restaurant, and the owners made their Sambo as popular as Tony the Tiger.

A few decades later, there were 1,117 Sambo’s restaurants in 47 states. Every one was mired in controversy over a name and visuals that seemed offensively racist to people growing up at a time when the storybook was banned. By 1983, in spite of efforts to reframe the pancake chain, only the original restaurant remained.

You might not even know that the franchise you’re considering is controversial or has been controversial in the past. Here are some examples of franchise controversies:

  • Chick-fil-A got into the headlines when the company’s then-COO remarked that gay marriage was “inviting God’s judgment” on the U.S. That was 2012, and now in 2015 the chain has largely put that controversy behind them.
  • Jack in the Box had the worst E. Coli outbreak in the nation’s history in 1993, with 600 ill and four dead. Adding to the problem, corporate headquarters initially denied the problem and only a week later expressed concern for the victims of the poisoning. Changes in food safety laws followed.
  • Gold’s Gym got into hot water with franchisees over political donations. Not political donations from the corporate office, though. It turned out that the donations in question had been made personally by an individual investor. Gold’s statement included this unequivocal statement: “Gold’s Gym is a non-political organization and our member’s dues are not used to fund political candidates.” However, social media spread the rumor far and wide before that statement was made.

When you check he background of a franchise business opportunity you’re considering, look for controversies. Then find the answers to these questions:

Was the franchisor at fault? Many of the most notorious franchise controversies came from events at an individual franchisee’s location. Franchisees are independent business people, and may not be reflecting the views of the franchisor, and the employees of an individual franchise may not reflect the views of the franchisee.

How did they respond? Jack in the Box was involved in another potential public relations disaster in 2011, when a customer sued, claiming the chain wasn’t using real beef. This time, they stepped up and took the issue public quickly, with transparency and success. They learned their lesson. You’re looking for evidence that the franchise acted quickly and honorably to deal with the controversy.

Have they recovered? Chick-fil-A faced protests at their stores in 2012, but three years later their company is doing well. Sambo’s went into bankruptcy and their later attempts to fix the problem failed. Look at the company’s financial information and ask current franchisees whether they still deal with reputation issues.

Controversy doesn’t have to be a deal breaker, but it’s worth looking for and it’s also worth checking to see how the issue was handled.

Think Twice about Marijuana Franchise Opportunities

Flowering_male_marijuana_plantMarijuana is completely illegal in 23 states and three U.S. territories. It is fully legalized in four states, and elsewhere it’s complicated. That’s enough legal flexibility that cannabis franchises are starting up. Several different cannabis-related companies, from e-commerce sites to herbal wellness centers, have announced the availability of franchise business opportunities.

Should you consider getting in on the ground floor with a cannabis franchise?

A Forbes article points out the marijuana franchise opportunities drawbacks:

  • Cannabis may be decriminalized in some states, but it is still illegal under federal law. That means that a franchise selling cannabis could be shut down at any time by federal authorities. Since it hasn’t happened yet, it’s impossible to predict what might set off a legal challenge.
  • The beauty of a franchise business opportunity is that it has been tested and proven successful over time. That doesn’t really apply to any current marijuana-related business, because they’ve all been open for just a few years. The franchisors also don’t really offer the value of name recognition, economies of scale, or other common franchise advantages.
  • Profit levels are also uncertain. All businesses have an element of uncertainty, but cannabis prices are volatile and taxes on cannabis are very high — 25% in Washington state. Add franchise fees to the mix and profits may never be robust.

The American Bar Association points out that cannabis franchisors can’t be expected to guide new franchisees through the legal complexities. Many of the new cannabis business founders sold the substance illegally before becoming lawful vendors; few have a strong legal background. What’s more, shoppers are likely to expect cannabis franchisees to be able to clarify their legal situation as customers. Add the fact that franchises are forbidden in some state laws on cannabis (Washington, for example, specifically limits cannabis businesses to a single location). Franchisees can expect to be in what can only be considered an uncertain legal position.

Some cannabis-focused franchises are taking a safer route by selling hydroponics systems, affiliate websites, or an e-cigarette system. In each of these examples, the franchisor never sells marijuana to the franchisee. Others are putting language in their franchising agreements that put the burden of legal issues squarely on the franchisees, specifying that the franchisees have the responsibility to follow all laws in their area and that the franchisor is not responsible for legal issues.

Franchise lawyers have been speculating about these potential legal issues. Here’s a list of possibilities mentioned on various legal blogs around the internet:

  • Given that marijuana is still a Schedule I substance, can a lawyer even legally give advice to a client who intends to sell it?
  • What if the instructions for the franchise system include illegal acts?
  • Can a cannabis business deduct business expenses on a federal tax return if the business is illegal under federal law?
  • Attorneys are blocked from “knowingly facilitating” crimes. Would advising a cannabis franchisee fall under this rule?

At this point, marijuana franchise opportunities may offer more interest — and more profit — to franchise lawyers than to franchisees. Read more about other top 100 franchises.

Is It Time for Change in the Franchise Regulatory System?

law--judicial_19-137273Australia recently revamped their franchise system, and Canada has made some changes, too. European regulations change, but the U.S. hasn’t made many changes at all in decades.

Franchise lawyer Rupert M. Barkoff wrote in the New York Law Journal that U.S. franchising law has essentially been static since 1979. There was a change in the disclosure rule in 2007 and a few changes in state laws, but, as Barkoff put it, “a Rip Van Winkle franchise attorney, having been asleep for some 35 years, could wake up today and, for the most part, continue where he had left off.”

In some ways, that’s good. We’ve seen a dramatic response to recent challenges and changes in the franchise arrangement since the National Labor Relations Board determined that franchisors and franchisees can be “joint employers,” and to redefining franchises as large businesses for the purpose of minimum wage laws. One of the primary concerns has been that franchisees will have signed agreements under one set of rules, and will have to deal with a new set of laws that will change that agreement.

Changing horses in midstream can be an unpopular idea.

Barkoff acknowledges this. “However,” he says, “this assumes that the existing regulatory scheme is effective.” Barkoff would like to see some changes. Reporting on a recent colloquium of lawyers and scholars on the subject of franchise regulation, he listed several changes he’d like to see:

  • Federal regulation rather than state by state regulation was, Barkoff said, surprisingly popular among the attendee at the colloquium. Clearly, it is simpler for franchisors who have franchisees in multiple states to cope with a single set of federal guidelines than to keep up with a variety of regulations in each state. Multi-unit franchisees with units in more than one state, an increasingly popular option, would also benefit. And franchise lawyers would be better able to keep up with regulations and to help their clients if regulations were uniform across the nation.
  • The FDD, or Federal Disclosure Document, seemed to the colloquium participants to be useful for helping prospective franchisees understand their legal rights. However, it didn’t give them much information about what the franchisee/franchisor relationship would be. Barkoff also felt that an FDD usually gives very little business information. He pointed to Item 1, which discusses the nature of the local market for a franchise. Often, he says, Item 1 simply announces that the field is competitive, and that there are other franchises offering similar goods and services. The prospective franchisee will probably have gotten that information by driving to the meeting.
  • Barkoff also wrote about the practice of “hotboxing,” or pressuring prospective franchisees to invest quickly by suggesting that the franchise offer is time-limited. In most states, franchisees must have the FDD for 14 days before signing an agreement, which gives you time to do your research before making a decision. However, the laws on this subject are not consistent across the country, as Barkoff would prefer.

Do you agree that these changes should be made, or are you more of the mindset of, “If it ain’t broke, don’t fix it”?

 

Franchise Opportunities for Retirees

Business professionalsRetirees increasingly look to franchise opportunities for a second career, and it’s no surprise. Their grandparents might have spent a few years in retirement, caring for grandchildren or enjoying their declining years with friends. Their parents might have gone on cruises and had a decade of leisure. But the Baby Boomers are living longer, and often without pensions or substantial investments.

A franchise business gives retirees something valuable to do for their twenty or thirty years of retirement, and lessens the chances that they’ll outlive their retirement funds. But the earliest of the Baby Boomers are now nearing 70, so they’re beginning to retire from the franchises they opened as retirees. Over the next decades, this will become an increasingly common scenario.

Some franchisors are already preparing for the possibility. Here are some of the responses the franchisor community is seeing to this demographic shift:

  • Some are making it easier for retirees to pass on their franchises to sons and daughters. Unlike traditional business owners, franchisees can’t automatically let their offspring step into their shoes and take over the business. Franchisors must approve family members just as they must approve any buyer of a franchise. However, as franchisors retire, this option is becoming more appealing.
  • Some are working to make their offerings more appealing to younger people who want to invest in a solid existing franchise. In-house financing and special discounts are bringing younger people into established franchises whose owners want to retire. One common scenario is the case of the general manager who has the knowledge and skills to keep the business running, but not the capital to buy the franchise. Financing in this case is low-risk, and it’s a win-win for the franchisor and for the young business person.
  • In some cases, serious discounts on up-front costs are a reward for strong sales within an existing franchise. Employees have the option of working their way into a franchisee position, with hard work taking the place of a cash investment. These arrangements might involve the current franchisee as a mentor for the up and coming young franchisee-to-be.

How can you benefit from this trend?

First, if you’re a young person with limited cash and plenty of energy, talk with franchisors to see whether they have or are planning programs like these. Some may be able to put you in touch with a suitable mentor within their franchises.

On the other hand, if you’re an older person and you don’t want to just lock up and walk away from your franchise when it’s time to retire, you could get involved with a program of this kind. While the details of these plans vary, they could provide a transition from active ownership through executive franchising to complete retirement.

If either option is appealing, you will be more successful if you plan ahead. If you’re planning to invest in a franchise business as a second career, you’ll need to put some effort into identifying and supporting a manager who will be able to take over the business successfully in the future, while a young person looking for such a position will need to invest some time up front to meet the requirements.