Multi-Unit Franchisee Magazine Issue I, 2015 | Page 82
FranchiseMarketUpdate
BY DARRELL JOHNSON
Year of the Franchisee
Defending the franchise model in 2015
O
n many levels, 2014 was
a tumultuous year for the
franchise business model.
First, a quick overview.
Franchising is regulated at the federal level,
and 15 states have specific registration and
approval requirements—yet we entered the
year with 19 ongoing or new state legislative initiatives involving franchising; several
city councils also got into the act. Back in
D.C., the NLRB piled on with additional
efforts to alter the franchise business model,
and the SBA is re-evaluating how it defines
“affiliation” standards for franchise brand
SBA-guaranteed lending eligibility. Some
of these actions have been challenged in
the courts; others will be in the near future.
The motivations for all these efforts
are varied and generally political in nature.
However, they have one thing in common:
the relationship between franchisor and
franchisee. What has changed to cause so
many dramatic actions on multiple fronts?
Let’s separate two distinct causes of
change. The first is the more recent revolutionary effort at changing the franchise
business model, motivated by self-interest
groups with no historical involvement in
franchising. They include union organizations and governing bodies (primarily cities) intent on altering the local competitive
business environment. Possible changes
from these activities will likely play out
as much in the courts as in governmental
bodies. This cause puts the entire franchise
business model at risk. Efforts to prevent
these changes must be successful or there is
a high likelihood the business model itself
will be permanently—and negatively—
altered. Franchisors and franchisees are
aligned in this revolutionary war. While
the IFA is leading the legal and legislative
battles, everyone’s involvement is required.
The second cause of change is evolutionary and market-driven. By its fundamental design, franchising is constructed
around a balance between the rights of
a brand owner (the franchisor) and the
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rights of the operator (the franchisee).
Those rights are defined in the franchise
agreement. Over the past few decades,
however, franchisors have added a lot of
protections and other terms to franchise
agreements. Some of these changes, designed to address unusual issues, could be
characterized as “protect the brand at all
costs.” The result has been a shift in the
balance of control toward franchisors and
away from franchisees, drawing the attention of legislative and regulatory bodies.
Franchising is
constructed around
the rights of a
brand owner and
the rights of the
operator.
Because of its management of the SBA
Franchise Registry since 1998, FRANdata
has seen this change firsthand. The SBA
looks at the level of control a franchisor
has over franchisees because federal loan
guarantees through the SBA are available
only to eligible small businesses, as defined by federal size standards statutes. If
a franchisor has “too much control” over
the franchisee, the SBA determines that
the franchisee is no longer a small business
and therefore ineligible for a federal loan
guarantee. (The entire focus of SBA affiliation determinations is franchise and related
agreements. Control issues are identified
over 90 percent of the time, and usually
solutions are found in the form of side
agreements negotiated between the SBA
and the franchisor for use by only those
franchisees seeking SBA loans.)
FRANdata has assisted the SBA in the
determination process and has tracked,
analyzed, and evaluated franchise agreements and resulting side agreements for
more than 1,600 franchise brands across
15 years of change. Based on this work,
we can identify the more significant issues that have arisen from this evolution,
which include 1) the right of a franchisee
to realize the value of their equity in the
franchise unit, 2) franchisor restrictions
over unit transfer rights, and 3) the level
of risk a franchisee assumes beyond the
operation of the business unit.
Evidence of the importance of these
particular topics can be found all around.
More than 20 state legislative initiatives
have come about in the past 3 years that
addressed some of these issues specifically.
The SBA just published an announcement
in the Federal Register about its approach to
these very issues. For the first time, the IFA
issued a Statement of Guiding Principles
in 2014 that addressed franchise practices
and to enhance franchise relations. And in
June, Aziz Hashim (a multi-unit operator,
past chair of the Multi-Unit Franchising
Conference, and 2016 chair of the IFA) and
franchise attorney Brian Schnell (a partner
with Faegre Baker Daniels) co-wrote an
article titled, “A New Era in Franchising
Continues T Emerge: Should a More Balo
anced Franchise Agreement Play a Role?”
I’m sure no franchisor inserted new
terms into a franchise agreement with
the intention of triggering city and state
franchise legislation or greater regulatory
oversight. Yet some of those same terms,
intended to protect the brand, have contributed to the dramatic rise in this type
of governmental activity.
What does this mean for the future of
franchising? First, we must win the revolutionary attack on the franchise business
model. Second, we must pay close attention to the evolutionary changes or we
will suffer from a series of unintended
consequences.
One of the most potent voices in this
dialogue should be that of the multi-unit
operator. Will we hear it in 2015?
Darrell Johnson is CEO of
FRANdata, an independent
research company supplying information and analysis for the
franchising sector since 1989.
He can be reached at 703-740-4700 or [email protected].
MULTI-UNIT FRANCHISEE IS S UE I, 2015
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