Multi-Unit Franchisee Magazine Issue II, 2015 | Page 80
A QUESTION OF BALANCE
IMPROVING THE FRANCHISE AGREEMENT
We asked a dozen people for their thoughts on today’s franchise agree- n Michael Seid, Managing Director, MSA Worldwide
ments. Here’s what they had to say about what they want in—or out. • Shorter documents that do not try to button down every possible event that may
n Paul Mangiamele, CEO, Bennigan’s
• It would be great if they were in simple and plain English, not obfuscating legalese.
• They should demonstrate collaboration with franchisees and not be so one-sided
and threatening. The positive spirit of a proposed franchise partnership is sometimes
put in jeopardy by the restrictive and punitive nature of the franchise agreement.
• It is truly a shame that the irrefutable bond of someone’s word and handshake has
been lost over the years because of the litigious environment our culture has created.
n Lane Fisher, Attorney, Fisher Zucker
• FPRs should be mandatory and contain certain baseline information (franchisors
can present more if they desire) so prospects can make a better-informed choice.
• More exemptions surrounding FPRs, so that franchisors can share more specific
financial information to multi-unit sophisticated franchisees outside of the FDD.
• Greater flexibility to the disclosure rules to craft a transaction that materially differs
from what’s presented in the FDD when negotiating with a sophisticated multi-unit
franchisee.
n J. Michael Dady, Attorney, Dady & Gardner
• Consecutive renewal rights, with renewal agreements that do not materially differ
over time, provided that the franchisee is not in default at the time the franchisee
requests the renewal.
• Franchisees who are operating at locations that are, despite their best efforts,
losing money may close those franchise locations without being liable to their
franchisor for lost future royalties or advertising fees over the remaining term of the
franchise agreement.
• Both the franchisor and the franchisee agree to deal with each other in an honest,
good faith, non-discriminatory, and commercially reasonable manner. Who can be
against that?!
n Michelle Rowan, President, Franchise Business Review
• Franchisors focusing on delivering transparency and clear expectations for
candidates via the FDD and franchise agreement.
• Item 19s providing more in-depth information to hel p a prospective franchisee
figure out net profit potential.
• Systems actively encouraging prospective franchisees to take the time to determine
a realistic profitability figure and provide them with information regarding how they
can do so, along with a list of independent accountants with franchise experience
who can assist them.
n Joyce Mazero, Attorney, Perkins Coie
• Integrate more specific statements of works for services to be undertaken by
franchisors, and corresponding KPIs with a gain/pain share formula for rewarding or,
at a minimum, motivating improved performance.
• Engagement of franchisees in the franchisor’s supply chain arrangement expressly
set out in franchise agreements like advertising and marketing fund and coop
arrangements are now, including franchisor-sponsored collaborative buying groups,
purchasing councils, and purchasing coops.
• Contracts that reflect the commercial makeup of sophisticated contracting parties.
This means addressing more specifically the elements important to both parties.
n Rob Branca, Franchisee
• Renewal rights were very important to us, and we got a clause granting us that
right. Of course, it has caveats, but it is a step in the right direction. Without renewal
rights, a franchise is a continually dwindling asset, becoming worth less as your term
winds down.
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take place over 20 years. The length of the agreement and the language used often
make it less than an optimum document.
• Better drafting by lawyers so the terms of the documents have the meaning
intended. There really needs to be a standard of competence in drafting. That is often
not apparent with some lawyers. It is past time that we have an ABA standard of
who can call themselves a franchise lawyer.
• Franchise agreements need to be based on the business realties of the relationship
and not on a legal viewpoint that appears to consider franchising as a more fungible
legal relationship.
n Darrell Johnson, CEO, FRANdata
• The right of a franchisee to realize the value of their equity in the franchise unit.
• Franchisor restrictions over unit transfer rights.
• The level of risk a franchisee assumes beyond the operation of the business unit.
n Jeffrey Tews, Franchisee
• An ROI factor included in the general marketing funds calculation.
• A balance of the non-compete clause required for franchisees to closer match the
placement of the location of additional stores.
n Gary Robins, Franchisee
• Liquidated damages clauses should not be a part of agreements.
• Covenants of good faith and fair dealing should be included and cannot be agreed
to be “waived.”
• Fairness in dispute resolution.
n Rupert Barkoff, Attorney, Kilpatrick Townsend & Stockton
• Franchise agreements are too long for most deals. Some of the earliest franchise
agreements were only one page long.
• How much detail is needed to protect the franchisor’s rights? Consider using less
detail and in particular moving much of this detail into the operations manual.
• Think carefully about the franchise agreement’s organization. Some are based on
the timing of events. Others try to segregate the duties and rights of the respective
parties. Some of them are organized without any thought as to the logic of the
chosen organization.
• Put the key elements of the franchise relationship—the grant, the term, renewal
rights, the territory, and the price (up-front fees, royalties)—within the first 3 pages
of the agreement; the rest is only filler.
n Greg Cutchall, Franchisee
• Some agreements have a clause if you do not open as per dates in the
development/franchise agreement you are liable for lost royalties. This is ridiculous.
• Closed location prior to franchise term being liable for royalties the balance of the
agreement.
• Territory protection and too-aggressive market development plan.
• Franchisor owning/operating competing brands.
n Gary Grace, Franchisee
• Eliminate franchisor right of first refusal.
• A “good faith and fair dealing” clause.
n Ricky Warman, Franchisee
• Protection of the area around stores should be bigger. Depending on the concept,
the area will vary, but all concepts need better protection.
• There needs to be an exit clause. Most franchisors hold you responsible for a long
time even if the business is not profitable.
• Franchisors need franchisees and vice versa, thus it should be a partnership.
MULTI-UNIT FRANCHISEE IS S UE II, 2015
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