News Briefs

From the IFA Franchise Expo '

A visit to the International Franchise Association Expo ('IFE') in Washington, DC, on March 30-31 revealed interesting observations about trends in the franchise industry and the impact of the updated Franchise Rule.

Earnings Claims. Marisa D. Faunce, partner Wiley Rein, LLP (Washington, DC), believes strongly that franchisors should include earnings claims in UFOC documents, despite the Federal Trade Comm-ission's ('FTC') decision not to require them in its updated Franchise Rule. 'Incorporating earnings claims gives a franchisor much more flexibility in the sales process,' said Faunce in a presentation at the IFE. 'It protects you from the rogue salesman, and it's becoming mandatory for franchisors who are appealing to sophisticated, multi-unit investor/ operators, who simply are not going to buy into a franchise system without it.'

FTC rules offer wide latitude in what earnings information a franchisor can choose to disclose, and Faunce said that franchisors should invest time in deciding how to present themselves in the best possible light in a UFOC. For example, she said that '99% provide unit sales data,' but only 49% provide unit cost data.

The revised Franchise Rule 'is a big win for franchisors because they can provide limited cost information without it being considered an earnings claim,' Faunce added. For potential franchisees who have some understanding of the dynamics of their industry ' such as restaurant operators ' having cost information often can be sufficient to 'back out' information about expected revenues, she added.

About 60% of franchisors give franchise unit performance data, and 44% give company-owned unit data, Faunce said. 'You can slice-and-dice the information any way you want, as long as you tell prospects what you have done,' she said. Common subsets of franchise unit performance data are provided for a particular region, a particular type of outlet, or the length of time a franchisee has been in operation, she said.

On the other hand, she recommended against providing data that forecast potential performance of franchise units.

Protecting a franchisor from exaggerations made by franchise brokers is the other significant benefit of disclosure, Faunce said. Even seemingly innocent hyperbole can be the cause of a dispute, she said, noting a recent case in New York in which a fast-food location was described as a 'million-dollar location' by a salesperson. The purchaser of the unit filed suit when revenues did not approach that lofty figure.

'Discovery Days,' an increasingly popular marketing tool in which prospects visit franchise locations, is another vulnerability point for franchisors that do not disclose earnings. Employees at franchises can inadvertently make earnings claims when prospects are visiting their stores. Responding to a question from the audience, Faunce noted that a pet grooming franchisor could conceivably be accused of making an earnings claim if the person behind the counter told a prospect that the store typically gets a certain number of customers each day or week. 'This is almost impossible for a franchisor to police,' Faunce added.

When shouldn't a franchisor offer earnings information? Faunce suggested that the primary reason would be if the franchisor does not have financial information that puts its units in a positive light. The other major reason is if the franchisor lacks reliable information from franchisees (a significant problem with older systems).

Trends. 'Growth in franchising is a long-term trend due to many factors ' including the fact that traditional employment is not as attractive for either party ' the business or the employee ' as it once was,' said David Cahn, owner of Business & Franchise Law Group in Baltimore.

Participating as one of several attorneys on-hand to discuss franchising with visitors to the Expo, Cahn typically speaks with individuals who want to purchase a franchise but who have not yet decided in which industry or field. Many of these people are unhappy with their current situation, and see franchising as a way to gain more control over their future. 'So many companies make people independent contractors these days,' he said. 'But they find that they have trouble keeping good people. Franchising gives a person a stake in the outcome, and it makes a huge difference.'

When approached by a business owner who is hoping to franchise his business, Cahn said he starts with 'hard questions about how long he has been in business, what systems he has in place, and what track record he can demonstrate.'

International Disputes. When U.S. franchisors are facing disputes with non-U.S. franchisees, arbitration is usually the best route to solving the problem, said Hal Sanders, partner, Haynes and Boone, LLP (Austin, TX). Speaking in a panel discussion about international disputes, Sanders listed four benefits of arbitration:

1) 'Arbitration is more predictable than going into local courts. Usually, you can specify an arbitrator who knows something about franchising.'

2) 'It's a more flexible process. You can establish timelines ' and also the scope of the dispute that is being resolved.'

3) 'International arbitration panel decisions are often easier to enforce in U.S. courts than court decisions from other countries. [However, enforcing arbitration decisions is] still not easy nor cheap.'

4) 'Arbitration is a confidential process … though you must ask for this in your franchise agreement.'

More Trends. While international franchising is bigger than ever, Jim Coen, founder of franchise consulting firm Franchise Perfection (Chestnut Hill, MA), noted that the IFE did not seem to have as many international buyers as in the
past. With Franchise World Council associations in 36 countries, it's possible that the proliferation of events has diminished franchisees' needs to come to the United States to conduct their search.

Franchise supply services seem to be a growth area. 'There are more suppliers today than ever before,' he said. 'As franchising grows and expands, there are more and more suppliers offering services to enrich franchise organizations ' lead generation, Web site development, advertising services, legal services, human resources, and career apparel, to name just a few.'

Coen also noted the mixed impact that Web-based lead generation is having on the industry. 'I spoke to a number of franchisors that were concerned about their conversion of Internet leads to franchisees,' he said. 'Over the last five years, the proliferation of the Internet has increased the quantity of leads, but the quality seems to have diminished greatly. Five years ago, conversion of three out of 100 leads was considered productive. With Internet leads, I heard numbers of one out of 100 or one out of 150.'

Those new prospects are increasingly willing to invest some of their 401(k) funds to fund a franchise purchase, Coen added. 'There were four companies at the IFE that are offering plans to turn a 401(k) plan into a vehicle to finance a franchise,' he said. 'The option started a few years ago, and I estimate that over 3000 people used their 401(k) to help fund their franchise investment in 2006.'

From the IFA Franchise Expo '

A visit to the International Franchise Association Expo ('IFE') in Washington, DC, on March 30-31 revealed interesting observations about trends in the franchise industry and the impact of the updated Franchise Rule.

Earnings Claims. Marisa D. Faunce, partner Wiley Rein, LLP (Washington, DC), believes strongly that franchisors should include earnings claims in UFOC documents, despite the Federal Trade Comm-ission's ('FTC') decision not to require them in its updated Franchise Rule. 'Incorporating earnings claims gives a franchisor much more flexibility in the sales process,' said Faunce in a presentation at the IFE. 'It protects you from the rogue salesman, and it's becoming mandatory for franchisors who are appealing to sophisticated, multi-unit investor/ operators, who simply are not going to buy into a franchise system without it.'

FTC rules offer wide latitude in what earnings information a franchisor can choose to disclose, and Faunce said that franchisors should invest time in deciding how to present themselves in the best possible light in a UFOC. For example, she said that '99% provide unit sales data,' but only 49% provide unit cost data.

The revised Franchise Rule 'is a big win for franchisors because they can provide limited cost information without it being considered an earnings claim,' Faunce added. For potential franchisees who have some understanding of the dynamics of their industry ' such as restaurant operators ' having cost information often can be sufficient to 'back out' information about expected revenues, she added.

About 60% of franchisors give franchise unit performance data, and 44% give company-owned unit data, Faunce said. 'You can slice-and-dice the information any way you want, as long as you tell prospects what you have done,' she said. Common subsets of franchise unit performance data are provided for a particular region, a particular type of outlet, or the length of time a franchisee has been in operation, she said.

On the other hand, she recommended against providing data that forecast potential performance of franchise units.

Protecting a franchisor from exaggerations made by franchise brokers is the other significant benefit of disclosure, Faunce said. Even seemingly innocent hyperbole can be the cause of a dispute, she said, noting a recent case in New York in which a fast-food location was described as a 'million-dollar location' by a salesperson. The purchaser of the unit filed suit when revenues did not approach that lofty figure.

'Discovery Days,' an increasingly popular marketing tool in which prospects visit franchise locations, is another vulnerability point for franchisors that do not disclose earnings. Employees at franchises can inadvertently make earnings claims when prospects are visiting their stores. Responding to a question from the audience, Faunce noted that a pet grooming franchisor could conceivably be accused of making an earnings claim if the person behind the counter told a prospect that the store typically gets a certain number of customers each day or week. 'This is almost impossible for a franchisor to police,' Faunce added.

When shouldn't a franchisor offer earnings information? Faunce suggested that the primary reason would be if the franchisor does not have financial information that puts its units in a positive light. The other major reason is if the franchisor lacks reliable information from franchisees (a significant problem with older systems).

Trends. 'Growth in franchising is a long-term trend due to many factors ' including the fact that traditional employment is not as attractive for either party ' the business or the employee ' as it once was,' said David Cahn, owner of Business & Franchise Law Group in Baltimore.

Participating as one of several attorneys on-hand to discuss franchising with visitors to the Expo, Cahn typically speaks with individuals who want to purchase a franchise but who have not yet decided in which industry or field. Many of these people are unhappy with their current situation, and see franchising as a way to gain more control over their future. 'So many companies make people independent contractors these days,' he said. 'But they find that they have trouble keeping good people. Franchising gives a person a stake in the outcome, and it makes a huge difference.'

When approached by a business owner who is hoping to franchise his business, Cahn said he starts with 'hard questions about how long he has been in business, what systems he has in place, and what track record he can demonstrate.'

International Disputes. When U.S. franchisors are facing disputes with non-U.S. franchisees, arbitration is usually the best route to solving the problem, said Hal Sanders, partner, Haynes and Boone, LLP (Austin, TX). Speaking in a panel discussion about international disputes, Sanders listed four benefits of arbitration:

1) 'Arbitration is more predictable than going into local courts. Usually, you can specify an arbitrator who knows something about franchising.'

2) 'It's a more flexible process. You can establish timelines ' and also the scope of the dispute that is being resolved.'

3) 'International arbitration panel decisions are often easier to enforce in U.S. courts than court decisions from other countries. [However, enforcing arbitration decisions is] still not easy nor cheap.'

4) 'Arbitration is a confidential process … though you must ask for this in your franchise agreement.'

More Trends. While international franchising is bigger than ever, Jim Coen, founder of franchise consulting firm Franchise Perfection (Chestnut Hill, MA), noted that the IFE did not seem to have as many international buyers as in the
past. With Franchise World Council associations in 36 countries, it's possible that the proliferation of events has diminished franchisees' needs to come to the United States to conduct their search.

Franchise supply services seem to be a growth area. 'There are more suppliers today than ever before,' he said. 'As franchising grows and expands, there are more and more suppliers offering services to enrich franchise organizations ' lead generation, Web site development, advertising services, legal services, human resources, and career apparel, to name just a few.'

Coen also noted the mixed impact that Web-based lead generation is having on the industry. 'I spoke to a number of franchisors that were concerned about their conversion of Internet leads to franchisees,' he said. 'Over the last five years, the proliferation of the Internet has increased the quantity of leads, but the quality seems to have diminished greatly. Five years ago, conversion of three out of 100 leads was considered productive. With Internet leads, I heard numbers of one out of 100 or one out of 150.'

Those new prospects are increasingly willing to invest some of their 401(k) funds to fund a franchise purchase, Coen added. 'There were four companies at the IFE that are offering plans to turn a 401(k) plan into a vehicle to finance a franchise,' he said. 'The option started a few years ago, and I estimate that over 3000 people used their 401(k) to help fund their franchise investment in 2006.'