Finding Bright Spots in Franchising

An important case that will have a profound impact on the franchise relationship is the U.S. Supreme Court's decision in AT&T Mobility, LLC v. Concepcion, __ U.S. __, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011) decided in April 2011. The Court overruled Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P.3d 1100 (2005), which struck down as exculpatory and unconscionable a class action waiver provision in an arbitration clause in a consumer contract. The Discover Bank case was relied upon in Independent Assn. of Mailbox Center Owners, Inc. v. Superior Court, 133 Cal.App.4th 396 (2005), 34 Cal.Rptr.3d 659 to strike down a class action waiver in a franchise arbitration clause.

Until Concepcion was decided, many franchisors were starting to shy away from adding or continuing arbitration provisions in their franchise agreements. Arbitration was becoming costly to both sides, and franchisors did not want to take the risk that an arbitrator or panel of arbitrators might decide the merits of a class action. Further, arbitration provisions were increasingly being struck down as unconscionable. AT&T v. Concepcion has altered the landscape, and it is likely that arbitration provisions with class action waivers will again become common in franchise agreements.

Openings for Opportunistic Investors

Michael Seid, managing director, MSA Worldwide

This has been an odd economic period for franchising. Generally, franchising has historically had a somewhat counter-cyclical motion. Investors have looked at moving from more passive investments into franchising during volatile periods on the street ' especially when other investments were considered riskier. There certainly has been a long history of increases in franchise sales during periods of high unemployment and uncertainty about jobs. But due to [new federal] financial regulations and the general negative tone imposed on the economy by the current administration, coupled with the lack of available leverage in the home equity market, the expected trends in franchising in this recession did not occur initially.

Where are the bright spots? For investors, there are significant opportunities to consolidate unit ownership in some brands, and we are seeing an increase in mergers and acquisitions being done or under consideration. However, with the pricing of some of the recent transactions, I need to question the multiples being paid today, given the lag in same-store sales and the softness in new franchise sales. A lot seems to have been paid for anticipated improvements and brand potential ' and that is always risky. The bright spot is that there is private equity money available for the right structured investments, and I expect the pricing of these deals to trend downward until the economy turns, which likely won't happen until the current administration leaves in, presumably, 2013. It makes for a good 2012 for the smart investors.

New Talent Brings Burst of Creative Thinking

Fredric A. Cohen, Cheng Cohen LLC

New blood and the innovation they bring: That's the silver lining in clouds hovering over franchising the past several years. Franchising has benefitted from a huge influx of tremendous talent fleeing or being evicted from other harder-hit sectors.

Like those who came before them, these new folks trend toward the creative, independent, and entrepreneurial. But more importantly for franchising, they bring new skill sets and best practices from the technology, manufacturing, services, or the financial sector jobs they left. They're conceiving applications for franchising as a method of distribution that until now remained “unthunk.” They're franchising ' or trying to develop ways to franchise ' concepts that have never been franchised before. They're incorporating technologies in unimaginable ways to remake business methods, models, and relationships. They're forcing C-suite executives, competitors, vendors, and service providers to step up their game. These are great folks to work with and even better for franchising's future.

Sure, things are tough. But the opportunistic aren't sitting around waiting for banks to reopen the spigot. They're “dealing with it” and adapting great new ideas to the environment as-is. This is a very good time for franchising.

Private Equity Investors

David Koch, partner, Plave Koch PLC

The enthusiasm of private equity companies for franchise brands is a big positive for franchising. Many franchise acquisitions ' of both franchisors and multi-unit operators ' carry high multiples. This is a collective endorsement from a community of very smart people who make their living by poring over business models. It's like a movie critic's stamp of approval: It doesn't guarantee that customers (prospective franchisees) will fill the theaters (buy lots of franchises), but the expert validation encourages filmmakers to keep trying and invites others to create. Also, there is no longer a void in the small-market/middle-market space where most franchise brands reside. Deal sizes in franchising are usually too small for the big-boy private equity firms, but a whole panoply of savvy smaller private equity firms have filled the niche. Their eagerness to invest not only says that the business model works, but also that they expect franchise brands to grow.

Non-Compete Provisions

Jay W. Schlosser, partner, Briggs and Morgan, P.A.

From a franchisor perspective, one area of optimism is the continuing trend by courts and legislators to enforce post-term non-compete provisions contained in franchise agreements. In May 2011, Georgia passed a new statute that should make it easier for franchisors to enforce their post-term non-compete provisions with respect to franchisees in Georgia. Moreover, in two decisions this fall, federal courts in North Carolina and New Jersey granted preliminary injunctions enforcing post-term non-compete provisions set forth in franchise agreements. See Meineke Car Care Centers, Inc. v. Bica, No. 3:11-cv-369-FDW-DCK, 2011 WL 4829420 (W.D. N.C., Oct. 12, 2011) and Otiogiakhi v. AAMCO Transmissions, Inc., No. 2:11-CV-04620 (DMC)(JAD), 2011 WL 825953 (D.N.J., Nov. 17, 2011).

The enforcement of post-term non-compete provisions is critical to the continued success of franchisors. A franchisee who builds up its business and establishes customer relationships by using the franchisor's name, reputation and system, and then abandons the system to go independent, can be devastating to a franchisor. Franchisors need to be secure that their non-compete provisions will be enforced and their interests and rights protected. The fact that courts and legislators have continued to recognize and enforce the protectable interests of the franchisors with respect to these types of provisions is promising.

Greater Access to Capital

Jeff Letwin, partner, Schnader Harrison Segal & Lewis LLP

One of few hopeful signs for franchisors and franchisees in the current economic climate is that Congress has recognized that small business needs more access to capital and fewer impediments to funding business. The rules regarding SBA loans have recently been relaxed in order to support small businesses and their ability to obtain funding. One of the major undertakings of the SBA in the past year has been, pursuant to requirements of the Small Business Jobs Act of 2010, to examine the revenue-based size standards of various industries to determine whether the maximums should be adjusted to allow more businesses to be considered “small businesses” for purposes of qualifying for federal government programs. According to the SBA, this will “allow more small businesses to qualify for SBA financial assistance.”

Furthermore, the U.S. House recently passed amendments to the Securities Act allowing for capital to be raised through a process known as “crowd funding.” Crowd funding would give entrepreneurs the ability to make Internet equity offerings of up to $5 million. The proposed bill also will allow any number of individuals to invest, with a cap at $10,000 or 10% of an individual's income, whichever comes first.

Relaxing some of these previously existing roadblocks to such financing should create a more robust franchise market and assist both franchisees and franchisors by providing easier access to capital, which, in turn, should lead to further unit development.

Higher-Quality Franchisees

Rupert Barkoff, partner, Kilpatrick Townsend & Stockton LLP

Two possibly beneficial developments. First, I believe that the quality of franchisee might have improved as a result of the downturn in the economy. The pool of prospective franchisees may have increased, as might the quality of the candidates. The problem in this scenario, however, is that the candidates will have difficulty financing a franchise purchase or its operation. But even here, there is a silver lining. If the franchisee does have the capital to get financing, or better yet, can provide all of it on its own, the franchisee might be better suited to survive if the franchise has no or only marginal success at the beginning. With less debt, the franchisee, who is so often undercapitalized, would have much less pressure resulting from smaller or no debt (in theory).

As a second observation, I sense that the trend to enter into mediation, whether voluntarily, by contract, or by judicial order, will continue to increase. If you compare the cost of mediation with the possible cost of litigation, the resulting ratio clearly favors mediation.

Expansion of Franchising Rules to Non-Profits

David L. Cahn, counsel, Whiteford, Taylor & Preston LLP

The final appellate decision in Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States, Inc. is the most positive recent development in the field of “franchise law,” as it extends the scope of enterprises that need to pay attention to compliance with franchise sales and relationship laws. This development also may benefit traditional for-profit companies that are competing in the marketplace with commercially aggressive “non-profit” entities. For example, if a not-for-profit hospital organization were to recruit doctors to develop and open branded “urgent care” facilities in various communities, in competition with Doctors Express' or Patient First', there is no reason why the not-for-profit should be exempt from the reach of the franchise laws. There is also no reason why the operator of such urgent care facilities should not receive the protections of otherwise applicable “franchise relationship” laws.

International Growth

Andrew J. Sherman, partner, and Alan J. Schaeffer, partner, Jones Day

Notwithstanding domestic challenges over the past few years, we remain optimistic and bullish regarding global growth opportunities. The reasons for this foreign expansion include a greater demand for personal services, higher levels of disposable income, a developing infrastructure, an increase in the size of the middle-class consumer base, and an increased desire for individual business ownership. Foreign franchisees are eager to have access to U.S. management best practices and lower levels of risk that are inherent in the marketing of an established franchised system.

Experienced U.S. franchisers with international franchising experience around the world will tell you that the ultimate success or failure of the program will depend on three critical things: Finding the Right Partner, Finding the Right Partner and Finding the Right Partner. Regardless of the specific legal structure selected for international expansion into a particular market, the master developer or sub-franchisor in the local market should always be philosophically and strategically viewed as your “partner.” The most promising candidates for global expansion will often be those with proven financial resources who have already established a successful business in the United States or their home country. Also, there is no substitute for face-to-face negotiations between parties, regardless of whether this individual is interested in a master development agreement or a single-unit franchise.

International Franchising

Stephen Vaughan, Gray Plant Mooty

While the economic conditions in the United States continue to present challenges domestically, the outlook for U.S. franchisors is not all doom and gloom. Other countries around the world have enjoyed higher GDP growth rates, and their prosperity has translated into opportunities for U.S. franchisors to reach eager consumers worldwide.

Franchisors of all sizes have announced their emergence in foreign markets, particularly Latin America (most prominently Brazil), China, India, Southeast Asia (Indonesia, Malaysia, Thailand, and Vietnam), and the Middle East to capitalize on burgeoning economies and the demand for their products. These investments are paying dividends. In the last year, many franchisors have reported increased and double-digit operating profits abroad despite flatter domestic sales. Concepts in the quick-service restaurants, specialty foods, retail (clothing), automotive products and services, personal services (handyman, cleaning services, and care for the elderly), and youth educational industries have flourished internationally as U.S. franchisors have become more adept at identifying which franchise sectors appeal to which markets. These successes have also made the markets more accessible and increased the number of potential suitors on the ground. Independent of the U.S. economy, U.S. franchisors have reason to look to the coming years with a healthy optimism.

Global Growth

Craig R. Tractenberg, partner, Nixon Peabody LLP

Without question, great optimism exists with international growth opportunities. The reasons are obvious and are easily demonstrable. While the U.S. and the Eurozone countries are repairing their economies, other world economies are clamoring for Western brands and services. Growth in the BRIC countries (Brazil, Russia, India, and China) is driving demand for goods and services from the West, and this will continue because of population growth, increased and enhanced communication with the West, and investors and lenders that do not need to de-leverage as we have in the West. The strength of banks in countries like Canada and Turkey is funding growth and expect more trade exchange as these countries reach to enhance their cross-border market shares. Increasing globalization will have positive effects on franchising and brand growth as global recognition will be the new currency for franchising merger and acquisition.

Global growth is being aided by technological and legal enhancements intended to cater to international expansion. Intellectual property protocols, which reduce the legal work for global protection, are increasing, and more countries are taking a less parochial view of intellectual property protections in favor of recognizing the importance of having a single source of reference. Brands need to learn to grow and compete on a global scale because the momentum, investment, and financing are driving growth in this direction.

A New Sense of Realism

Rochelle (Shelley) B. Spandorf, partner, Davis Wright Tremaine LLP

I will skip over the two most popular answers, international expansion opportunities and loosening of capital markets, because I find these to be over-hyped. Foreign expansion done right is best suited for well-capitalized, seasoned concepts, but is pie-in-the-sky for newbie U.S. franchisors that have yet to hone their operations. As for capital markets loosening, my personal assessment is that conventional small-business lending remains dormant for average brands and downsized executives buying their first franchise.

What I am most optimistic about is franchising's ability to attract franchisee candidates who, from my armchair perspective, are more realistic about the risks of their franchise investment and the franchisor's responsibility for their outcome. A Nov. 26, 2011 Los Angeles Times article quotes a local franchisee: “I'm not naive to the fact that any business venture is a gamble ' But I'm investing in myself, in something I can pass on to my kids. I can't do that in corporate America.” While you'll never hear franchisors using the term “gamble” to promote their investment opportunities, having franchisees accept the descriptor is a very positive development in franchising's evolution.

I am also optimistic that franchisors are finally embracing the reality that they can't succeed if their franchisees don't succeed. Both paradigm shifts bode well for more successful franchise relationships in the future. That, in turn, should improve franchise parties' access to capital markets whenever lenders do come out from hiding.

Much of the news in franchising has been negative for the last several years, as the “Great Recession” has taken its toll. In the last few months, the Massachusetts decision in Coverall and the upholding of the Iowa Supreme Court's tax nexus ruling have added to the gloom of a slow economic recovery. But things can't be all bad, all the time. As we begin 2012, FBLA asked leaders in franchise law to comment about the bright spots in franchising today.

AT&T Mobility

Charles G. Miller, shareholder, Bartko, Zankel, Tarrant & Miller

An important case that will have a profound impact on the franchise relationship is the U.S. Supreme Court's decision in AT&T Mobility, LLC v. Concepcion , __ U.S. __, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011) decided in April 2011. The Court overruled Discover Bank v. Superior Court , 36 Cal. 4th 148, 113 P.3d 1100 (2005), which struck down as exculpatory and unconscionable a class action waiver provision in an arbitration clause in a consumer contract. The Discover Bank case was relied upon in Independent Assn. of Mailbox Center Owners, Inc. v. Superior Court , 133 Cal.App.4th 396 (2005), 34 Cal.Rptr.3d 659 to strike down a class action waiver in a franchise arbitration clause.

Until Concepcion was decided, many franchisors were starting to shy away from adding or continuing arbitration provisions in their franchise agreements. Arbitration was becoming costly to both sides, and franchisors did not want to take the risk that an arbitrator or panel of arbitrators might decide the merits of a class action. Further, arbitration provisions were increasingly being struck down as unconscionable. AT&T v. Concepcion has altered the landscape, and it is likely that arbitration provisions with class action waivers will again become common in franchise agreements.

Openings for Opportunistic Investors

Michael Seid, managing director, MSA Worldwide

This has been an odd economic period for franchising. Generally, franchising has historically had a somewhat counter-cyclical motion. Investors have looked at moving from more passive investments into franchising during volatile periods on the street ' especially when other investments were considered riskier. There certainly has been a long history of increases in franchise sales during periods of high unemployment and uncertainty about jobs. But due to [new federal] financial regulations and the general negative tone imposed on the economy by the current administration, coupled with the lack of available leverage in the home equity market, the expected trends in franchising in this recession did not occur initially.

Where are the bright spots? For investors, there are significant opportunities to consolidate unit ownership in some brands, and we are seeing an increase in mergers and acquisitions being done or under consideration. However, with the pricing of some of the recent transactions, I need to question the multiples being paid today, given the lag in same-store sales and the softness in new franchise sales. A lot seems to have been paid for anticipated improvements and brand potential ' and that is always risky. The bright spot is that there is private equity money available for the right structured investments, and I expect the pricing of these deals to trend downward until the economy turns, which likely won't happen until the current administration leaves in, presumably, 2013. It makes for a good 2012 for the smart investors.

New Talent Brings Burst of Creative Thinking

Fredric A. Cohen, Cheng Cohen LLC

New blood and the innovation they bring: That's the silver lining in clouds hovering over franchising the past several years. Franchising has benefitted from a huge influx of tremendous talent fleeing or being evicted from other harder-hit sectors.

Like those who came before them, these new folks trend toward the creative, independent, and entrepreneurial. But more importantly for franchising, they bring new skill sets and best practices from the technology, manufacturing, services, or the financial sector jobs they left. They're conceiving applications for franchising as a method of distribution that until now remained “unthunk.” They're franchising ' or trying to develop ways to franchise ' concepts that have never been franchised before. They're incorporating technologies in unimaginable ways to remake business methods, models, and relationships. They're forcing C-suite executives, competitors, vendors, and service providers to step up their game. These are great folks to work with and even better for franchising's future.

Sure, things are tough. But the opportunistic aren't sitting around waiting for banks to reopen the spigot. They're “dealing with it” and adapting great new ideas to the environment as-is. This is a very good time for franchising.

Private Equity Investors

David Koch, partner, Plave Koch PLC

The enthusiasm of private equity companies for franchise brands is a big positive for franchising. Many franchise acquisitions ' of both franchisors and multi-unit operators ' carry high multiples. This is a collective endorsement from a community of very smart people who make their living by poring over business models. It's like a movie critic's stamp of approval: It doesn't guarantee that customers (prospective franchisees) will fill the theaters (buy lots of franchises), but the expert validation encourages filmmakers to keep trying and invites others to create. Also, there is no longer a void in the small-market/middle-market space where most franchise brands reside. Deal sizes in franchising are usually too small for the big-boy private equity firms, but a whole panoply of savvy smaller private equity firms have filled the niche. Their eagerness to invest not only says that the business model works, but also that they expect franchise brands to grow.

Non-Compete Provisions

Jay W. Schlosser, partner, Briggs and Morgan, P.A.

From a franchisor perspective, one area of optimism is the continuing trend by courts and legislators to enforce post-term non-compete provisions contained in franchise agreements. In May 2011, Georgia passed a new statute that should make it easier for franchisors to enforce their post-term non-compete provisions with respect to franchisees in Georgia. Moreover, in two decisions this fall, federal courts in North Carolina and New Jersey granted preliminary injunctions enforcing post-term non-compete provisions set forth in franchise agreements. See Meineke Car Care Centers, Inc. v. Bica, No. 3:11-cv-369-FDW-DCK, 2011 WL 4829420 (W.D. N.C., Oct. 12, 2011) and Otiogiakhi v. AAMCO Transmissions, Inc., No. 2:11-CV-04620 (DMC)(JAD), 2011 WL 825953 (D.N.J., Nov. 17, 2011).

The enforcement of post-term non-compete provisions is critical to the continued success of franchisors. A franchisee who builds up its business and establishes customer relationships by using the franchisor's name, reputation and system, and then abandons the system to go independent, can be devastating to a franchisor. Franchisors need to be secure that their non-compete provisions will be enforced and their interests and rights protected. The fact that courts and legislators have continued to recognize and enforce the protectable interests of the franchisors with respect to these types of provisions is promising.

Greater Access to Capital

Jeff Letwin, partner, Schnader Harrison Segal & Lewis LLP

One of few hopeful signs for franchisors and franchisees in the current economic climate is that Congress has recognized that small business needs more access to capital and fewer impediments to funding business. The rules regarding SBA loans have recently been relaxed in order to support small businesses and their ability to obtain funding. One of the major undertakings of the SBA in the past year has been, pursuant to requirements of the Small Business Jobs Act of 2010, to examine the revenue-based size standards of various industries to determine whether the maximums should be adjusted to allow more businesses to be considered “small businesses” for purposes of qualifying for federal government programs. According to the SBA, this will “allow more small businesses to qualify for SBA financial assistance.”

Furthermore, the U.S. House recently passed amendments to the Securities Act allowing for capital to be raised through a process known as “crowd funding.” Crowd funding would give entrepreneurs the ability to make Internet equity offerings of up to $5 million. The proposed bill also will allow any number of individuals to invest, with a cap at $10,000 or 10% of an individual's income, whichever comes first.

Relaxing some of these previously existing roadblocks to such financing should create a more robust franchise market and assist both franchisees and franchisors by providing easier access to capital, which, in turn, should lead to further unit development.

Higher-Quality Franchisees

Rupert Barkoff, partner, Kilpatrick Townsend & Stockton LLP

Two possibly beneficial developments. First, I believe that the quality of franchisee might have improved as a result of the downturn in the economy. The pool of prospective franchisees may have increased, as might the quality of the candidates. The problem in this scenario, however, is that the candidates will have difficulty financing a franchise purchase or its operation. But even here, there is a silver lining. If the franchisee does have the capital to get financing, or better yet, can provide all of it on its own, the franchisee might be better suited to survive if the franchise has no or only marginal success at the beginning. With less debt, the franchisee, who is so often undercapitalized, would have much less pressure resulting from smaller or no debt (in theory).

As a second observation, I sense that the trend to enter into mediation, whether voluntarily, by contract, or by judicial order, will continue to increase. If you compare the cost of mediation with the possible cost of litigation, the resulting ratio clearly favors mediation.

Expansion of Franchising Rules to Non-Profits

David L. Cahn, counsel, Whiteford, Taylor & Preston LLP

The final appellate decision in Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States, Inc. is the most positive recent development in the field of “franchise law,” as it extends the scope of enterprises that need to pay attention to compliance with franchise sales and relationship laws. This development also may benefit traditional for-profit companies that are competing in the marketplace with commercially aggressive “non-profit” entities. For example, if a not-for-profit hospital organization were to recruit doctors to develop and open branded “urgent care” facilities in various communities, in competition with Doctors Express' or Patient First', there is no reason why the not-for-profit should be exempt from the reach of the franchise laws. There is also no reason why the operator of such urgent care facilities should not receive the protections of otherwise applicable “franchise relationship” laws.

International Growth

Andrew J. Sherman, partner, and Alan J. Schaeffer, partner, Jones Day

Notwithstanding domestic challenges over the past few years, we remain optimistic and bullish regarding global growth opportunities. The reasons for this foreign expansion include a greater demand for personal services, higher levels of disposable income, a developing infrastructure, an increase in the size of the middle-class consumer base, and an increased desire for individual business ownership. Foreign franchisees are eager to have access to U.S. management best practices and lower levels of risk that are inherent in the marketing of an established franchised system.

Experienced U.S. franchisers with international franchising experience around the world will tell you that the ultimate success or failure of the program will depend on three critical things: Finding the Right Partner, Finding the Right Partner and Finding the Right Partner. Regardless of the specific legal structure selected for international expansion into a particular market, the master developer or sub-franchisor in the local market should always be philosophically and strategically viewed as your “partner.” The most promising candidates for global expansion will often be those with proven financial resources who have already established a successful business in the United States or their home country. Also, there is no substitute for face-to-face negotiations between parties, regardless of whether this individual is interested in a master development agreement or a single-unit franchise.

International Franchising

Stephen Vaughan, Gray Plant Mooty

While the economic conditions in the United States continue to present challenges domestically, the outlook for U.S. franchisors is not all doom and gloom. Other countries around the world have enjoyed higher GDP growth rates, and their prosperity has translated into opportunities for U.S. franchisors to reach eager consumers worldwide.

Franchisors of all sizes have announced their emergence in foreign markets, particularly Latin America (most prominently Brazil), China, India, Southeast Asia (Indonesia, Malaysia, Thailand, and Vietnam), and the Middle East to capitalize on burgeoning economies and the demand for their products. These investments are paying dividends. In the last year, many franchisors have reported increased and double-digit operating profits abroad despite flatter domestic sales. Concepts in the quick-service restaurants, specialty foods, retail (clothing), automotive products and services, personal services (handyman, cleaning services, and care for the elderly), and youth educational industries have flourished internationally as U.S. franchisors have become more adept at identifying which franchise sectors appeal to which markets. These successes have also made the markets more accessible and increased the number of potential suitors on the ground. Independent of the U.S. economy, U.S. franchisors have reason to look to the coming years with a healthy optimism.

Global Growth

Craig R. Tractenberg, partner, Nixon Peabody LLP

Without question, great optimism exists with international growth opportunities. The reasons are obvious and are easily demonstrable. While the U.S. and the Eurozone countries are repairing their economies, other world economies are clamoring for Western brands and services. Growth in the BRIC countries (Brazil, Russia, India, and China) is driving demand for goods and services from the West, and this will continue because of population growth, increased and enhanced communication with the West, and investors and lenders that do not need to de-leverage as we have in the West. The strength of banks in countries like Canada and Turkey is funding growth and expect more trade exchange as these countries reach to enhance their cross-border market shares. Increasing globalization will have positive effects on franchising and brand growth as global recognition will be the new currency for franchising merger and acquisition.

Global growth is being aided by technological and legal enhancements intended to cater to international expansion. Intellectual property protocols, which reduce the legal work for global protection, are increasing, and more countries are taking a less parochial view of intellectual property protections in favor of recognizing the importance of having a single source of reference. Brands need to learn to grow and compete on a global scale because the momentum, investment, and financing are driving growth in this direction.

A New Sense of Realism

Rochelle (Shelley) B. Spandorf, partner, Davis Wright Tremaine LLP

I will skip over the two most popular answers, international expansion opportunities and loosening of capital markets, because I find these to be over-hyped. Foreign expansion done right is best suited for well-capitalized, seasoned concepts, but is pie-in-the-sky for newbie U.S. franchisors that have yet to hone their operations. As for capital markets loosening, my personal assessment is that conventional small-business lending remains dormant for average brands and downsized executives buying their first franchise.

What I am most optimistic about is franchising's ability to attract franchisee candidates who, from my armchair perspective, are more realistic about the risks of their franchise investment and the franchisor's responsibility for their outcome. A Nov. 26, 2011 Los Angeles Times article quotes a local franchisee: “I'm not naive to the fact that any business venture is a gamble ' But I'm investing in myself, in something I can pass on to my kids. I can't do that in corporate America.” While you'll never hear franchisors using the term “gamble” to promote their investment opportunities, having franchisees accept the descriptor is a very positive development in franchising's evolution.

I am also optimistic that franchisors are finally embracing the reality that they can't succeed if their franchisees don't succeed. Both paradigm shifts bode well for more successful franchise relationships in the future. That, in turn, should improve franchise parties' access to capital markets whenever lenders do come out from hiding.