'Owners Wanted' a sign visible off the 515 freeway exclaims, aiming to recruit local franchisees into the booming market. Opportunities for success abound, but even the most promising venture can turn into a messy divorce if the parties don't plan ahead, small-business advisers say.
Franchisees and franchise operators are most successful when they work toward the same goal, but that’s not always the case, said Susan Kezios, the president of the American Franchisee Association. The franchisor and franchisee may end up at cross-purposes, she said. Often, the franchise corporation tries to increase profits by opening new stores as quickly as possible, which puts the squeeze on the franchisee.
“Someone with a lot of stores can withstand a single-store challenge, but someone with just one or two stores can’t,” she said.
Kezios advises “buyer beware” in franchising. Now, she is getting some help in enforcing that notion.
After more than a decade of fighting for franchisees’ rights, Kezios and her Chicago-based lobbying group had something to cheer about: A Federal Trade Commission ruling takes effect this summer that requires franchise operators to put more information in their disclosure contracts.
The new FTC requirements force franchisors to include contact information for all present and past franchisees in the system. The rules also require franchisors to list any organizations that have been formed to represent franchisees.
Kezios said the new rules are a step in the right direction, but are just a start.
“The franchisee can’t sue in federal court (over a violation of the new rules). They must complain to the FTC,” she said. “It’s still a tempest in a teapot.”
Franchisees and franchisors would be better off avoiding court, said Brian Schnell, a Minnesota-based franchising attorney. Resolving legal disputes in front of a judge or arbitrator tends to leave bad feelings, which may linger long after the dispute is resolved, he said.
Schnell, who has represented franchisors and franchisees such as PostNet, advises his clients to list everything in a contract.
“If the franchisor doesn’t spell out what rights it’s going to give the franchisee and what rights it is keeping for itself, it can have difficulty with disputes,” Schnell said.
Typical disputes can be avoided with planning, the lawyer added.
“The franchisee will have disputes in regards to encroachment or putting units too close. They may have disputes on the distribution system,” he said. “It’s customary that franchisors get rebates from suppliers, so franchisees believe they have the right to pay a lower rate (for the supplies).”
Some franchisees in Nevada do get help interpreting contracts. The U.S. Small Business Administration reviews the franchise agreement prior to approving a loan for the franchisee, John Scott, the SBA’s Nevada District Director, said.
Royalties, terms of operation, guidance and direction from the franchisor are reviewed.
“It’s also to make sure that the royalties and premiums the franchisee pays back to the franchisor (do not constitute) a mere contract manager or employer of the franchisor,” Scott said.
Source: LV Business Press