Allan J Gold

Lawyer

Allan J Gold
(514) 849-1621

Franchise Agreement – The case of the fast food franchise eating the franchisee alive

Franchise Agreement – The case of the fast food franchise eating the franchisee alive

Vol. 10, #4 – April 30, 2018                                                     ALLAN GOLD’S BLOG

Gold's Legal Minue


Next blog post of weekly series over 3 months on contracts for company executives & owners of family-small home businesses


TODAY’S TOPIC: “Franchise Agreement” – The case of the fast food franchise eating the franchisee alive*”

SPECIAL ANNOUNCEMENT TO READERS

√ Hello Readers. Please be informed that I write a blog for my professional community – it’s titled “Gold’s Legal Minute*GLM*” . Because you do not have a lot of time and since time is money, I aim for a quick and easy read. Since I practice primarily in such fields as corporate and commercial law, civil litigation, etc., the subject matter is more or less in such areas. In addition, seeing that I am passionate about the well-being of older people, and as I also practice in the field of civil law relative to elder law, I write about this area as well. Furthermore, I write about topics in the news in order to highlight what’s then legally at issue.

√ In each blog post, I shall deal with a legal notion or raise a legal issue and deliver, strictly for informational purposes, some commentary respecting the same. As per the format, I shall first answer the question, “Why you should read this?” Next, in the facts section, to illustrate some of the things in play, I will recount a fictional story of imaginary characters or companies, not based upon any person or enterprise in real life. For fun, it will be titled “The Case Of The …”, this in the style of the vintage “Perry Mason” TV show (1957–66). And then, through the sections, “Judgment”, “Analysis” and “Lesson Learned Or Take-A-Way”, I shall provide my take on the facts and some thoughts thereon. At the finish, I will offer a “Closing Thought Of The Day” plus a preview of the next in the series.

√We have re-launched the blog, such with a series over 3 months on contracts, especially geared for company executives & owners of family-small businesses. Kindly note that as per our schedule, we will usually make new blog uploads each Monday. Some weeks, usually on Wednesdays, there will be one or more bonus uploads. 

A. WHY YOU SHOULD READ THIS BLOG POST (next of weekly series over)

First, this blog post series is written especially for business people, ranging from proprietors of small-family enterprises through to executives of mid-to-large corporations. The assumption is that they routinely make contracts. The proposition is that it’s good business to make each contract sound and profitable. The premise is that a good contract can mean money and profit. And if you’re a member of this group, this is for you.

Second, you want to know about another type of contract, notably a franchise agreement. There are several kinds – they could be classified as a master franchise (national, provincial or regional), multi-unit franchise, or individual unit franchise. It usually involves a license agreement and a registered user agreement. This is where a grantor, known as a franchisor, grants to a grantee, known as a franchisee, a limited right to use a trade mark and carry on a business, whilst employing trade secrets and a special system of operations. This is also where the franchisor recites its rights, obligations and recourses, while the franchisee makes its undertakings. There would be a term and a location/territory.  

B. FACTS OF THE CASE

Note to Readers: In this space, I will recount a fictional story of imaginary characters or companies, not based upon any person or enterprise in real life.

Scenario #1: The Sad Story of Smitty & His Franchise

Scene #1: Robert Smith worked at a big corporation. As a junior, he started at an entry level position. He followed the rules, He was a quick learner. He kept his nose clean and did his job well. He worked hard and smarter, always intent on making his work product bigger than the next guy. Seen as better than the average, he moved up the corporate ladder. At his company, this administrative type was recognized as a team player, someone building consensus. He ended up as a middle manager, In his personal life, he was well liked – his friends called him Smitty. Seeing the good in everybody, he was known as ‘Mr. Nice Guy.’ When the economy took a downturn, his company downsized and eliminated thousands of jobs. He was offered a package and he took it.

Smith routinely ate in fast-food restaurants. He enjoyed the fare and liked the predictability. He started to think about franchise as the next career move. He first considered the large, leading multi-nationals. But as he says it, they are “2-2-2,” that is to say:

  • Too expensive – he did not think that he had enough money;
  • Too numerous – the best locations especially in his locality were already taken;
  • Too many franchisee requirements – he didn’t think that he would have the qualifications to be accepted.

Scene #2: When Smith drove over to the next town, he stopped at a place called the “Hot (Diggety) Dog Pound.” Intrigued by the catchy name, he turned into the lot and stopped his car. On entering the restaurant, he saw the menu board, offering a range of meals: #1 -the 74 cent “poochie” with two condiments; #2- the $1.49 “muttie,” one half beef and the other pork with three condiments, your choice; and #3 – the $1.99 Super Dog known for its insane mixture of 10 toppings. Its slogan asks: “Can you dig it?”

Smith ordered a wiener and found it good. Curious about the business, he asked the manager, who said: “ It’s a new franchise and the man to call is Mr. Super Slick.” Dialing the number, the manager handed the phone to Smith. Slick set up a meeting for the next evening at 7:00 P.M. at Smith’s house.

Scene #3: On his arrival, Slick immediately presented an oversized business card, indicating his occupation as franchise sales – read salesman. There was no address or land-line given. In their place were the words, “The Franchise King.” In his flashy suit and glossy blue shoes, Slick was a sight to behold. Being a big talker, he spoke highly about the hot dog restaurant. He also mentioned that he had a fish place – it’s called “Freshy Flounder” whose slogan was “Our Fish are the quickest from the sea to your plate.” Smith asked if he has any literature about these outfits. Slick gave him a single page for each. Smith asked about the price. Slick said: “I can fast track those franchise applicants having the qualifications and being a good fit. I can tailor a deal to match the applicant’s resources, giving him or her flexible terms to pay.” Smith asked about available locations. Slick said he can have the franchise for his entire town. Smith asked about qualifications. Asking for his CV and on perusing the document, Slick said: “You pass!” Relieved, Smith said that he would think about it and speak with his wife.

Scene #4: The next morning, Slick telephoned Smith and spoke with him in a very friendly manner. In the next days, Slick called him again and again, inquiring how he was feeling and conversing like he had known him forever. Then, as if he was waiting for the right day, Slick called and invited Smith and his wife for lunch. He told Smith to go to the ‘dog’ place, asking him to come precisely at 12:20 P.M. and ended the call by saying: “Don’t be late.”

Scene #5: On arrival, Smith found the parking lot full. Inside, there was a line- up of customers. He didn’t notice the posted sign, in BIG letters “SURPRISE SALE TODAY ONLY -”BOGOF” – Buy one get the second for free. Bringing over a few items, Slick said: “ Take only a bite …just to taste the quality and secret recipes.” Everything was tasty. Hurrying them along, Slick said: “Let’s go.” Smith then asked: “Where do we go from here?” Slick suggested that they all go over to the fish restaurant to have their mid-day meal. Invited to ride in Slick’s luxury auto, they sunk into the cushy back seats. He told Smith to press the button on the back of the front seat. When the bar opened up, Slick said: “Take a drink – let’s party.”

He drove fast and in five minutes, they arrived at the fish restaurant -its parking lot was also filled with cars. Slick walked in like a big shot. The interior was pleasant. There were plenty of diners. Although many people were waiting to be seated, they were given the best table in the house. The waitress was sunny and attentive. The food arrived without ordering and it was steaming hot and fresh. Everything was delicious. Smith didn’t notice the sign, announcing a “POP-UP SPECIAL SALE – WE LOVE YOU CUSTOMERS: Lunch today only at 1949 prices – bring your pennies!”

Without speaking about the investment, Slick chatted them up. Finally, Smith said: “I have a few questions.” Smith asked about a franchise manual. Slick said, “We believe in keeping it simple…and with mobile phones, we’re just a phone call away …it’s not necessary to write things down … But if you want a hard copy, buy a cook book at the book store.” Smith asked about food purchasing and preparation, Slick answered: “I’m sure you do the groceries and cook at home. You’re smart – you don’t need any training. We believe in you.” Smith asked about advertising and promotion. Slick answered : “Put up a sign and hire a guy to bring in customers – he can wear poster boards, walking on the front sidewalk. You can do it all.” Slick added a throw-a -away line: “We do nothing more than take your money – that’s how we keep our franchise fee so low.” Not really hearing this, Smith said: “What now?” Slick answered: “ Go home, and rest this afternoon, since I’m inviting you out on the town.”

I can go on and on giving every detail and action of the rest of the story, but let’s just fast forward to the point – Slick closed the deal and Smith signed up as a franchisee. And when all was said and done, after the s*** hit the wall, Smitty found himself up to his neck in trouble, but Slick never looked back.

C. JUDGMENT

Yes, Smith did make errors. And Smith’s current troubles, in many instances, are self-made.

D. ANALYSIS

Mistakes: Pre-Opening Errors

Overall, the attitude of Smith was to charge ahead ‘willy nilly’. This is never good. It is particularly bad in the business world. As a result, there are many deficiencies, which pre-date the founding of his franchised business.

Mistake #1: Bad Choice Of Franchisor. Smith did not pick a winner! When considering the choice of franchises, Smith ruled out, for no good reason, the industry leaders. It’s true that they have grown to become huge, multi-national corporations, but they are not the biggest for nothing. It’s because their system works and individual units work well and make money. And when their units succeed, they increase in number throughout their home country, thusly forming a strong franchise system; and many of these successful companies even go international.

If a prospective franchisee and you set your sights on the low lights, you’ll probably go down, ending up in the pits. But if you want to get ahead and stay ahead, then aim high … straight for the top tier. Don’t think that you don’t measure up; instead, think positively – think that you got what it takes. Then go after the best in the business because if you walk with the best, chances are better for you to achieve a money-making business. And as an entrepreneur “wannabe,” you will have a better chance of becoming a success story, yourself!

Mistake #2: Dealing with Mr. Super Slick. Let’s analyze this! There are many included mistakes – some are as follows.

2.1 Failure to check out franchisor beforehand. When referred to Mr. Super Slick, Smith could have taken the phone number and said that he would call him back. It would have been far better for him, as step one, to learn about the franchise, by “googling” the company, downloading hard copy materials for his file. The situation is comparable to when you are applying for a job. Experts tell job-hunters to research the prospective employer before making an application and going to an interview. It’s important to find out as much as possible in order to speak knowledgeably about the company.

2.2 Failure to first contact the franchisor. Smith should not have dealt with the salesman, until he had first communicated with the franchisor, this in order to verify whether he could apply for a franchise directly. Indeed, it’s always better to go straight to the source and not through a middle man. As well, he then could have verified whether the salesman was an authorized seller of this franchise. Dealing with a salesman might be the way to go, but one needs to be careful.

2.3 Failure to check out the salesman. In addition, Smith should have first inquired into the history and record of Super Slick to see if past customers were satisfied and if they would recommend Mr. Slick to others.

2.4 Failure to exercise reserve with sales people.

2.4.1 Smith should have had a better understanding of the selling game. If good at selling, a sales professional talks up what’s being sold. The salesman then listens to the prospect, trying to discover what elements of the pitch are attractive and what’s stopping the buyer from saying: “Yes.” Being street smart and intuitive, a super salesman is able to play the mark.

2.4.2 Smith should have realized that he was being given a short list of two franchises. The choice was unnecessarily limited. This was intentional. Making a selection from two is easier than choosing from many alternatives. Slick also recognized that choosing from a number of different options, will slow down the buying process. It’s also significant that Slick is offering a choice only between franchises which he is pushing.

2.4.3 Smith should not have been so trusting – he should have recognized that Slick was a salesman first and foremost. As a result, he tended to exaggerate and embellish. This should have given Smith much reason for pause.

2.4.4 Smith was terribly gullible in accepting the baloney being spewed out by Slick “hook, line and sinker.” Instead, he should have been much more skeptical. As the party purchasing he needed to separate the noise, i.e., the meaningless double talk or double speak, in order to examine what is actually being offered for sale and the true quality thereof.

2.4.5 Smith should have been quite wary of Slick.

2.4.5.1 Being of the bad variety, Slick was prone to lie and cheat. In order to make the sale, he was perfectly able to say anything or withhold something important. As far as I’m concerned, the moniker, “Tricky Slicky” is most appropriate!
2.4.5.2 As one of the worst of the bad, Slick was just after the money. He had absolutely no empathy towards Smith. Indeed, Slick couldn’t care less about Smith, and Smith should have run for the hills.

2.4.5.3 And being really nasty, Slick intended on getting what he wants before Smith knew what was really going on. Indeed, he was intent on using “all his wiles to skin this cat.”

2.6 Smith did not seem to comprehend that a sales personnel have limited authority. They are not generally empowered to bind the company on such issues as the following: location, eligibility and acceptance of qualifications and reductions in price and modalities of payment.

2.7 Slick was seemingly befriending Smith, who started to see Slick as a friend, but this was wrong. Instead, it was only bare greed masquerading as feigned friendship. Indeed Slick was no friend – he was just trying to off load a lousy franchise upon a foolish buyer.  

E. LESSONS LEARNED OR TAKE-A-WAY

A prospective franchisee needs to know:

  • That an enterprise emerges only after a founder-owner dreams it up. If you dream it yourself, good for you. But if someone else dreams it up, watch out, it may not be good for you!
  • That some people are born entrepreneurs, able to start a business from scratch and own it outright. But others, wanting to be self–employed, would rather look to a well-established, successful outfit, and buy certain rights to a franchise from a franchisor, which outfits them with everything ‘soup-to-nuts’ and full directions how to make it run. But, in the real world, there are also many fraudsters out there, very good at sweet talking, ready to sell a franchise worth a big zero.
  • That a good franchise is usually something, which is part of something, very big and strong financially, with very good products and a highly regarded brand, having an excellent track record. In contrast, a bad franchise is usually something, which is a part of something small and weak financially, with mediocre products and an unknown brand, having lackluster results.
  • That a franchisee, having it good is more often than not, someone who plays it smart, buys a good franchised and does good business. A franchisee not having\it so good is usually someone, who goes off the beaten path, buying a bad franchise, which goes bankrupt, and ends up beaten. Of course, it best to be careful and choose good over bad any day!

F. CLOSING THOUGHT OF THE DAY

A franchised business is good, but not in all instances; and it’s not for everybody!  

G. PREVIEW OF NEXT IN THE SERIES OF ARTICLES: “The case of the dueling dealer debacle*”

Next time, continuing on with general topic of contract, we will next look at another type, this time, a dealer-distributor agreement. It usually involves a national (or international) manufacturer-wholesaler granting a dealership-distributorship to a local enterprise. This is where a grantor, grants to a grantee, the right to be an authorized dealer-distributor of the manufacturer-wholesaler and this, within a certain locality Not familiar with this? See you next time.*

* ©/TM 2015, 2016, 2017, 2018 Allan Gold, Practitioners’ Press Inc. – ALL RIGHTS RESERVED