Many lawyers and franchise professionals seem to be stuck in a rut as to how franchise businesses should operate, particularly with regard to the franchise fees and royalty matrix.  The old adage, “same old, same old,” seems to hold true.  In light of the kind of return on investment franchisees are getting in this tight economy, tight commodity prices and escalating labor costs, the proactive franchisor needs to take a new look at the economics of its franchise system and how the franchisor charges for their intellectual property rights, services, and overall partnership with the franchisee community.

Sometimes it is said that the eyes are the window to the soul, and I would say the same is true about a company’s profit and loss statement (“P&L”).  Profit and loss statements are the window to a company’s success.

For the last several years, growth in the franchise world (in terms of new units opening) has been slow.  The reasons are very obvious: the economy has not grown at the pace we would all like, capital has been short, and there has been uncertainty.

Royalty fees are at the heart of the financial relationship between a franchisor and a franchisee, so it’s no surprise that they’re often the source of disagreement. The concept is simple enough: a franchisee agrees to pay a franchisor periodically during the term of a franchise agreement in exchange for using the franchisor’s brand and operating methods and benefitting from the franchisor’s established goodwill.

Franchise agreements are frequently criticized as being over-reaching in protecting the franchisor.  While criticism is justified in many cases, more and more franchisors are realizing that a balancing of the parties’ interests is necessary for long term success of both franchisor and franchisees. 

What Is Protected Under Copyright Law?

In these volatile economic times, the challenge every franchisor faces is effectively monitoring the financial health of a franchise system.  Monitoring the health of the system is not just a luxury but a necessity.

As covered in last month’s column, there were a number of positive developments in franchise finance in 2010.  In addition, the franchise trade press has been active with reports of many encouraging developments.  Still, not all the news is positive.  In a discussion with my partners, Randy Evans and Rick Gibson, we thought it would be interesting to further elaborate on last month’s column and look at the challenges and opportunities for 2011.

Each year I reflect back on the high points of the previous year and look at the ideas, transactions and developments I think had the greatest positive effects on financing for the franchise community.  In reverse order, here is my list of the ten best things that have happened in 2010 for franchise finance:

In today’s tight financing market for franchise businesses, it is key for us to share our success stories and help each other find financing.  This column discusses three actual situations where a franchise business was able to secure financing.

Many of you know from reading this column over the years that I believe franchisors should play an active role in helping their franchisees.  Franchisors historically seem to take three basic approaches:

Is your delivery business adequately reimbursing your delivery drivers for the travel expenses they incur in making deliveries?  Domino’s Pizza (“Domino’s”) has been sued by a group of its current and former delivery drivers (“Drivers”) in Minnesota federal district court.

In the present fluid and volatile franchise world, it is imperative that a franchise system knows itself.  As I have discovered in my representation of many franchisors and franchisees, it is rare a franchisor has a good understanding of its franchisees’ financial positions.  It may be that the franchisor understands an individual franchisee or multi-unit operator’s profit and loss positions and clearly understands whether the franchisee is current on royalties and advertising payments.  

For years my partner, Randy Evans, and I have been helping both franchisors and franchisees navigate the tricky waters of getting into the franchise world and then developing a franchise business.  Many of our franchisee clients have gone from one unit to hundreds of units, and many of our franchisor clients have grown from a core group of businesses to become multi-national concepts. 

Tax savings may be your friend.  Year-end tax planning for 2009 may be the most challenging in recent memory.  This is particularly true in the franchise world because the uncertainty of when various businesses will become profitable again.

Low consumer confidence, fickle consumer spending, unpredictable commodity costs, and tight credit markets are all causing distress throughout the franchised industries and injecting new stress into the franchisor-franchisee relationship.

Today’s real estate market can be seductive for the franchise business owner.  Landlords are offering historic low rents, various allowances, and financing for the franchise business owner.  These incentives can make it possible for the business owner to get into a good, if not a prime, real estate site for virtually little or no money.

I had a recent discussion with one of my colleagues, Barry Blum.  Barry has a unique view of the current financing and economic issues of the franchise world because he has served as both an inside lawyer and business person and as a private practice lawyer representing franchisees and franchisors.

At the recent Franchise Finance and Development Conference in Las Vegas, John Hamburger and I discussed some of the unique ideas that have recently evolved in creating financing sources.  Financing is certainly a different game than it used to be.  This article highlights these unique ideas.

This month’s column will continue to highlight opportunities in the multi-unit retail world.  Even though there is much continued talk of “tough times” in the media, there are new, emerging concepts that are growing and thriving.  I want to focus on three groups I have the tremendous opportunity of being involved with. 

I am tired of listening to speeches, reading articles, hearing about conferences and webinars, and having every conceivable means of communication all tout the latest and greatest on how to manage in tough times.  I am sure you are tired of these things as well.  Many of these communications have the same ideas and thought processes.

When I started writing for Franchise Times ten years ago, I had been practicing in the area of franchise finance for almost 20 years.  All along I had a dream.  I had a dream that each solid franchisee would be able to obtain financing for growth and acquisitions. 

I don’t have to tell you that franchise financing is tight.  All you have to do is open up the Wall Street Journal, local newspapers or trade magazines to understand the present credit crunch.  In my 30 years of working in the franchise space, I have seen many contractions and have been through many periods of time when franchise financing was virtually nonexistent. 

This column has recently been addressing economic issues and how they affect the franchise industry.  This month we’ll finalize the series by discussing how the franchisor can help its franchisee community.

In these tough economic times, the question I am asked most often is, “What is my franchise business worth?”  This month’s column will outline a few key points that may be helpful in determining what your franchise business is worth.  Also, you may want to look at the July 21st issue of Restaurant Research prepared by Wally Butkus at www.restaurantresearch.info.  In the newsletter, Wally addresses the valuation issues with information he has gathered for franchise restaurants.

In recent months we have seen many franchisors selling off their corporate units.  (This is commonly called “refranchising.”)  There are many reasons for refranchising.  For example, DineEquity (the franchisor for Applebee’s) feels their focus should be pure franchising and the capital investment necessary to own corporate stores is not part of their strategic plan.

This month we are going to discuss a very relevant topic in the whole multi-retail arena: gift cards and gift certificates.  More and more franchise establishments are using gift cards, and they are becoming increasingly important for specialty shops and restaurants.

Trademarks, copyrighted works, trade secrets and proprietary business information form the core of any franchise system, and are frequently a company’s most valuable assets.  Trademarks, including service marks, logos, slogans and trade dress, define the brand identity as presented to the public.

Without exception, the success of any company, including a franchise company, is directly related to its leadership.  Conversely, the root cause of a failed enterprise is without question the product of the decisions (and non-decisions) of its leader.  Obviously then, determining when to replace the leader or the management team of a company will likely play a key role in determining the future of the enterprise.

This time of year a person’s thoughts turn to taxes, and the latest tax act is euphemistically called “The Small Business and Work Opportunity Tax Act of 2007.”  This new tax act does not have a lot of good news, but it does provide a few special benefits to the franchise owner.

As background to this article, I would like to reference the recently distributed Asian American Hotel Owners Association (“AAHOA”) publication that listed their 12 points for fair franchising.  (AAHOA is an influential hotel group.)