The slippery slope of government intruding on contracts in franchising…and beyond

 

 

This week, Maine is set to hold a hearing on so-called “Fair Franchising” legislation (LD 1458). This legislation, like many others, opens up a Pandora’s Box of ambiguity in contract terms that threaten the basic and proven tenets of the franchise business model, which is all about maintaining the brand, and would leave both the franchisee and the franchisor liable for potential litigation down the road.

The result?  More franchisors and franchisees will be fighting lawsuits versus working together to grow their businesses, add jobs and make the U.S. economy stronger.  Meanwhile, consumers would have a less consistent experience at franchise locations.

The International Franchise Association is working to educate lawmakers in Maine (and elsewhere) about why LD 1458 has damaging provisions that would harm the franchising industry and the 74,100 jobs it supports at 3,674 franchised locations in Maine, which pump $7.4 billion annually into the Maine economy.  Now is a good time to remind folks why IFA is fundamentally opposed to further government regulation of franchising.  The word “further” is a key point here, as the franchising industry is already highly regulated by government at both the state and federal levels, by commercial contract law, state investment law and nationally by the Federal Trade Commission.  Additional regulation is not only bad for business, but it’s bad for the free enterprise, market-driven system that our great nation was founded upon.

To be sure, going into business is inherently risky.  However, without risk, there would be no opportunity for success.  When a person starts a business of any kind, there is a risk of failure, and there is perhaps a greater risk that things won’t work out exactly as planned or envisioned.  Is that fair?  One could argue that it depends on your perspective.

With franchising, due to the contractual nature of the model, there are adequate opportunities for both parties to assess through due diligence the risk before a contract is executed.  The franchisor can evaluate the prospective franchisee and ask questions about if he or she is financially qualified, will be a good operator, and will follow the franchisor’s operating system.  The franchisee gets a detailed disclosure document with information about the franchisor, its business history, and its financials.  The franchise contract spells out the obligation of both parties to each other for the term of the agreement.  At the end of the day, both the franchisor and franchisee can make the decision to sign the agreement or not.

So what are some of the consequences of these so-called Fair Franchise bills?  With regard to Maine, there are several provisions that are very problematic and damaging to the franchise industry.  For instance, franchisors could not terminate, cancel, or fail to renew franchisees for refusing to take part in promotional campaigns for the products or services of the franchise that promote profitability.  That means non-compliant franchisees could benefit from advertising funds contributed by other franchisees who are following the system.  Franchisees also would be exempt from selling approved products from approved suppliers, which could jeopardize consistency and quality affecting the integrity of the brand.  We hear from franchisees that they want the brand protected as much if not more than the franchisors as it has a direct impact on their success.  These negative consequences hurt both the franchisor and franchisees.

In most cases, the root cause of tensions in franchise relationships is due to communication and transparency breakdowns.  Franchisees who feel they are being treated unfairly are encouraged to leverage the many mechanisms in place within the overwhelming majority of franchise systems to work together with the franchisor to resolve issues.  Franchisors ought to be transparent and consult with their franchisees when implementing a new relationship with a vendor, or implementing a new policy across a system and show franchisees why it will ultimately help them.

Franchising works when franchisees are profitable.  If franchisees don’t make money, franchisors don’t grow their system, don’t expand their royalties, and they certainly don’t create the jobs this country desperately needs.  In most systems, communication is very good between franchisees and franchisors.  IFA encourages all of its members to abide by its Code of Ethics, and while not a self-governing body, we believe the best course of action when tensions or disputes arise is through a private dispute resolution, before any legal action is taken.

An IFA-commissioned task force of leading franchisees and franchisors formed last fall is working toward the completion of a core set of principles that it believes franchise businesses should abide by to stave off conflict.  Fundamentally, their intention is to avoid conflict from the get-go by promoting transparency in franchise agreements and trust in franchise relationships.  If things do go wrong, mechanisms should be in place that are understood at the beginning of the contract phase by both parties to address the concerns.

IFA will continue to work to identify best practices to better the industry.  Litigation should always be a last course of action.  Government intrusion in a private right to contract is unnecessary, and will only result in unintended consequences for both franchisors and franchisees.

For more information about the consequences this legislation could have on the economy in Maine, click here

IFA Continues Immigration Reform Listening Tour with Business Leaders in Arizona

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Franchise industry leaders held a roundtable discussion on the topic of franchising’s role in the economy and the impact the recently introduced immigration reform bill could have on franchise businesses today at the Westin Kierland Hotel & Resort in Scottsdale, Ariz., in conjunction with the Restaurant Leadership Conference, a gathering of 1,700 restaurant industry participants.

IFA Pres. & CEO Steve Caldeira opened the roundtable by reacting to the recently introduced immigration reform bill by saying, “the Senate Gang of Eight bill includes many of the priorities of the IFA’s goals for immigration reform, including a mandatory e-verify system and a new W-visa program that allows employers to access foreign workers for lesser-skilled jobs, but only after Americans have had the opportunity to fill those jobs first.”

“We see the pendulum swinging on this issue in the direction of having more positions available than we can fill with workers right now, even with a still relatively high rate of unemployment,” said Don Fox, President of Firehouse Subs.

It isn’t just restaurants that are facing difficulties finding workers to fill the forecasted demand for growth in their franchise businesses. Peter Tourian, the founder and CEO of SYNERGY home care, part of the growing non-medical in-home care industry, said immigration reform can help fuel the necessary demand for workers in his growing enterprise. “With 10,000 baby boomers turning 65 everyday, the demand for non-skilled care in our industry will continue to grow as this industry grows in the coming years.”

One of the priorities of IFA’s immigration agenda is the inclusion of a federal e-verify system that protects employers who may unknowingly hire illegal employees as a result of worker fraud. Several of the roundtable participants shared their concerns with the current e-verify program, which is mandatory in Arizona and would be mandatory nationwide as part of the Gang of Eight bill.

“There must be safeguards in e-verify to ensure that companies like mine who do the right thing by hiring legal workers are not held liable due to shortfalls in the system,” said Scott Novis, founder and CEO of GameTruck Licensing.

Aslam Khan, the largest franchisee of Church’s Chicken, implemented e-verify at his restaurants last year. “We want to do the right thing and hire legal workers, but as a result we lost many of our best workers who came back as undocumented.”

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The event was part of IFA’s integrated advocacy campaign taking place across the country to ensure the franchise industry’s voice is heard in the immigration reform debate. Participants in the Arizona roundtable included Don Fox, CEO, Firehouse Subs, Aslam Khan, CEO, Falcon Holdings (Church’s Chicken, Jack in the Box, Long John Silver, A&W and Schlotzsky’s franchisee), Scott Novis, CEO, GameTruck Licensing, Eddie Goitia, CFO, Tilted Kilt Pub and Eatery, Steve Chavez, Senior VP of Franchise Operations, Native New Yorker Franchising and Peter Tourian, CEO, SYNERGY HomeCare.

Making franchising’s voice heard on immigration

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As the immigration reform debate heats up in Washington ahead of the anticipated release of the Senate “Gang of Eight” legislative framework next week, IFA is making the voice of franchising heard to ensure the industry has the workers it needs as it continues to grow in the years ahead as part of any guest worker program that is included in the legislation.

On Wednesday, IFA Pres. & CEO Steve Caldeira penned an op-ed with Jerry Howard, CEO of the National Association of Home Builders, that appeared in The Wall Street Journal, arguing for a market-based guest worker program:

“Elegant political deals, anchored by common principles agreed to by business and labor groups often at odds, may bring cheers in Washington. But the real key to success will be a final immigration measure that is comprehensive in nature. That would mean ensuring that the government isn’t put in the position of picking winners and losers, and that the legislation is appropriately aligned with the constantly changing needs of small and large businesses.

An employer’s access to lower-skill workers participating in the visa program should be triggered after a check with the domestic labor market. If Americans want the jobs that employers need to fill, they would be first in line to get them and there would be less need for foreign workers. But the need will always exist to some degree, and a guest-worker program that permits a market-based supply of lower-skill workers is essential. Without such a program, no immigration reform bill will be worthy of the name. With one, the framework will be set to power the most prosperous economy in the world.”

The piece serves as a great reminder of the economic impact of the franchising industry to the overall economic recovery, and how a guest worker program that works for our businesses will help power the economy, which continues to create jobs at rates faster than other businesses.

Also on Wednesday, IFA was quoted in this POLITICO story that noted the concern of IFA and other leading business groups with the emerging details of a the potential legislative framework of the immigration reform package coming from the Gang of Eight and negotiated by the U.S. Chamber of Commerce and the labor unions.

International Franchise Association CEO Steve Caldeira also told POLITICO he is concerned about the size of the program and economic indicators used as triggers.

“Obviously we would like to see a number higher than 20,000 workers at the start of the program,” said Caldeira. If Americans want the jobs that employers need to fill, they would be first in line to get them and there would be less need for foreign workers.”

The POLITICO story led to an appearance on Thursday evening by IFA President & CEO Steve Caldeira and ImmigrationWorks USA CEO Tamar Jacoby on FOX Business’ Cavuto program to discuss whether or not the “deal” negotiated by the Gang of Eight is sufficient.

In the segment, Caldeira and Jacoby expressed praise for the Senate negotiators and the business and labor groups involved in crafting the current framework.

“We believe in the basic principles negotiated by the Gang of Eight and the Chamber and Labor, but we believe it does not go far enough as it relates to guest worker program. The caps that you just mentioned on the program account for not even 1/10 of the workers we’ll need in franchise industry as well as construction industry…In our industry, we added 150,000 jobs last year, we forecast 162,000 jobs this year, but we can’t find the workers to meet the forecast of demand moving forward.

As the debate evolves in the coming weeks and months over immigration reform, IFA will continue to engage in an integrated lobbying, grassroots, media outreach and member engagement campaign throughout the country to ensure the franchise industry’s voice is heard. This campaign included a roundtable at last week’s Franchise Update Multi-Unit Conference in Las Vegas and at the upcoming Restaurant Leadership Conference in Arizona. The Las Vegas outreach resulted in a story in the Las Vegas Review-Journal featuring comments from Aslam Khan, George Zografos, and IFA VP for Government Relations & Public Policy Jay Perron, as well as an April 1 Las Vegas Review-Journal opinion piece by IFA member Patrick Walls, the president of Capriotti’s Sandwich Shops.

Franchisee Buy-in was Key to Turnaround of Hardee’s, Carl’s Jr.

 

 

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At IFA’s 53rd Annual Convention on Feb. 19, Andrew Puzder, CEO of CKE Restaurants, franchisor of the Hardee’s and Carl’s Jr. restaurant chains, told 3,600 attendees that getting buy-in for his unconventional approach to compete with larger restaurant change was a critical component of his turnaround strategy. It has been a guiding principle which has propelled the brands to 3,300 restaurants, with growth for ten consecutive years, including during the recession, and operations now in 28 countries.

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“We have a simple philosophy at CKE Restaurants:  If the franchisees make money, we all make money.  We believe we’re the most franchise friendly company around.  For over 10 years, we’ve had a Carl’s Jr. and a Hardee’s franchisee on our corporate Board of Directors,” said Puzder.

Puzder talked about how Hardee’s and Carl’s Jr. bucked the conventional wisdom in the early 2000’s with the rollout of the $6 burger for $3.99. The franchisees in the system were very concerned consumers wouldn’t pay $4 for a burger, particularly during a time when most restaurant chains were selling smaller burgers for less money.  Yet by testing the burger in a corporate store in California and demonstrating to the franchisees in the system that the product sold “off the charts,” the brand was able to roll it out nationwide.

“Being able to prove the concept in company owned markets and having the franchisees involved from the beginning were essential to making this product a success,” said Puzder.

The CKE advertising strategy also bucked the conventional wisdom. By involving franchisees in the decision-making process and explaining the rationale for targeting “Young, Hungry Guys” with famous models like Paris Hilton, the franchisees “generally, if reluctantly, went along”.

Puzder said their advertising strategy to compete with brands spending exponentially more dollars on television was to break through the clutter and generate earned media. The numbers and results speak for themselves. According to Puzder, a Kim Kardashian ad got 330 million earned media impressions, Kate Upton got over 1.5 billion in 210 countries and Nina Agdal is close to a billion.

What are main street franchise owners saying about the proposed minimum wage hike in the State of the Union?

While the President’s State of the Union address touched on a number of priorities of the franchise industry, such as the need for comprehensive tax and immigration reform, many franchisees are concerned that President Obama’s proposal to raise the minimum wage at this time would be a job killer.

After the speech, IFA President & CEO Steve Caldeira released the following statement:

“The franchising community welcomes the president’s call for action in Congress to address challenges with our immigration system and the complexities in the tax code. IFA stands ready to work with Members of Congress to enact these much-needed reforms for America’s 825,000 franchise businesses to accelerate job creation in our industry.”

Franchise businesses have been hit hard with constant incremental cost increases that make it more difficult for them to expand and create new jobs, such as Obamacare compliance costs, tax increases, hikes in commodity and energy prices and the lack of available capital. All of these policies and external factors are chipping away at the profit margins of America’s 825,000 franchise establishments, which support nearly 18 million workers.

This morning, we asked a few of IFA’s members what they thought about the proposal to raise the minimum wage, and here is what they said:

“The vast majority of employees in my business who make the minimum wage are not full- time employees. Requiring me to pay a high-school student, who I am training to be a worker in our society, a minimum wage of $9 will crush my business. 

“If my employees have a great work ethic, then I immediately pay them more.  This is a simple ‘market’ decision. If they are poor performers, then paying them $7.25 or $9 per hour will make no difference in their performance, but it will erode our ability as small-business owners to make a profit and therefore open new locations.”

Sean Falk a multi-unit franchise owner of Salsarita’s Fresh Cantina, Great American Cookies, Mrs. Field’s Famous Brands and Pretzelmaker

“Raising the minimum wage will not deliver customers with more money in their pockets. It will continue to discourage small businesses from hiring or even keeping minimum wage personnel.  Increasing the minimum wages does not help stimulate business.”

Earl Wertheim, Franchise Developer, The UPS Store