Tips For The Franchisee In Pursuit Of The American Dream

By Robert Zarco, Esq. 

The Flame, A Franchisee Report, Winter 1993, A Quarterly Publication of the National Franchisee Association, An Association Of Regional Burger King® Associations

For many, franchising is the foolproof way to fulfilling the American Dream.  For others, immediate business is not always guaranteed.

Robert Zarco, a Miami franchise attorney, sees the idea of investing in a successful franchise operation as a potentially lucrative investment.  He also views it as a potential pitfall for those who are not wary and do not tread with caution.

Zarco recently successfully obtained a ruling in favor of Massachusetts franchisee Steven Scheck in a case against Burger King® Corporation pending in a Miami Federal Court.  Judge William Hoeveler upheld his previous ruling that a jury should decide whether the food-giant breached the increasingly popular Implied Covenant of Good Faith and Fair Dealing, a doctrine which governs every contract.  Scheck's suit contends that Burger King® "cannibalized" his business by 24 percent when it sold a competing franchise less than 2.0 miles from his store to its competitor the Marriott Corporation, owner of Roy Rogers Fast Foods.  The national precedent-setting franchise case is set for trial to commence on December 7, 1992 in Miami.  This will be the first time a franchisee will have his day in court before a jury on this issue.

The McDonald's® Corporation is also being pursued by Zarco who represents longtime McDonald's® franchisee, Marshall Magruder, in his claim against the fast food corporation arising out of encroachment and cannibalization issues similar to those present in the Scheck case.  Magruder claims that over the course of 18 years McDonald's® opened six locations too close to this two store Mesa, Arizona stores, vitally wiping out his market share and ultimately forcing the handicapped restauranteur to sell his only source of livelihood back to the mega corporation.

Franchising is the boom-industry of the 1990s.  Franchises account for one-third of retail sales in the U.S. according to Francorp, a Chicago consulting firm.

From healthcare to child care, to a cadre of retailing services, budding business people across the nation are buying into the more than 3,000 U.S. franchise operations.  But there's a downside: For everyone looking to buy in, a company is luring the unwary so as to profit from selling the dream.  And it doesn't come cheap.  Some franchises cost upwards of $500,000 in capital investment and start-up fees and require payment of up to 20 percent of gross sales for rent, marketing and royalties.

While most franchisors hold the upper hand and few will negotiate away strong points in their agreements, without asking, the franchisee will never know what can be gained.  Zarco offered the following tips for the hopeful franchisee.

• Invest in what you know. People who pursue their heart's desire often fare better than those who tackle an industry because it looks good on paper.  Remember: Franchising is at least a 15-year commitment.  "It's like everything else," Zarco said. "If you like what you do, you'll give it 110 percent."

• Study the marketplace. Don't blindly trust performance statistics the company provides you.  Especially with younger and smaller franchisors, analyze financial statements and market performance.  Interview existing franchisees on their success with the company, the business, and the marketplace.  Make site visits, monitor traffic.  What are the pitfalls?  When digesting the input, be skeptical: Franchisees may see you as potential competition and skew their answers.

• Be prepared to go for the unexpected.  After your franchise lawyer has prepared the agreement, consult a franchise litigator to review it further.  Litigators are trained to anticipate lawsuits on every issue.  Also, make certain that the offering circular and franchise agreement don't conflict.  Have your attorney review both.

• Look ahead. Does the contract allow you to automatically renew after the initial contract periods: The new Iowa Franchise Act requires automatic renewal for qualified franchisees in that state, but the rest of the nation awaits such mandates.  Assuming your outlet performs up to corporate standards you - not the franchisor - should be the one to make the decision whether you continue in the business.

• Promises, promises.  If the franchisor makes a promise, get it in writing.  Consider verbal agreements - especially without witnesses - worthless.  Follow-up every conversation in which some promise was made to you with a confirmation letter to your franchisor's representative.

• Don't get eaten alive.  To prevent cannibalization by other outlets within the company, get your franchisor to commit - as much as possible - to your market.  If the company plans to build another store in your area, negotiate either the right of first refusal to buy that store, or for the company to compensate you on the decreased revenues and market share you will suffer as a result of the encroachment.

• Get more bang for your ad dollar.  You will be paying national marketing fees.  Try to negotiate that any national or regional advertising campaign is also done in your market area.  Additionally, when a competing chain launches a special offer--for example, "Breakfast for a Buck" - commit your company to match it.

• Thanks for the memories.  If you decide to sell your franchise, who chooses the buyer?  Any reasonable qualified buyer should be acceptable, and approval of the potential buyer should not be at the sole discretion of the franchisor.

• Avoid the slippery pen. Do not sign any documents, regardless of time pressures, without first consulting your attorney.  Often, hidden releases of liability may prejudice any future claims you may have against the franchisor.
  
• Remember. Often franchisors won't allow side agreements to be written into the contract. "Franchisors will never negotiate away their right to protect themselves.  Except now that franchise law is in such turmoil, some franchisees have a better chance," Zarco said.  "You may not be able to negotiate these items, but it's the awareness.  Focus on these issues and show that you've done your homework."

Franchisors across the country will be following Zarco's case - Scheck v. Burger King® Corporation - when it goes before a federal jury in early December.  "That matter," coupled with Zarco's pending case, Magruder v. McDonald's, "could well determine the course of U.S. franchise law and how franchisors treat and deal with their franchisees in the future," stated Zarco.

This article will appear in a future legal publication.  Mr. Zarco graciously allowed its publication in the FLAME.  Please contact him with any questions in Miami at (305) 374-5418 or via email at zarco@zarcolaw.com.