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Surprise – Quiznos sued by Franchisees Again

Source: Daily Courier (Pittsburgh)A law suit was filed on July 3, 2008 by a few dozen franchisees in Western Pennsylvania.   The allegations are: The lawsuit alleges that Quiznos engages in a “pattern of racketeering” and generates “grossly inflated profits” at the expense of franchises that usually fail. It also accuses the company of saturating geographic areas with more franchises that can be supported. Quiznos is accused of allowing customers to redeem coupons for free or discounted sandwiches, a practice that allegedly benefits the company but not the franchise holders, who are not compensated for the loss of revenue, according to the lawsuit. Quiznos, according to the filing, requires its franchise owners to buy products they do not need and work only with suppliers connected to Quiznos who charge high prices.   The financial strain on the franchisees causes the business to fail, the suit maintains. When the franchise fails, Quiznos threatens the owners with lawsuits to enforce the agreement, which requires them to pay royalties for 15 years even if the business has been forced to close, according to the lawsuit.     Quiznos Response: Richard Emmett, general counsel for Quiznos, said the allegations in the lawsuit are similar to those in an action filed two years ago in Illinois that was dismissed recently by a federal judge.”This is a copycat of that lawsuit,” Emmett said. “We’re confident the claims have no merit and this lawsuit, like the other one, will be dismissed.”   He added that the allegations contained in the action arose several years ago.” They have nothing to do with the way we’re operating now. It’s historical rather than present day,” Emmett added.  

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Dippin’ Dots Competitors

[Post prompted by a comment on this blog] Many people believe Dippin’ Dots has a monopoly the cryogenically frozen “popcorn” ice cream.  However, the Dippin’ Dots patent was invalidated by the USPTO in 2007, in part because Dippin’ Dots founders had made sales of a similar beaded ice cream product to over 800 customers more than a year before submitting its patent application, which sales were not disclosed to the PTO – thus the prior art was obvious. (read the court’s ruling here ) Today, there are two main competitors of Dippin’ Dots – MiniMelts and MolliCoolz .

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No Financial Disclosures – The Excuse

“We cannot provide you with any financial results of our existing franchisees because the FTC and/or state law prohibits it.” I can’t count how many times I’ve heard directly from franchisors that they choose not to disclose financial results or franchisees because they are prohibited by law. That is an outright lie, and at the very best, extraordinarily misleading. The FTC wants to encourage franchisors to provide as much financial guidance as possible, but that guidance must be delivered in a consistent and regulated manner so as not to mislead the potential franchisee. On Michael Webster’s BizOp blog, he looks at Romp ‘n Rolls bogus claim that they do not provide the financial results of their franchisees because FTC prohibits it.

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Invest $240,000, but don’t hold me responsible for anything!

Franchisors are always protecting their butts to the fullest extent possible, and that is often what franchisors hire me to do as their attorney. But, franchisees should be aware the rights they are giving up when signing a release, such as the one below from the 2007 UFOC of Snap Fitness. The release requires the franchisee to give up any right to sue for any reason. Many U.S. states reserve certain legal action by franchisees to protect their financial investments from fraud, making the release unenforceable under certain circumstances. But signing a release does in many situations prevent a franchisee from using the courts to enforce a right or to protect themselves. And if you can’t sue, the franchisee will have little leverage over the issue when dealing with the franchisor. Below is the release from Snap Fitness. Read this doc on Scribd: snap-fitness-release

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Dairy Queen Remodeling Fight

Dairy Queen franchisee associations with members in Arizona, West Virginia, Ohio, Virginia, Maryland, Pennsylvania, Kentucky, Missouri and Illinois filed law suits to halt required remodeling: Dairy Queen franchisees’ arguement: The lawsuit contends Dairy Queen is trying to force franchise owners to spend between $275,000 and $450,000 to remodel stores to adhere to an unproven concept — one that will cost more to operate, double staffing requirements, and cut into profits. “No one should have to make this conversion that is quite expensive unless they want to,” Caruso says. “If the DQ Grill & Chill concept was such a promising new concept, then the free market would solve this problem.” That hasn’t happened, according to the lawsuit. As of December 2006, the complaint says, just 105 Grill & Chill restaurants had opened in the United States. Some have performed poorly, and two have closed. Dairy Queen franchisor’s argument: Moreover, Mooty maintains no one is being forced to do anything. Dairy Queen does require about 70 percent of franchises to modernize restaurants periodically. But Mooty says Dairy Queen has capped the required investment at $75,000 for 2008, $85,000 next year and $95,000 in 2010. The required modernization should be no surprise to franchise owners because it’s standard in most of their contracts, Mooty says. “It is not making somebody spend hundreds of thousands,” he argues. “And it is not forcing somebody to go to another concept.” Mooty said it is the franchise-owner associations, which compete with the corporation to supply the restaurants, that are stirring up trouble. Dairy Queen is cutting margins on its supply business, which is hurting the associations, he contends. “They are losing membership, they are losing market share and they are having to take more drastic measures in creating fear and concern.”

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Franchisees: Give Your Stock to the Best Employees

This Plato’s Closet franchisee in Colorado found an often overlooked solution to a common problem – give outstanding employees equity ownership in stores (more precisely, stock in the franchisee entity or management company of the franchisee that owns the stores). What if the franchisee is not willing to accept new owners? Offering a “phantom stock” or “stock appreciation rights” may be an attractive alternative for franchisees in granting stock to employees. A corporate attorney with experience in this area should be able to set this up for you….I have set these compensation plans in my legal practice. A “stock appreciation right” is granted to employees and enables the employees to profit from the appreciation in value of a set number of shares of company stock over a set period of time. The valuation of a stock appreciation right operates exactly like a stock option in that the employee benefits from any increases in stock price above the price set in the award. The stock price for private companies is determined by a set valuation formula or outside firm selected by the company’s management. However, unlike an option, the employee is not required to pay an exercise price to exercise them, but simply receives the net amount of the increase in the stock price in either cash or shares of company stock, depending on plan rules. If the employee’s employment is terminated, the stock appreciation rights are revoked.

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Is that UFOC Updated?

Franchisors must keep their UFOC’s up-to-date, and at a minimum, must be updated when: The information contained in the UFOC document must be current as of the close of the franchisor’s most recent fiscal year. After the close of the year, the franchisor must prepare a revised disclosure document within 90 days. The franchisor must update its disclosures to reflect any material changes within a reasonable time after the close of each fiscal year quarter. A material change is generally “any fact, circumstance, or set of conditions which has a substantial likelihood of influencing a reasonable franchisee or a reasonable prospective franchisee in the making of a significant decision relating to a named franchised business or which has any significant financial impact on a franchisee or prospective franchisee.”  Examples of a “material change” include: changes in the franchisor’s management, corporate structure, address or interim financial statements; changes to the offer itself; closing or failing to renew a significant number of franchisees; and the filing of material litigation or administrative proceedings. Third, the FTC Rule contains specific updating requirements if a franchisor makes earnings representations. A franchisor must notify prospective franchisees of any material changes in the information contained in its attached earnings claim document prior to entering into the franchise relationship.

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Captain D’s Largest Franchisee Files Chapter 11 Bankruptcy

http://www.bizjournals.com/memphis/stories/2008/01/28/story4.html Serve Holdings LLC, the largest franchisee of Captain D’s restaurants in the country with 26, has filed for Chapter 11 bankruptcy to, in part, avoid payment of $245,000 to the franchisor. [note: post title amended on 2-1-2008 to more accurately identify the zee as filing….hat tip: FuwaFuwaUsagi and Michael Webster in the comments]

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Dealing with Local Government Planning Boards

Getting permits and approvals from local boards can be tedious and overly political.  I used to work at a real estate development company that hired “expediters” to get local planning approvals pushed through.  A Farmington, NY Dunkin Donuts franchisee is finding out the hard way what a pain this process can be. By Billie Owens, staff writer at the Daily Messenger Now that the old Pizza Hut building on Route 332 has been razed, it’s going to stay like that for awhile. A Dunkin’ Donuts is planned for the site, but on Thursday code enforcement officer Floyd Kofahl put the brakes on the project. He slapped a stop-work order on franchisee David Francisco of Canandaigua because the project differs vastly from what the permit allows. The property is owned by Farmington Realty LLC. Francisco disputes the notion that the project differs a lot from what his permit allows. He said the only sticking point is a glass wall that he wants to put in instead of a regular one. The permit allows renovation of the existing building to accommodate a bakery to make doughnuts and sell them. Not all Dunkin’ Donuts franchises have a bakery; most of them have the baked goods delivered from a Dunkin’ Donuts that does operate a bakery. A bakery for doughnuts and one for pizza, as in the case of the building’s former occupant, is the same under state law. For that reason, Francisco’s plans did not require review by the Planning Board unless more than 1,000 feet were to be added to the building. But last week, Kofahl said, Francisco informed him it would not have a bakery. Francisco disputes this claim, too, saying he and corporate officials will make the bakery decision jointly over the next two weeks.

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Story of a Bankruptcy: Jiffy Lube franchisee

Things will probably work out for Heartland Automotive Services Inc. of Omaha, Neb, a 438-unit Jiffy Lube franchisee filing Chapter 11 bankruptcy as it will probably sell/close underperforming and money-losing units.Chapter 11 bankruptcy, the business filing usually continues to operate while a bankruptcy court supervises the “reorganization” of the company’s contractual and debt obligations. The court can grant complete or partial relief from most of the company’s debts and its contracts, so that the company can make a fresh start. Often, if the company’s debts exceed its assets, then at the completion of bankruptcy the company’s owners (stockholders) all end up with nothing; all their rights and interests are terminated and the company’s creditors end up with ownership of the newly reorganized company. The other type of bankruptcy is chapter 7, whereby the business ceases operations and a court appointed trustee sells all of its assets and distributes the proceeds to its creditors in accordance with statutory defined priorities.The large franchisee most likely negotiated favorable terms when faced with closing or selling units, such as reduced transfer fees, low or no penalty for closing a certain number of units, delays in royalty payments when filing bankruptcy, etc. According to a statement on Heartland’s Web site, the company filed for Chapter 11 because of what it calls a “breakdown of negotiations with Jiffy Lube International to resolve long-simmering disputes regarding the companies’ relationship” over advertising and marketing, and support from the franchisor, product pricing from JLI’s parent, Shell Oil Co., and expansion strategies.Economic pressures in the volatile gas and oil market were also cited as reasons for the filing.Heartland said it anticipates going back to the negotiating table with JLI after the initial stabilization phase of its reorganization, which was to go heard in court on Jan. 23. If settlements …

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Government Regs

Local government regulations can be an expensive pain to comply with, as this Lamar’s Donut franchisee found out with its sink: •When is the Lamar’s going to open on Johnson Drive? A sign has been up since this summer. An area Lamar’s Donuts franchisee took over the spot at 5901 Johnson Drive in May but was slowed down dealing with city regulations, such as fitting in a three-compartment sink to a 600-square-foot spot, along with other plumbing issues. The “satellite store” opened Friday. Doughnuts are made at the midtown store and then taken to Mission. The franchisees, Alan and Kimberly Foster, own the Lamar’s at 3395 Main St., as well as locations in Lee’s Summit and Greenwood, Mo.

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Business Opportunity Laws

From the FTC: Twenty-six states have business opportunity laws. Most of these laws prohibit sales of business opportunities unless the seller gives potential purchasers a pre-sale disclosure document that has first been filed with a designated state agency. State business opportunity laws typically cover every imaginable type of business opportunity that might be offered. If a business opportunity seller is not required to provide pre-sale disclosures by the Franchise Rule, these disclosures will almost always be required by the laws of the states listed below. The disclosures required by state business opportunity laws differ, and usually provide more abbreviated information than the FTC’s Franchise and Business Opportunity Rule requires. However, most of these laws provide important rights and remedies for business opportunity investors, including required security bonds to cover investor losses. If you are considering purchasing a work-at-home or other business opportunity, and reside in a state with a business opportunity law, we encourage you to find out more about the protection provided by your state statute before you invest. Alaska, California,Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, Washington, Wisconsin

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Franchise Churn, In Australia

Accusations of franchisor misconduct and fraud occurs in every country. Australia, for example, franchise churn is a big issue: At the centre of these 30-plus claims is what is known as franchise churn. This is where a franchisor sells a site or territory that cannot turn a profit then sits back and waits for the business to fold. The franchisor reclaims the site for a nominal price and resells it to another franchisee who inevitably fails a year or two down the track. Each time the franchisee spends up to $450,000 buying what he or she believes is a viable business and ends up paying another agreed amount (usually about $50,000) to the franchisor for marketing fees. Royalties and annual franchise fees, which range from 5-20 per cent of revenue, are owed on top of this. Business failures are easily pinned on the franchisee. … “All you’ve got to do is follow the money trail. In the robbery stream, the franchisor virtually drives the franchisee to the wall to the point where they throw up their arms, leave behind them assets worth 10 times [what they are sold for in a fire sale] and so it goes on,” Farrell says.

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Prices on Required Purchases

From the Columbus Dispatch: DavCo Restaurants Inc., a Maryland company that owns 160 Wendy’s restaurants, contends that Wendy’s required franchisees to buy only Coca-Cola products, set a price higher than market value for those products and used the funds for advertising. Dave Norman, DavCo’s chief financial officer, said his company believes its agreement with Wendy’s allows DavCo to suggest alternate suppliers. Further, Norman said, Wendy’s didn’t give DavCo a credit against its required contribution to the national advertising campaign. Both constituted breaches of the franchise agreement, he said. Franchisors will claim that the mandatory vendors are passing on savings to franchisees through volume discounts it can achieve through negotiations. Franchisees will claim that the vendors prices still are inflated partly because of the rebate paid to the franchisor. There’s a “very significant difference” between the cost of products in Wendy’s contract with Coke and the price an open bidding process would bring, Norman said. Competition and competitive bids almost always produce lower prices and better service. Franchisees should look for franchisors that are flexible with their vendor requirements, permitting the franchisee to select their own suppliers and vendors so long as the quality is the same as the required vendor. If this is important to you, there MUST be language iinserted into the franchise agreement stating that such supplier substitutions are permitted and permission will not be unreasoably withheld.

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Finding Franchise Disclosure Documents

Uniform Franchise Offering Circulars, known as UFOCs, was a response to some unethical behavior in the 1960’s and 1970’s. Today franchises are regulated by federal and some state laws. The Federal Trade Commission (FTC) requires that certain information be disclosed to potential franchisees before a contract can be signed or any payment made. The information is presented to the prospective franchisee in the form of a document — the UFOC.The UFOC, contains information franchisors must provide to franchisees by law. UFOCs are deemed to be reliable and if the information provided is false, franchisors are subject to civil penalties. However, the FTC does not require filings. There are 13 states that do keep UFOCs on file, and 23 states that require business opportunity disclosure filings. The UFOC is designed to give prospective franchisees all the information relevant to a franchise offering. It is made up of three basic parts: 23 sections (called Items) describing various aspects of the franchise program; a set of the franchisor’s audited financial statements; and a copy of each form or contract a franchisee is expected to sign if he/she intends to buy the franchise. The UFOC is similar to a securities prospectus. It can provide the information you need to evaluate a company. An accredited franchise company, whether publicly traded or privately owned, must provide this disclosure document. The UFOC is most valuable for potential franchisees, potential franchisors, franchisors, investors, financial companies and suppliers to franchisees. You can obtain UFOC’s directly from the franchisor usually for free, from the California state franchise document portal, and from several online sources such as FreeFranchiseDocs.com which downloads and scans the documents from the California database. Cross Posted at: Let’s Talk Franchising [edited by Ryan on on Oct 20, 2007 @ 10:15PM]

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Franchise Industry Shakeout Coming? {Part 4 of 4}

Are the number of Franchise Consultants, and Brokers going to continue to grow? Or, as I predict, will this part of the Franchise industry start consolidating?……. In the last 3 articles I have written about the phenomenon that is taking place..Too many consultant/brokers in the franchise world, and the  plethora of  new ones just entering an already crowded field. Here are links to Parts 1, 2, and  Part 3, just in case you wish to refresh your memory. Am I writing about this just because I am a franchise consultant? Am I writing about this  because I do not want more competition? Am I writing about this because I just left a Franchise brokerage group that I really am not feeling the love for? I am writing this to open up a discussion. I want to know how consumers feel about us. I want to know how franchise company execs feel about us. I am also writing this so that some prospective franchise brokers that are being courted by the franchise brokerage groups to buy their franchises that sell franchises to others, can take a breath..and find out before they buy, just what  it is that they are buying. Janet Sparks, a veteran franchise industry writer, just wrote about one such wonderful franchise company, “The Entrepreneur’s Source” that once again is  is the position of defending itself against a class action lawsuit brought on by former franchisees. Article They have a large number of franchisees, and at one time in little old Cleveland,Ohio, had 3-4 franchisees at the same time. {As of this post, I only know of one franchisee in Cleveland who remains in business} So, if “The Entrepreneur’s Source” as an example, has no problem selling 3 or 4 franchises in a shrinking metropolis like Cleveland, Ohio, …

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