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Banning employees from speaking foreign languages

"Speaking a language other than English is not only disrespectful, it’s also prohibited" allegedly read the sign posted at a Supercuts on Michigan Avenue in Chicago. The stylists claim Supercuts managers prohibited foreign languages (Spanish) from being spoken by employees anywhere on the business property, including break rooms.  Is this prohibition of speaking foreign languages even in private conversations where customers can’t hear (in break rooms) a violation of the of the 1964 Civil Rights Act that prohibits employment discrimination based on national origin?   Probably yes.  But, the Suprecuts franchisee (owner of 20 Supercuts) denies such a policy existed as alleged. The Equal Employment Opportunity Commission ("EEOC") joined the stylist in a civil law suit against the Supercuts franchisee.  The EEOC has already given direct guidance on this issue. …an employer’s rule which require employees to speak English at all times, including during their work break and lunch time, is one example of an employment practice which discriminates against persons whose primary language is not English. However, an employer may require employees to speak only English at certain times and this would not be discriminatory, if the employer shows that the rule is justified by business necessity. The employer must clearly inform its employees of the general circumstances under which they are required to speak only English and the consequences of violating the rule. If the reported facts are accurate, the EEOC will probably win this one. Whether the EEOC’s regulations goes too far in interferring with employer-employee relationships is a debate worth having.

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Transfer fee benchmarks

So, you bought a franchise and it’s been successful for a few years and now you want to sell it.  The franchisor reserves some influence and financial discouragement.  The two biggest considerations given to the franchisor are: Right of first refusal – the franchisor can match your highest legitimate offer and buy your franchise Transfer fee – a fee you must pay to the franchisor for the privilege of transferring your licensing rights and obligations to another party Sample Transfer fees: FOOD: Pizza Factory: $12,000 Quizno’s: $5,000 Dominic’s of New York: $1,000 + 6% of sales price Submarina: $1,000 Cheeburger Cheeburger: $12,250 Pizza Patron: $5,000 The Dugout: $5,000 Arby’s: $13,500 Doc Green’s Gourmet Salad: negotiated at time of sale Jerq’zine:  $10,000 Original Hamburger Stand: $250 Sub Station II: $5,000 Steak-Out: $18,750 Fazoli’s: Reaonable attorney, accounting, training and other related costs OTHER: Bartercard: 10% of sales price Herman’s World of Sports: $12,500 Sears Carpet and Upholstery: $3,000 – $6,000 (depends on market size) Stone Mountain Carpet Mill Outlet: $2,500 Screenz:  $5,000 Tax Centers of America: $1,000 Sports Clips: $25,000 Fantastic Sams: $20,000 or 10% of sales price (whichever is greater) Hair Cuttery: $5,000 ($0 if franchisee for 5+ years) Fastframe: 5-10% of purchase price  

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More on the Krispy Kreme case

 Follow up to Franchisor as Exlusive Supplier (Krispy Kreme case) More on the Krispy Kreme and Franchisee lawsuit: Court documents filed in the case paint a cloudy financial picture for Sweet Traditions. In an affidavit, Sigurdson said a "continued catastrophic decline" in sales contributed to net losses of $1.2 million in 2003 and $3.2 million in 2004 and an operating loss of $2.2 million so far this year for Sweet Traditions. He blamed Krispy Kreme for pressuring the franchise to expand too quickly, for overcharging it on supplies and equipment and for failing to promote the brand, even though Sweet Traditions has paid $2.5 million into a "brand fund."

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Franchisor as exclusive supplier

What can go wrong if your franchisor is also your supplier? A lot. Krispy Kreme, along with many franchisees such as Dippin’ Dots, are required to buy supplies direcly from the company. So what’s the big deal, right? Well, what do you do if they threaten to not ship supplies unless you agree to new terms, such as payment upfront instead of the normal 30-35 days? If you don’t comply you can’t operate your business. That was the unfortunate situation faced by a few Krispy Kreme franchisees. Krispy Kreme threatened to stop shipments unless it received $1 million that is in dispute (it didn’t say if those were late payments or due to new Agreement terms sought by Krispy Kream). In this case, the franchisees were lucky and the court agreed with their argument. The court ordered Krispy Kreme to resume shipment of supplies under the traditional terms of the agreement. The order includes assertions by the franchisee that Krispy Kreme – "has refused to ship Plaintiff ingredients, supplies, and equipment, including doughnut mix – all of which are necessary to Plaintiff’s business operations – on terms previously agreed to by the parties."

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Subway’s DeLuca loses battle with franchisees

Franchisee’s can sometimes successfully challenge and win in arbitration and court battles with their franchisors. Subway’s founder Fred DeLuca lost his appeal to overturn an arbitration board’s decision that awarded Rottinghaus and Dowell, two midwestern Subway franchisees, $150,000 each. In 1997, DeLuca apparently didn’t want the two franchisees to be elected to the board of the Subway Franchise Advertising Fund, which distributes advertising money to Subway stores across the country. In 2001, the arbitration panel concluded that DeLuca violated Connecticut’s Unfair Trade Practices Act by pressuring the board to cancel the election and resolve new rules that prevented the two men from running. It only took 8 years for this grievance to reach a final conclusion 😉

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What to learn from this Subway lawsuit

in reference to: Doctor’s Assoc., Inc. v. Stuart This above case from 1996 illustrates many of the horror stories you read on this blog, particularly site selection and mandatory arbitration clauses. Site Selection: Several Subway franchisees sued Subway corporate for basically screwing them on site selection. First a little insight into Subway’s site selection process described in the court’s opinion. After a Subway franchise is purchased, Subway helps the franchisee to find a site for the Subway shop. If Subway approves the site, it requires each franchisee to sublease the premises from one of several real-estate leasing companies that are affiliated with Subway (red flag!). In 1990, Defendants opened their first Subway sandwich shop in Granite City, Illinois. Later they bought a second Subway franchise. Subway corporate allegedly promised to approve any appropriate site Defendants found for the second franchise in Bethalto, Illinois. After locating two potential spots in Bethalto, Defendants asked Subway corporate for approval, but were told that both sites were too close to another Subway sandwich shop located in Wood River, Illinois. Subway corporate then allegedly permitted another franchisee to open a Subway shop in Bethalto, at or near the spots picked by Defendants. Despite Defendants’ objections, Subway corporate made Defendants locate their second Subway store in Granite City, less than two miles from Defendants’ first store. The opening of this second shop cut into the sales of Defendants’ first Granite City shop. Subway corporate is your landlord. They can dangle an eviction notice in the face of franchisee to compel desired behavior. If Subway had the franchisee’s best interests in mind, that franchisor-landlord relationship could work in theory. Intuitively, you would think that maximizing the franchisee’s profits would maximize Subway’s profit, right? Wrong. (see The hidden ways franchisors make money off franchisees) Arbitration Clause: So …

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Quiznos gets toasted with lawsuit

It looks like the Quiznos franchisees are not standing by in the face of apparent fraud: The primary allegations of the complaint are that the franchisees were harmed by the company’s "deceptive recruitment practices" and "failure to deal in good faith" when it took franchise fees from the plaintiffs, but refused to approve locations to open Quizno’s stores. In addition, the complaint charged, Quizno’s has refused to return any portion of the franchise fees, even though the plaintiffs paid more than 18 months ago and are now being threatened with termination. and more general comments… Commenting on the lawsuit, Susan P. Kezios, President of the American Franchisee Association, said, "This lawsuit is a classic example of a popular franchise chain using its brand name recognition to deceive hard-working Americans into investing their dollars to grow a franchise. Bob-the talking baby in Quizno’s current media campaign-is definitely talking out of both sides of his mouth in this case." Added Klein: "It is unfortunate that not enough people are aware of the abuse that franchisees often endure at the hand of their franchisors. Too many entrepreneurs automatically assume that buying a franchise is a safe investment. We are confident that we will prevail in our lawsuit, and are eager to finally bring justice to the franchisees who were victimized while also alerting people who are interested in purchasing a Quizno’s franchise to make an educated decision. I don’t have a comment from Quiznos, but I’d assume they deny the allegations. Still, Quiznos claims to open a new franchise every 16 hours. Have those franchisees all done enough due diligence to uncover these allegations of fraud? I fear they are too eager to hand over the $25,000 franchise fee. Even if this lawsuit turns out to represents a relatively small percentage of …

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Litigation disclosures in the UFOC

Law suits between franchisors and franchisees happen regularly. The outcome of the litigation, however, is rarely known if a settlement occurs. As a condition of settlement, franchisors usually require the franchisee to sign a statement admitting liability. In exchange, the franchisor will pay a premium settlement. With the signed admission of liability, the franchisors can claim victory in the matter and possibly scare away other law suits. Franchisors are required to accurately and clearly disclose litigation events with past and present franchisees. 16 C.F.R. §436.1(a)(4)(ii). Of course, disclosures will usually be technically accurate but, whenever possible, will put a positive spin for the franchisor. One way this is accomplished is with the liability admission mentioned above as a requirement of settlement. Even when the franchisor was clearly at fault, the “admission” of liability by the franchisee can shade the actual events. More info here.

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Entire Agreement

The "Entire Agreement" clause is very powerful and often underestimated by franchisees signing a franchise agreement.

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The hidden ways franchisors make money off franchisees

Franchisors can make money off their franchisees in several ways: Upfront Franchise fees Monthly royalties on gross revenue Deposits on equipment Ongoing “hidden” cut on the mark-up of equipment, products, services, extra training and support, and supplies (many use Vistar Corp as a distributor) Advertising, art and signage fees Kickbacks and commissions for real estate deals (from landlords and brokers) Kickbacks from financial lenders (similar to finder’s fees) Usually the skimming is minimal and is serves the purpose of offsetting lower upfront costs for the franchisee. But, many of these extra “fees” and “commissions” earned by the franchisor are not disclosed and purposely obfuscated during sales process. Too often franchisees do not have enough accurate information to estimate these. Also, franchisors often do not disclose the total related expenses and costs of a full site build out. They know that once you paid the upfront franchise fee, you will make the extra investments needed to get your building up to par and ready. Franchisors also make nice profits on the resale of franchises. Franchisees who want out can’t just sell their franchises to their neighbor. Usually there are breakup fees and all sort of other hoops the corporate headquarters will impose on the seller.

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