Planes, Trains And... Subways: Growth Through

This is Part One of a three part series presented by Haynes and Boone, LLP exploring franchise sales growth in 2010.

2009 was a difficult year for most franchisors, but 2010 is a new year and many franchisors are again looking to grow their businesses. Developing and implementing a "non-traditional" franchise program is one of several key growth vehicles that we will explore in our three part series.

What makes a franchise offering "non-traditional"? The easy answer is that it differs from your standard prototype offering, but there are degrees of differentiation and the "non-traditional" nature of the offering can be derived from: (1) the location (i.e., captive customer audience locations such as airports, hotels, motels, casinos, arenas, stadiums, convention centers, hospitals, universities and schools, museums, theme parks, aquariums, military and governmental facilities and shopping mall courts); (2) the operator (i.e., master concessionaires or other special third operators, minority based businesses, airport authorities, colleges and universities); and/or (3) an alternative method of distribution (i.e., supermarkets, stores, convenience stores, food stores or club stores or even carry-out, kiosks or other off-site sales).

Key Business Structuring Considerations

Franchisors contemplating a non-traditional program must give thought to the type of the unit, the location of the unit, the operator of the unit and the type of products and services offered at the unit (not mention whether there is a "unit" at all). Some initial practical structuring questions that need to be asked and answered include:

  • Do my products or services lend themselves to particular types of non-traditional location/delivery methods?
  • Does my prototype unit premises require modification to accommodate limited space, equipment options and/or personnel?
  • Do I need to modify my distribution and supply chain programs?
  • Do my agreements grant or reserve rights for non-traditional locations?
  • Do I want to operate units myself?
  • Are my franchisees capable of securing rights for or operating non-traditional units?

The Regulatory Basics

Franchisors offering non-traditional rights must comply with federal and state franchise registration and disclosure laws unless exempt. Many franchisors use their standard offering and consider the non-traditional grant a "one off", negotiated transaction, or take advantage of an exemption because the franchisee is a large institution that satisfies the FTC's fractional franchise exemption (such as a master concessionaire, airport authority or college). However, some franchisors have developed non-traditional disclosure documents that provide revised fee structures, investment figures, territorial rights and/or tailored financial performance representations. Unfortunately, it is almost impossible to find a one-size fits all exemption at the federal and state level. Thus, care must be given to confirm compliance or exempt status, especially where multiple non-traditional rights are to be granted cross multiple state lines.

Key Agreement Considerations

Many franchisors simply negotiate their standard form franchise agreement with the franchisee to address issues unique to a non-traditional location or operator. However, more and more franchisors are using streamlined non-traditional agreements that address one or more of the following key non-traditional nuances, which as noted above are based on the distinctive attributes of non-traditional units and operators:

  • a separate, pre-existing agreement and relationship with a facility that affects/limits control over pre-opening matters (such as site selection, and build out), continuing operational matters (such as marketing, product offerings and hours of operation) and/or operational changes or cessation of operations (such as termination of the Facility lease or restrictions imposed by governmental regulation).
  • a large, sophisticated operator that expects a greater degree of respect and compromise from franchisors, including as to all aspects of unit operations and mutuality as to general contract provisions.
  • removal or reduction of standard in-term or post-term covenants against competition.
  • shorter terms and/or rights of termination that can be exercised without cause or other consequences.
  • reduced initial and continuing fees, including marketing fees.
  • limits on requirements, required purchases and reporting requirements.
  • removal of personal guarantees and strict transfer limitations.
  • removal of franchisor's rights over real property interests.

Conclusion

It is safe to say that the cutting edge non-traditional programs of today will be commonplace tomorrow, and that the cutting edge non-traditional programs of tomorrow will raise new issues and new concerns that require understanding and diligence. Thus, it is more important than ever have informed and practical counsel to help you traverse the non-traditional landscape and either catch up to and surpass your competitors or stay one step ahead of them.

Robert Lauer is a Partner in the Franchise and Distribution Practice Group of Haynes and Boone, LLP and can be reached at rob.lauer@haynesboone.com.

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