HOMEWOOD, IL – The iFranchise Group (www.ifranchisegroup.com), a leading franchise consulting firm based in the Chicago area, works closely with franchisors and their attorneys as they develop or modify their franchise systems and related legal documents. In a recent interview, experienced franchise consultant and iFranchise Group President, Dave Hood, talked about trends and other common concerns in franchising as they pertained to the creation of franchise legal documents and management of franchise systems.
Q: What advice would you give new and existing franchisors when they are creating or updating their franchise legal documents?
Mr. Hood: Franchisors should analyze or benchmark the practices of franchise systems in similar industries. And, when franchisors consider making any significant change to their existing franchise agreements, they should always assess the potential impact of the change from the perspective of both the franchisees and franchisor. Most important, franchisors should only work with an experienced franchise attorney when drafting or modifying their legal documents; franchising is highly regulated, and it's critical to work with lawyers with ample experience in franchise law to avoid potential pitfalls.
Q: What do franchisors need to keep in mind this year and going forward in terms of "hot topics" in franchise law?
Mr. Hood: I'd say to continually monitor changes in the state laws regarding taxation and employment. In recent years, multiple states have been seeking ways to tax royalty income for out-of-state franchisors. This was most notably supported within the last few months by an Iowa Supreme Court decision that upholds the state's ability to tax out-of-state franchisors based solely on having franchisees in the state. We expect more and more states will follow suit in the future. Franchisors need to understand that advances in technology make physical presence obsolete in some situations. Thus, they must be sure the attorney they retain to draft their documents has a thorough understanding of the nature of the business and franchise. And, they'll need to have a highly detailed strategic plan prepared before creating any legal documents.
Also, franchise documents have recently been under scrutiny for how they establish the legal relationship between the franchisor, franchisees and their employees. Franchisors need to have carefully worded legal documents that do not inadvertently create an agency relationship or other employment-related arrangement as they structure their franchise programs. Recent cases show that some local courts look beyond contract language and closely examine the actual business structure; so, in addition to including appropriate language in the Franchise Agreement, franchisors have to truly treat franchisees as independent operators.
Q: What do you see as key to successful franchising from a legal perspective, now and in the future?
Mr. Hood: Franchisors should keep their legal contracts as simple and straightforward as possible, and also be consistent in terms of how they enforce contracts from one franchisee to the next. They should also ensure the franchise agreement is flexible enough to allow for changes in the system or industry. Also, as the economy slowly recovers from the recession, franchisors need to stay on top of the financial health of their franchisees to ensure they remain strong. Franchisors should be very proactive in identifying franchisees who are at risk financially, and should develop internal programs or practices for addressing struggling franchisees before bigger legal issues arise in the relationship.
iFranchise Group (www.ifranchisegroup.com ) is a leading franchise consulting firm that offers the skills of the nation's top professionals in franchise strategic planning, operations training and documentation, franchise marketing and sales, advertising fund management, franchise recruitment, and development of Internet-based applications for emerging and established franchise companies worldwide. Since its inception in 1998, iFranchise Group has dedicated its efforts to establishing long-term, strategic relationships with franchisors, both new and established, and other companies seeking consultative guidance with business expansion strategies. With a staff of franchise consultants with a combined 450+ years of experience in franchise development and implementation, iFranchise Group has worked with over 30 Fortune 2000 companies and with 98 of the world's top 200 franchisors as rated by Franchise Times magazine.