Watching your back at contract time
How do you draft a franchise agreement that fits the needs of your growing brand and train your salespeople not to make mistakes when selling it? The three bold entrepreneurs we’re following in this column all year have different strategies.
From Vitality Bowls’ founder, the goal is to communicate once, twice and then again. Tara Gilad, founder and COO of San Ramon, California’s Vitality Bowls, believes a franchise agreement should protect the brand and the company while still being fair to the franchisee. She says clearly communicating with prospective franchisees is enough to prevent revisions.
Where there is pushback is because there wasn’t an understanding of the difficult attorney language,” Gilad says. “We really haven’t altered our franchise agreement.”
“We try to avoid legal battles by having everything be clear up front.” — Tara Gilad,
Gilad built opportunities for her company that don’t even exist yet into the agreement and occasionally that has made prospective ‘zees nervous.
“We reserved the right to sell products within their territory,” Gilad says. “That doesn’t mean we’re going to open a store. Let’s say we have a to-go bowl and have it in the Whole Foods. Or what if we decided to package and bottle our VB juice blend?”
The main emphases of the franchise agreement are brand standards. Franchisees have to know up front that they need to use the right kind of products and not change recipes to protect the brand’s integrity.
“We’ve heard of other franchisors saying they have problem franchisees that aren’t curing,” Gilad says. “It’s always a legal battle at that point. We try to avoid legal battles by having everything be clear up front.”
While ironclad franchise agreements are a legal way to protect the brand, Gilad says she tries to scare away or reject bad fits before they join. She personally meets with every prospective franchisee and screens them to make sure they’re cut out to run Vitality Bowls. While some franchise salespeople overpromise financials, Gilad emphasizes the difficulty of running a restaurant. It’s an unconventional way of avoiding liability later, but Gilad would rather save herself the headaches.
“We’ve said no to so many investors,” Gilad says. “We’ve met people I just didn’t feel like had the personality to run a restaurant...If I have any red flags or don’t get a good feel we don’t move forward.”
Young Chefs beefs up its legal team
Waco, Texas-based Young Chefs Academy had grown to more than 35 locations, including in several foreign countries. But CEO and founder Julie Burleson wasn’t happy with the way the company was expanding. She learned that from partners all the way down to salespeople, finding people with similar values was key.
“That was the biggest mistake I made when I started,” Burleson says, “putting trust in a sales team and being naïve about the process.”
“I believe your franchise system is as strong as your franchise agreement is.” — Julie Burleson, Young Chefs Academy
Five years ago she instituted a selling freeze. Then in 2014 she brought in franchise lawyers Kevin Ayers and Roger Schmidt as partners and spent eight months refining internal processes.
Schmidt was the former senior VP and chief general counsel of Waco, Texas-based Curves, and together with Ayers put over 40 hours into the new document. The goal was to create an agreement that didn’t have to change no matter how large the company got.
“I believe your franchise system is as strong as your franchise agreement is,” Burleson says. “No matter how fast you grow, you write your franchise agreement with the expectation that you aren’t ever going to change it.”
Only three domestic and “one or two” international locations currently use the new agreement, but Schmidt says within five years all locations should be covered.
When it comes to the sales process, Schmidt says the most difficult states to work in are California and Wisconsin, but salespeople in all states should be well trained to avoid later lawsuits.
“All your claims are, ‘Well, the salesman said…’,” Schmidt says. “The biggest ones are financial performance representations, the sites and territories, where your sales team will always want to wander to get that sale closed.”
Young Chefs Academy makes sure salespeople go through the exact same training a franchisee will go through and spend enough time with top management to really understand operations.
Schmidt says paying salespeople well and making sure they know not to overpromise under the table is important, but it starts with who you hire.
Some salespeople could sell anything from shoes to air conditioners, but Schmidt wants his staff members to be Young Chefs Academy employees first and salespeople second.
A lot of franchisors will hire people “and they’re salesmen—that’s what they are,” Schmidt says. “I don’t want those people. I want someone who is passionate about the business.”
Playing with the numbers at Salon Suites
Getting a franchise agreement right may not happen the first time around. Ken McAllister is the CEO and president of New Orleans-based Suite Management Franchising, which owns the mid-upscale My Salon Suite and the low-mid level Salon Plaza. He says new franchisors should think in terms of tweaking the numbers to kick-start growth.
“If you have an emerging franchise that just starts there should be an incentive,” McAllister says.
“We have an independent third party that puts it together and sends it out. Our franchise team doesn’t touch the franchise agreement. They can negotiate on it but they don’t touch it.” — Ken McAllister, Suite Management Franchising
His first year in business, he charged his franchisees an initial flat rate. This was simple to set up and calculate and seemed like a fair deal for initial franchisees. The next year, he changed it to a rate based on square footage. But by the third year, he realized both systems were out of step with the market.
“It was confusing candidates,” McAllister says. “Our competition did a percentage.”
He switched to 5.5 percent of gross sales, which is what his competitors were doing. Three changes in three years may sound like a lot, but the shifting systems of those first years have now settled in to a consistent approach.
“As the franchise matures it becomes a flat one,” McAllister says.
The agreements are built strategically to encourage larger investments. A single franchise location starts at $50,000. An additional 3 pack is $99,000, a 6 pack is $150,000, and a 10 pack is $200,000.
“As you buy more up front it’s a better buy,” McAllister says. In order to make sure the sales team doesn’t go beyond the terms of the agreement, McAllister says they have to know the FDD inside and out.
Furthermore, the franchise team doesn’t ever modify the franchise agreement itself. The company makes sure any changes are made in a way even a lawyer can be happy with.
“We have an independent third party that puts it together and sends it out,” McAllister says. “Our franchise team doesn’t touch the franchise agreement. They can negotiate on it but they don’t touch it.”
Living Large is a series about building a bigger franchise, which will follow three emerging brands throughout 2016 and report their progress. Email Beth Ewen, firstname.lastname@example.org, to add your advice or experiences for emerging franchises (about 100 words, and include your contact information). Franchise Times will publish the best advice in future issues. Next month’s topic is attracting capital to your system.
The flip side
George Sigalos, managing partner of Simon & Sigalos, has advice for franchisees before signing a contract:
>> You are not buying a partnership or guarantee of success from the franchisor. You are buying a business that operates utilizing a specific system for delivering goods or services under a particular brand.
>> Perform your due diligence before purchasing a franchised business. Franchise disclosure documents are very informative but also very detailed and require a lot of effort to understand. Engage professionals to advise you.
>> Take advantage of all the training programs and opportunities the franchisor offers and follow the franchisor’s system in order to reduce your chances of failure.
>> If you have a legal dispute with the franchisor, recognize the financial, personal and emotional toll a lengthy court case will have on you and seek alternative dispute resolution as much as possible.