AAFD weathers tough year, lauds FTC
Bob Purvin began the annual meeting of the American Association of Franchisees and Dealers with a phrase nobody ever wants to hear. "This has been a tough year," the group's chairman said.
He was referring the economy's impact on the AAFD, the group that promotes higher standards in franchise contracts and works to organize franchisees under association. Membership and its budget were flat last year for the first time in five years.
Yet Purvin also had to deal with a raging Internet controversy over the AAFD's decision a year ago to accredit the franchise agreement of the troubled coffee chain Cuppy's, a decision some say threatened the AAFD's credibility. The controversy flared up in the weeks leading up to the meeting, even as the chain was sold to the owner of the franchise-consulting firm FranSynergy.
Moments after giving him a lifetime achievement award, AAFD Chairman Bob Purvin (left) asked attorney Richard Rosen to perform a musical number with him.
Nevertheless, the meeting went on with its typically quirky and celebratory fervor and provided a forum to help franchisees unite and get their voices heard. The AAFD celebrated the accomplishments of numerous franchisees who have been working to form associations and build membership. It even included a rare "thank you" to a government agency: The Federal Trade Commission, which received the AAFD's Chairman's Award for its contributions to the franchise community.
The FTC recently amended its franchise regulations, including several changes to disclosure rules. The new franchise disclosure document, or FDD, includes provisions requiring franchisors to disclose the existence of franchise associations, information on parent companies and lawsuits franchisors file against franchisees. The rules take full effect on July 1.
In accepting the award, Steve Toporoff – ex-director of the FTC's franchise program who spearheaded the rules changes – said the AAFD played a strong role in crafting the new rules. "The FTC has been very concerned that the voices of franchisees be heard," Toporoff said. "We could always get franchisors and their attorneys to show up and make comments, but Bob and the AAFD have always been there to make sure the amendments do what they're supposed to do so franchisees could understand the system they're getting into."
The annual meeting was the last in which attorney and longtime AAFD activist Richard Rosen will chair the group's Standards Committee – a moment that earned Rosen a standing ovation. Rosen also received the group's Total Quality Franchising Award for Lifetime Achievement. "Over the years, Richard's contributions to the AAFD have been substantial," Purvin said. "His recognition was more a question of 'when' it would occur rather than 'if.'"
That’s not a used car salesman, that’s AAFD staffer Stacie Power, performing in a sketch.
The Cuppy's controversy
Rosen's last Standards Committee meeting included a long discussion about Cuppy's. The 75-unit chain has had an outsized reputation in the franchise world largely due to its critics' use of the Internet as a forum for complaints about the company's actions.
As Java Jo'z, the chain had a reputation for questionable actions toward what were then licensees – Purvin himself called it a "scam." Medina Enterprises bought the chain's assets in 2006, renamed it Cuppy's and turned it into a franchise. Amid mounting criticism on the Internet, the new owners sought out help from the AAFD.
More than a year ago, those owners agreed to write a franchise agreement that followed nearly all of AAFD's standards. "They did everything we asked," Purvin said. He said the association accredits the contracts of new or troubled franchises, like Cuppy's, in an effort to get them to abide by certain practices that are fair toward franchises. He said the accreditation focuses exclusively on the language in the contract, and not on the company's actions.
Yet critics point out the accreditation makes it seem to prospective franchisees that the system operates fairly – and, indeed, Cuppy's President Doug Hibbing said the AAFD's accreditation was a big reason for his company's astounding growth over the last year. It has signed deals worth 300 units.
Deep concerns about the Cuppy's accreditation were seemingly confirmed in recent months as stories of additional problems involving franchisees began appearing. Most notably, many prospective franchisees weren't getting refunds of their franchise fees after they were turned down for loans – refunds promised under the franchise agreement.
Cuppy's newest owner, Dale Nabors (see Currents section), also added fuel to the fire when he said at the AAFD's award banquet that, "We weren't living up to AAFD's standards. The company had the desire. But we hope that by next year ...franchisees will say we deserve to be here."
Purvin defended his association's actions, and said he investigated Cuppy's and the owners were living up to the language of the franchise contract. Of the 12 people who requested refunds because of financing, only one has had their request disputed, Purvin said, adding, the rest were either approved or pending. "They're responding to claims," Purvin said.
Purvin agreed that Cuppy's should have put refunds in escrow if they were refundable under the contract, but Purvin said the contract didn't specify the funds be escrowed. "I'm not going to throw them under the train," he said.
Purvin also said many of the franchisees receiving refunds would not be getting them if Cuppy's had not agreed to the association's franchise fee refund standard. During one lunch meeting he asked a room full of mostly franchisees if any of them had refunds in their contract. Nobody raised their hands. "But for AAFD's involvement, the people would not have claims," he said.
Thomas Webb with Jackson Hewitt, takes in a minor-league baseball game with attorney Eric Karp (left), one of the conference events.
The Cuppy's controversy has come just as the AAFD navigates a rare halt in its growth. After five years of 20-percent average annual membership growth the number of members were flat this year, along with the organization's revenues. And, Purvin said, the association is "not showing positive cash flow."
Purvin blamed the problems on the economy. The economic issues that are affecting many franchise systems are having a trickle-down effect on the organization as franchises shore up finances and avoid joining new associations.
In particular, Purvin said, the AAFD lost two large associations, the Brown Board Owners Association, which disbanded, and the Satellite Contract Owners Association, which represents H&R Block franchisees. The H&R Block group in particular couldn't sustain membership. The loss of those two associations offset any increase in the number of association members.
"We're tertiary organizations," Purvin said. "We're not as high (a priority) as the essentials. We've had good retention and good growth. We've just seen some associations go away."
Conference attendees did listen to discussions about numerous issues affecting franchises, including one on the benefits and challenges of remodeling units, a common requirement that can cause strife in an organization.
Eric Karp, an attorney with the Boston firm of Witmer, Karp & Warner, said that a franchisor could inoculate itself against lawsuits involving remodeling requirements by working to get an endorsement from a franchise association. He cited a late 1990s case involving a Sizzler plan to convert from a buffet to a grill.
A franchisee sued, saying the company had no right to do that, but a judge disagreed and cited the association's endorsement, which came after the company shared information such as marketing studies about the change. "Your endorsement can be a valuable marketing chip," Karp said.
Meanwhile, attendees received advice on recruiting members to their organizations – advice that included an urge to avoid being too adversarial. "Eighty percent of your franchisees are terrified that you're going to be adversarial," Purvin said. In addition, members are lured to an association when its board members have credibility and the organization's goals are clear and made public, said Joni Lampl-Seiavitch, of the MRI Franchisee Association. The best way to recruit members, she said, is to avoid e-mail and simply pick up the phone.