Food Franchise

Posts Tagged ‘Franchise Agreement’

Franchise is a method of doing business by licensing trademarks. A recurring royalty fee being the prime source of income, the advent of franchise business dates back to the 1850s. The earliest example being the bars of New South Wales, the agreements between these bars and the breweries can be considered the foundation for modern franchise businesses. Further examples of early franchises include the telegraph system (operated by various railroad companies but controlled by Western Union) and exclusive agreements between automobile manufacturers and local dealers.A franchise agreement is the first step between the willing parties; the agreement binds the parties together through contractual provisions, strengthening further the arrangements of selling ones own products or services through another person holding the license. The agreement also specifies the area of operation under the franchise holder, though the franchise provider usually denies a complete and exclusive control of the franchise holder over that particular territory. Franchise in the US abides by the jurisdiction granted by the state and federal laws though there is no federal registry of franchising or any federal filing requirements for information. However, franchise holders are required to have a Uniform Franchise Offering Circular (as per the Federal Trade Commission rules); it helps in disclosing the business transactions and purchases that remain involved. As of now, the Financial Times declared that if sales by US franchise businesses were translated into national product, they would qualify as the 7th largest economy in the world.

Franchise-based restaurants opened gates for the wave of franchise businesses since the 1930s. First came the traditional sit-down restaurants (Howard Johnson’s) and then McDonalds in the 1950s rendering United States a franchise business dominion to the point where proprietorship business has become the exception rather than the rule.

In 1996, 32 Pizza Express franchisees sold their businesses back to the franchisor Pizza Express.HMRCs argument was that there was no saleable goodwill as the franchisees merely had a licence to trade and therefore no business asset to be rolled over. They claimed the amount allocated to goodwill should be reallocated to early termination of franchise agreement! The consideration apportionment should not be changed as it was reached honestly and at arms length. As a matter of law, the goodwill belonged to the franchisor, not the franchisee. The Commissioner considered that what was goodwill, had to be determined in accordance with legal rather than accountancy principles. It was a question of fact and would include whatever was added to the value of a business by virtue of situation, name and reputation, connection, introduction to old customers and absence of competition. The Commissioner found that the appellants invested capital and time into their businesses and Pizza Express had no direct interest in their profitability, simply, taking a percentage of turnover as their franchise fee. The accountants had complied with standard accountancy practice in allocating part of the consideration to goodwill, being the excess over the true and fair value of the tangible assets. The appeals were therefore allowed in principle

AAFD Chairman Robert L. Purvin issued the following formal notice being delivered today to Cuppy’s Coffee CEO, Dale Nabors:

 

Since late July, the AAFD has received several serious allegations that Cuppy’s Coffee and its affiliate Elite Manufacturing have deliberately failed to honor contractual commitments regarding store build outs and openings, causing material harm to franchisees.  The AAFD has invited Cuppy’s to respond to these complaints, and Cuppy’s has failed to address these latest allegations.  In late August, I acted to suspend Cuppy’s Accredited Contract status with the AAFD pending action by the AAFD’s Board of Directors.

 

On September 4, 2008, the AAFD Board of Directors voted unanimously to withdraw AAFD Accredited Contract status for the Cuppy’s Franchise Agreement, effective immediately.

 

In order to maintain AAFD Accredited Contract status, a franchisor must both adopt and honor the provisions of a franchise agreement that substantially conforms to the AAFD Fair Franchising Standards. 

 

In addition to Cuppy’s failure to respond to the AAFD’s invitations to respond to numerous charges of contractual defaults, recent public statements by Dale Nabors have essentially acknowledged the defaults, offering only that the defaults by Cuppy’s and its affiliates is not the result of criminal activity.

 

Purvin added, “Cuppy’s has also reneged on specific commitments to mediate contractual disputes with its franchisees and to support and subsidize the organization of its franchisees, but it was the unanswered claims of material breach of contract that led to the AAFD’s action, beginning with my decision to suspend Cuppy’s accreditation last month.”

 

The AAFD Board of Directors met by conference call on September 4, 2008.  Purvin and Board Member and attorney, Michael Webster, gave detailed reports about the AAFD’s efforts to investigate franchisee complaints against Cuppy’s. 

 

Michael Webster reported that there was evidence of Cuppy’s violating state franchise laws, and engaging in practices which materially increased the risk of default on SBA approved loans to the franchisees.

 

Purvin reported that all listings of Cuppy’s Coffee have been removed from the AAFD Website, and Purvin also reported that it appears Cuppy’s has complied with the AAFD instruction to remove all references to the AAFD from its Website and all franchise marketing literature, in print and on the Internet.

 

Purvin and the AAFD Board continue to believe in the value of AAFD Accredited contracts.  “We intend to continue to recognize companies that offer franchise agreements that comply with the AAFD Standards, but our experience with Cuppy’s demonstrates that the AAFD must clearly educate investors that a fair contract is only one factor in choosing a franchise, and the AAFD will also attempt to do more to assure that Accredited Contract recipients honor their contracts.”

 

The AAFD offers two forms of accreditation.  The AAFD’s Fair Franchising Seal is awarded to mature companies with an established track record of collaborative franchisor-franchisee relationships, high franchisee satisfaction, and a franchise agreement that respects the AAFD’s Standards. 

 

On the other hand, the AAFD Accredited Contract recognition is available to companies as a first step to gain full accreditation. 

 

For both awards, the AAFD disclaims that AAFD Accreditation is a full endorsement of a franchise system’s profitability or business model.  The AAFD encourages individuals to perform their own pre-purchase investigation and where possible to contact the franchisor’s independent franchisee association for more details on the business model.

 

The American Association of Franchisees and Dealers is a national non-profit trade association dedicated to promoting its vision of Total Quality Franchising through the support of strong and effective franchisee associations and collaborative franchising practices.  The AAFD currently supports some 60 franchisee groups representing more than 50,000 franchised units.  The AAFD seeks to support a trademark specific chapter or independent franchisee association for every franchise system operating within North America.

 

For more information , please visit www.AAFD.org.

 

 

If you’re looking to purchase a food franchise opportunity, then there are a few things you need to know. In this article I will discuss how to analyze food franchises to determine if they are worth the franchise fee you must pay in order to get them. Specifically we will talk about determining if they have a workable profit model, if the marketplace is saturated or not, and analyzing the food franchise agreement. After reading this article, you should have a good understanding of what a profitable food franchise looks like.

Food franchises are a dime a dozen. But finding one with a profitable business model, that’s another story. The most important thing when choosing a food franchise is to determine whether or not it is a good investment. The most important thing to look at is the demographics of the food franchise compared to the location. Just because a food franchise has a working system, doesn’t mean the system will work in your location. You must locate a food franchise that coincides with the proper demographics for your area.

Even then, it doesn’t mean you will be profitable. Sometime food franchises that are wildly successful, quickly saturate the market. This means they eat up all the demand. If there is no demand for your franchise, and you will not make any profit. Besides saturation from other food franchises, you must also analyze your competition. Is there room for you to enter into the marketplace and gain a share of the market? You need to do the research to find out.

In regards to franchising in general, you should always be more apt to choose a franchise based on the statistics and not what your emotions are telling you. There are many times when a franchisee will get caught up in one industry solely because he or she likes that industry. For example, let’s say a franchisee really had an interest in ice cream. This particular franchisee lives in New Jersey and decided they were going to open an Ice Cream franchise. According to market research, all the statistics for this particular franchisee were negative, but the franchisee decides to start the business anyways. What do you think will happen to this business? Chances are it will be out of business within the first two years.

Finally, everything hinges on the food franchise agreement. The franchise agreement will cover everything from what products and services you’re allowed to sell, locations you’re allowed to use, all the way down to the signage and franchise name rights you have. Franchise agreements need to protect your rights, and not just the franchise itself. Before entering into agreement to purchase a food franchise, consult a franchise lawyer first to look over the agreement to make sure you’re getting a fair shake.

In conclusion, a food franchise can be successful if it is located in the proper area, if there is a demand in the marketplace for it, and if you enter into a reasonable franchise agreement. Follow this advice, and you’ll purchase the right food franchise opportunity.