House bill aims to ‘level the playing field’ for franchisees

HB 1215 would allow franchisees to set their own hours and their own prices and refuse to sell unprofitable items


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Noel Cassiano, owner of the Sears Hometown Store franchise in Plymouth – penalized after it remained closed on Thanksgiving Day – didn’t hesitate. He said he would travel to Concord to testify in favor of a so-called Franchisee Bill of Rights.

“I want to be given an opportunity to be more of a voice in the company, not just an echo,” he said.

But Cort Mendez, owner of the New Hampshire Five Guys franchise rights, which has or is opening about 10 stores over five years, is not so sure. Yes, the requirement that he puts in silestone rather than Formica counters is costly, and yes, he once was forced to open on Easter, and yes, there could be better promotion.

“But it’s their company,” he said. “They are the ones that started it, and they’ve been good to me.”

Franchising has become a huge industry in the United States. Nationwide, it accounts for 14 percent of private sector employment. According to the International Franchise Association, which mainly represents franchisors, there are some 3,700 franchise businesses employing 39,000 people in New Hampshire.

Though regulated in Washington by the Federal Trade Commission, increasing tensions between franchisors and franchisees has led to the formation of the Coalition of Franchisee Associations, which has been pushing franchise fairness legislation in state capitals around the country, including in Concord, where House Bill 1215 was introduced earlier this month.

The bill’s stated purpose: “To protect franchisees against unfair treatment by franchisors, who inherently have superior economic power and superior bargaining power in the negotiation of the terms and conditions of the franchise relationship.”

Or, as bill sponsor Rep. Patrick Abrami, R-Stratham, put it: “The intent of this legislation is to level the playing field between franchisors and franchisees.”

‘Blood, sweat and tears’

HB 1215 would allow franchisees to set their own hours and their own prices and refuse to sell unprofitable items. It would require franchisors to be transparent in their financial dealings with the owners, to not set up another franchise nearby that would hurt a franchisee’s business, and to not ask for upgrades beyond those called for in the original agreement.

Perhaps most importantly to the supporters, it would prevent franchisors from refusing to renew a franchise (or allow it to be transferred) without good cause -- and that good cause wouldn’t include joining a trade organization or speaking out against their franchisor.

“You spend 30 years building a business that you want to turn over to your kids and the franchisor has the right to say no without a good reason,” said Edwin Shanahan, executive director of Dunkin’ Donuts Independent Franchise Owners, a coalition member based in Massachusetts. “It’s just not right that they can arbitrarily take away what was earned with your blood, sweat and tears.”

According to the International Franchise Association, there are some 3,700 franchises businesses employing 39,000 people in New Hampshire

Indeed, Representative Abrami said he attends to offer an amended version of the measure that would only include termination, transfer and renewal and freedom of association provisions so that the bill would have a better chance of passage in light of the strong opposition from the International Franchise Association, which especially objects to the provision that would allow franchisees to run the business the way they want.

“The bill puts itself in the middle of private contracts freely entered into and highly regulated by the FTC,” said IFA spokesman Matt Haller. The bill, he said, would allow weaker franchisees to drag down standards, hurting the brand for those that upheld them, as well as discouraging franchisors from expanding in the state.

“Franchises will go away in the state,” Haller warned. “It will either be corporate stores or no stores.”

The bill follows on the heels of Senate Bill 126, the Auto Dealer Bill of Rights, which became law last year despite an aggressive lobbying and advertising campaign by car manufacturers. For that, the big issue was costly upgrades that were already in the contracts.

But everyone agrees the franchisee bill will have a much tougher time than SB 126, which was strongly backed by the New Hampshire Automobile Dealers Association and featured testimony of many dealers who are major economic players in many communities.

HB 1215 has no similar local organizational champion. Most state trade organizations have not taken a position, including the New Hampshire Lodging and Restaurant Association, which represents both franchisors and franchisees.

“This is not a local grassroots bill,” said Henry Veilleux, a lobbyist for NHLRA. “None of our members have asked us to get involved in it.”

And many individual franchisees say they are afraid to speak out.

HB 1215 also deals with a much more diverse industry, ranging from fast-food restaurants to posh hotels, from hair salons to handymen, from real estate agencies to fitness centers. That would mean any regulation would be either more complex or more limited.

Finally, HB 1215 primarily deals with a different kind a franchise, a business format franchise, compared with an auto dealer, which is a product distribution franchise, points out Haller. In the latter, the product comes from the franchisor so that a “few automobile manufacturers wield enormous power over the dealers,” he said.

In New Hampshire, most franchises (3,470 out of 3,708) are business format.

In a business format, the franchisor provides business model, trademark, startup assistance, training, marketing and site selection assistance, while the franchise builds the unit and pays a franchise fee. There is usually a close relationship over the length of the contract.

Haller referred New Hampshire Business Review to Franchise Business Review, a franchise services company based in Portsmouth (and with no connection to NHBR), whose survey generally showed that franchisees like their setup.

In the latest FBR survey of some 25,000 franchise owners representing 360 brands, four-fifths of respondents said they respected their franchisor and three-quarters said they trust them. In a New Hampshire-specific survey of 97 businesses over 56 different brands, the satisfaction rate was even higher: 85 percent respect their franchisor and 80 percent trust them.

Also according to the survey, nearly a quarter of franchisees nationally said they think franchisors’ marketing programs aren’t so great and about a fifth feel the same about franchisors’ use of technology, communication and their current financial condition. Some 17 percent said they didn’t think their fees are fair.

According to Eric Stites, FBR’s CEO, that discontent rose with the recession, and was stronger among those with older franchises. Still, Stites emphasized the positive.

“The vast majority are satisfied and happy,” he said. “It’s just a very small group of vocal franchisees” who are pushing the bill of rights legislation. He noted they are often those who hold multiple franchises.

“It tends to be the lower-performing operators that have these kind of issues” he said, adding that the legislation “would weaken franchisors to get rid of these bad apples. The operators who are doing a good job don’t want to see it diluted. There is a reason a 7-11 is open 24 hours. That’s what a franchise is all about -- standards. If you don’t like that, don’t go into franchising.”

Standardization: pros and cons

Udo Schlentrich, director of the Rosenberg International Franchise Center at the Paul College of Business and Economics at the University of New Hampshire, also said he opposes the legislation, though he seemed a bit more sympathetic to franchisees, comparing the franchise relationship to a marriage with “positive and negatives on both sides.”

Yes, standardization “is like a straitjacket, but that jacket is also your livelihood because that is what the consumer buys.”

There are gray areas in contracts and problems can occur when corporate management changes, ignores, or tries to take advantage of franchisees.

Look at what happened with Dunkin’ Donuts after founder William Rosenberg (whose funds financed the startup of the UNH center) sold it to a private equity partnership, which included Bain Capital.

“It became more bottom line-driven, and they squeezed the franchise like a sponge at the expense of the franchisee in order to flip the company,” Schlentrich said. “Now it’s in public ownership, and there is a much longer prospective.”

It was a Dunkin’ Donuts franchisee who approached Abrami to introduce the legislation. The franchise owner, however, asked not to be named because he feared retaliation.

“Dunkin’ was the most litigious franchise several years ago,” he said, and several of those leaders were now at the IFA. “I’m afraid of payback.”

The franchisee referred to a series of articles that pointed to more than 300 lawsuits against franchisees, many settled by franchise owners who could not afford to challenge them. Lawyers for the franchisees charged that the corporation was “scaring them into submission.”

Shanahan, of the Dunkin’ Donuts franchise owners group, said things have improved much since then, but that doesn’t mean they can’t change again. And, he said, there are other franchises – he named Quiznos and Cold Stone Creamery – that “have horrific problems.”

Shanahan also defends the right of franchisees to set their own hours. A franchisee up in the rural North Country may not have enough customers or employees to stay open 24 hours and there are legitimate safety concerns in more urban areas.

“For a franchisor to dictate hours … that’s a little bit beyond the pale,” Shanahan said.

The trouble faced by the Plymouth Sears Hometown Store is a well-publicized example of the struggle over hours. When franchise owners Noel and Holly Cassiano said they would refuse to open on Thanksgiving so that their employees could enjoy the day with their families, they were penalized by Sears. It cost the store a bonus that would have been between $1,800 and $4,000, Noel Cassiano said. That may not seem like much, “but it meant that a week’s payroll had to come out of our pocket,” he said, adding: “The sad part is that rather than protect the franchisee, they treat you like you are pretty much slaves.”

Sears offered to renew his contract earlier this month and the Cassianos accepted the offer despite his wife’s qualms, said Cassiano.

“It once was a lucrative business, and I can see a light at the end of the tunnel,” he said.

Still, the family will continue to speak out.

“I hope to encourage other owners to have a little more spine,” he said. “I have a voice. I am a man. America is a free country where I can express what I feel.”


 

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