Nationwide Franchise Assistance for Hotel Owners
Franchise feeds growing number of consulting firms
Special Report: Legal & Consulting Services
By Martin Desmarais
IndUS Business Journal
Reports show that the franchise industry is growing at a healthy rate and becoming an increasingly better option for many individuals looking to invest their money in a self-owned business, as well as continuing to provide more and more jobs in the overall U.S. economy. As its piece of the economic piece increases, so too does the attention from the outside sectors looking to offer consulting services to thriving franchise businesses. The legal industry is one sector that has had a long-standing tie to the franchise industry and, as the industry grows, increasing numbers of attorneys and law firms are specializing in franchising and finding a plentiful and lucrative business in doing so.
Don Culp, an attorney with the Kansas City-based law firm of Blackwell Sanders Peper Martin LLP, has worked with the franchises for over 20 years and says that currently the legal community/franchise industry relationships is at a high point and many law firms see franchise legal services as a necessity. “Everybody today is doing business with franchises,” he said.
Blackwell Sanders, which has 330 lawyers in over half-a-dozen U.S. offices and one in London, focuses its franchise practice on the design, implementation, financing and maintenance of franchise systems. Franchise legal services encompass a number of traditional law practice areas, including intellectual property, labor and employment, litigation, real estate, securities, mergers and acquisitions, as well as tax and antitrust law.
As Culp describes it, a lawyer’s relationship with a franchisor is ongoing and covers the business from start to finish: starting from structuring a franchise business concept to implementing a franchise program to terminating a franchise agreement.
Other specific services include: designing and preparing franchise documents, franchise and area development agreements, master franchise agreements and cooperative advertising agreements; preparing the Uniform Franchise Offering Circular in compliance with Federal Trade Commission rules; designing and managing regulatory compliance programs, including state franchise registrations and renewals; assisting clients with relationship issues, including mediation, arbitration and litigation; conducting compliance audits; conducting due diligence investigations of franchise systems in connection with acquisitions; representing clients in the acquisition or sale of franchise systems and franchise unit operations; assisting clients in raising expansion capital through public and private equity and debt offerings; advising clients of recent developments in franchise law and antitrust, tax and intellectual property issues; advising clients involved in international distribution on matters including trademark licensing, foreign tax issues, joint ventures, master franchising and distributor terminations.
Culp emphasizes that regulatory compliance support is crucial part of what law firms provide to franchisors. “Franchising is unique from the regulatory compliance aspect,” he said. “Franchisors need a lawyer and a franchise specialist –someone who specializes in franchise law.”
As part of the franchise experience that Culp brings to Blackwell Sanders, he spent 10 years working as an in-house counsel for a franchisor. Overall, he has worked with numerous franchise companies, including Applebee’s International Inc., H&R Block Inc., Quaker Steak & Lube Franchising Corp., Sheridan’s Franchise Systems Inc., The Cheezteak Co. and Whiskey Creek Franchise Systems LLC.
Typically, franchisees seek legal services when they feel they are not getting the support they should from franchisors and for mediation, arbitration or litigation, Culp said. However, he added that others seek out attorney help when doing due diligence before joining a franchise chain.
According to Culp, law firms work with franchisors or franchisees because both have a need for legal services. He said that firms do often focus more on one than the other, but some work with both, as long as there is not a conflict of interest. In fact, he said working with both can be good because lawyers get to see both sides of the coin. Blackwell Sanders works with both franchisors and franchisees.
“Working with both makes it easier to represent the other,” Culp said.” It is beneficial to your representation of a franchisor to know some of the issues a franchisee has.”
Culp does not draw a line between the two and relishes his involvement on both sides. “You get to see your clients achieve the American dream and see franchisees achieve the American dream,” he said.
Mediation demand on the rise.
The legal industry’s importance to the franchise industry has even spawned other consulting firms offering related services.
One such company is the Randolph, N.J.-based Hospitality Solutions LLC, which provides franchise agreement support, termination/liquidated damage claim negotiation assistance, mediation and litigation support.
The company started four years ago by long-time hotel industry veteran Steven J. Belmonte. Belmonte is president and chief executive officer of the Lexington hotel brand, former president and CEO of Ramada Franchise Systems, as well as former chairman of the American Hotel & Lodging Association’s Educational Foundation.
With Belmonte at the helm, Hospitality Solution’s main emphasis is on helping franchise hotel owners negotiate the termination of license agreements. This is a crucial matter as most terminations have associated liquidated damages that can total anywhere from $2,000-a-room to $5,000-a-room. Due to the serious cash penalties at stake hotel owners have long turned to lawyers for help, but Belmonte’s belief is that his company can provide mediation services first and help avoid even more costly litigation.
As Belmonte explains it, Hospitality Solutions offers its clients a $4,500 one-time fee for mediation services-at least a quarter of what a law firm might charge for a monthly retainer fee- and will approach franchisors on the grounds of settling a termination and liquidated damages dispute without litigation, saving all parties expensive legal fees.
According to Belmonte, his hospitality experience and familiarity with many brands in the hotel industry is what makes this possible. “I understand what both the franchisor and the franchisee are trying to accomplish,” he said.
“We can go right to the franchise company and we start to negotiate the fee down,” he added. “A lawyer needs to take time and money to learn about the franchise.”
Belmonte believes Hospitality Solutions offers is so appealing because at the end of the day, neither the franchisor nor franchisee wants to go to litigation. “Typically, once you have attorney on attorney it is tense, it is drawn out,” he said. “We are not attorneys. That is not the way we operate.”
“It is not necessarily a legal issue. It is a negotiating issue,” he added. “All the client wants is to get the number down as far as possible so they can pay their damages and move on with their lives.”
According to Belmonte, even if a hotel owner could guarantee a litigation victory and reduced damages the cost of legal proceedings, mediation might still be viewed as a better option. “Even though at the end you win, you spend a lot of money to get there,” he said.
Belmonte said that his mediation approach has been well received, particularly by franchisees. “We have done many, many cases and have a lot of happy clients,” he added.
The franchisors have taken longer to jump onboard with Hospitality Solutions a pproach, but Belmonte said they are coming around.
“It took them a year before they got it,” he said. “Their immediate reaction was to put up a wall.”
However, he believes the mediation process really does sell itself because it is fast, fair, keeps franchisors from burning bridges with franchisees and eliminates litigation. "Once they get it they understand the value of the service,” Belmonte said. “Then they love working with us.”
“All I’m saying is, ‘Hey, let’s find some common ground so everyone can find some good success and move on,” he added.
Franchisees seek accounting options
The Tacoma, Wash.-based TADAccounting Inc. has found another way to tap into consulting services for the franchise industry-through its Web-based accounting services.
Started in 1996, the company was on the cutting edge of the outsourced accounting industry, choosing to focus on a model that utilized the Internet.
Six years ago, TADAccounting began to offer services specifically for the franchise industry. “The franchise industry works absolutely wonderfully with an outsourced accounting mode,” said Scott west, chief operating officer of TADAccounting.
The company provides complete outsourced bookkeeping services to franchise owners and managers using procedures developed to address the daily operations of individual stores and reporting requirements of corporate management. TADAccounting’s system provides direct Web-based interface between the franchise back office system, accounting software and its accounting services staff. The system allows franchise access to up-to-date financial information, lets them print checks and run reports from any Internet connection. Services include: accounts payable, general accounting, daily sales and cash receipts, cash management, inventory, financial reporting, quarterly tax filing and payroll.
Franchise owners scan in relevant information and then TADAccounting’s accountants can access it remotely.
“Most transactions now are all electronic,” said West. “We can access all [a franchises’] banking information and reconcile on a daily basis.”
“The franchise guy all he has to do is get a scanner, put in the office or franchise location and, at the end of the day, upload all the bills that he has and we do all the rest,” he added.
It is a viable and much cheaper option than having an in-house accountant who has to constantly visit numerous franchise locations, according to West.
He said TADAccounting’s outsourced accounting model also works so well in the franchise industry because the different locations are all uniform and run the same way. This way, TADAccounting’s accountants only have to learn the system once than can easily apply it to other locations.
The company has over 20 franchise clients and has worked with brands such as Burger King, Blockbuster, Krispy Kreme and Quiznos. Fees can range from $350 a month for a single location to $7,000 a month for a 20-store chain.So far, West said that most of his company’s clients have been franchisees with a portfolio of locations, but TADAccounting is working to get in on the franchisor level.
According to him, dealing with the franchisors has been slow going because they have not considered an outsourced accounting model and there is a lot of compliance to make sure everything fits into the defined franchise system. However, he believes such a service will become a necessity.
“With businesses needing to cut back-and they will-this is the perfect place to go because they save money and it doesn’t hurt their business any,” he said.
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