Arleen Goodman Oversight Hearing

One thing I continue to be amazed about is the number of franchisees who simply sign on the dotted line without ever reading the contract, without ever consulting an attorney, or studying other materials before making a choice to buy the franchise. No amount of legislation will ever protect, or make successes, out of those individuals.

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U.S.A. House of Representatives
June 24, 1999

Oversight Hearing on the Franchising Relationship
Arleen Goodman, franchisee

United States of America
House of Representatives
Subcommittee on Commercial and Administrative Law

ARLEEN GOODMAN

Mr. Chairman and members of the Subcommittee, good morning. My name is Arleen Goodman, I am from Nashville Tennessee, and I am here today as a representative of the International Franchise Association (IFA).

I have spent the last 24 years in franchising. By all accounts, I would be labeled as successful. My career began as a part time employee, ascending to manager and ultimately owner of a franchise of KOA (Kampgrounds of America). I am proud to say that I came the first woman in 30 years to be elected President of the National KOA Owners Association and I am deeply interested in protecting franchising for the benefit of others who spend their days, and many times their evenings, working their own American Dreams.

KOA is one of the oldest franchising companies in the nation and currently has approximately 1000 franchisees. Many best practices in franchising have come from our system. Our franchisor was one of the first to actually form an owners association, then turn it over to its franchisees. Even though my campground ultimately had 150,000 visitors yearly, and was much larger than the typical campground, we are traditionally mom and pop small businesses.

Before I chose to become actively involved with my owners association, I needed a wakeup call. It came in the form of a divisive group circulating a rumor that they were putting together a fund to sue our franchisor for $50 million dollars. As a long time franchisee of the system, it became all too evident that if this group was warranted in their accusations, and a suit took place, not only would my franchisor possibly not be able to withstand such a judgement, but should the franchisor become worthless, so would my franchise. Not willing to sit on the sidelines, I chose an active role and served as one of a four-member team that mediated out our differences. To my knowledge, the programs we put in place are continuing to actively serve our franchise system well. As of today, channels of communication between the franchisor and its franchisees remain open.

During my tenure as president of the national KOA association, the state of Iowa took a giant leap toward legislating franchise agreements. Our KOA franchise system was one of the first to notify the governor of Iowa that we would no longer franchise in that state because of its actions. The welcome mat for franchising businesses had decidedly been removed. As president, I had no answer for the anguished face of a franchisee that pleaded with me as association president, "What are we going to do now?
We've worked our whole lives, this is our retirement, and now KOA is not going to renew our franchise agreement." It became increasingly evident that franchisees needed information, as well as representation, about national issues. Iowa was only a state, but the nation was watching.

While searching, I found no major national association representing the interests of franchisees. No where to go for a perspective from this side of the contract. As a result, the KOA Owners Association became one of the founding members of the American Franchisee Association. We soon sought other information sources because that association became a home to franchisees predominately in very troubled systems. The interests of KOA owners, or in my opinion, those in other good systems, would not share an equal voice at the table of AFA.

At the time, the International Franchise Association had no provision for franchisee inclusion. But, within the year that opportunity became available for the first time. For the organization to have the desired meaningful voice of franchising, both parties had to have a place at any table of discussion. Our KOA owners' board embraced the invitation to join, and we became a founding member of the IFA Franchisee Advisory Council. Our decision rested solely upon this: No other group offered the possibility for franchisor and franchisee alike to sit together. No longer was it them and us. It became "we".

Now, five years later, I have joined the ranks of other franchisees recognized as leaders, and have been elected to the Board of Directors with the IFA. Importantly, Steve Seigel, one of my co-founders in the American Franchisee Association, who also became a founding member of the IFA's Franchisee Advisory Council, has been tapped into Board leadership and will become the first franchisee Chairman of IFA in three years.

I would be remiss in my remarks if I did not acknowledge the great strides of IFA in keeping its finger on the pulse on the evolving nature of franchising. Not only did IFA recognize the necessary inclusion of franchisees as part of its leadership structure; IFA has now begun to mirror what it expects its membership to reflect in the future. For the first time in its 39-year history, IFA has its first Chairman of color, Mr. Ronald Harrison, Vice President of Corporate Community Affairs at PepsiCo. No longer is franchising or IFA the white male dominated industry that some would have us believe. As a woman I am further proud to say that in the year 2000, JoAnne Shaw, President of Coffee Beanery Ltd. will succeed Mr. Harrison becoming the IFA's first woman Chairperson.

IFA is also proud to have an Emerging Markets Group, which is solely responsible for increasing the number of minority and women franchisors, franchisees and suppliers. These national programs are designed to develop mechanisms to increase the number of minority and female franchise owners by linking interested entrepreneurs with companies that are committed to supporting diversity. A series of Franchise Trade Delegations and Regional Educational Conferences to be held throughout the country will provide the forum for advancing these objectives.

Delegations have already been held in St. Louis, MO; Richmond, VA; Miami,FL; Washington, D.C. and Charlotte, NC.

In April of this year, the IFA signed a Memorandum of Understanding with the U.S. Small Business Administration. This agreement commits both organizations to encourage lending institutions to provide capital for creditworthy existing and prospective franchise owners in economically distressed areas. Goals outlined in this agreement are to increase the number and dollar volume of SBA guaranteed loans to franchisees in under-served markets, increase opportunities for eligible entrepreneurs, strengthen local economic and social infrastructures, and support sustainable economic growth.

As a member of the Women's Franchise Committee, I fully support IFA's Emerging Markets programs.

In 1995, I was selected to chair the Tennessee Delegation of 50 delegates to the White House Conference on Small Business. Some of my most vivid memories are about a session I attended there on franchising. The room was packed to capacity, because as delegates, we were being asked to carefully consider the top 60 issues facing small business. It was my opinion then, and my opinion now, that to send 60 issues to Congress for action was close to asking for the impossible.

Nevertheless, this was our charge. I vividly recall the room packed to the doors, standing room only because it was getting late and adjournment was near. I listened to what in my opinion was a stacked presentation on why relationship problems in franchising deserved government intervention. I was bold enough to suggest from the back of the room where I'd found a place to stand that more government is not always the answer, nor the best resolution. As I attempted to offer that there were many good systems, which needed to be taken into account in this discussion, I was literally booed into silence. While I had great compassion for the stories I heard in that room, there was no willingness to seek alternative answers. Obviously for my words to be interrupted, there was not even a willingness to consider alternatives. Many times we seem to be a nation bent on big brother solving a problem that may have not yet tried something simpler.

As an independent business owner, I know first hand the impact of additional government regulation, which may be designed to help, but which may result in additional hardships for small businessmen and women. As a small businesswoman and as leader of KOA's 1000 independent owners, I've seen the negative impact of federal regulation and the positive results of an open relationship between franchisors and franchisees.

As a leader within my state, I have spoken with others in systems with critical problems because communication wasn't there. And, I have seen the faces of those who have been given notice that they will no longer be allowed to operate a franchise because the state restrictions have choked off the air supply for the franchisor. I have listened to the voices on both sides of a discussion who have said this just isn't worth it anymore.

I urge you to use caution with this delicate balance as you proceed. Franchise relationships are just that. We are the nation's largest system of small businesses. Without a successful franchisor, there will be no successful franchisees. And without the success of the franchisee, there will be no successful franchise system. Our success is interwoven and relies in large part on open and frank communication between franchisors and franchisees. Thanks to modern technology, that kind of immediate and complete communication is now only an email or a phone call away. Good franchise systems prosper and grow because they seek out and listen to the opinions of their business partners - their franchisees. Unsuccessful franchise systems are just as likely to fail because of their failure to involve and rely on their franchisees for constructive criticism about how to operate the business.

I hope that at some point in the future, no potential franchisee would consider buying a franchise from a company that does not adhere to a Code of Ethics for fair conduct. There are many franchise companies from which to choose, and prospective franchisees should be diligent in investigating those many opportunities prior to making an investment in a franchise. In our system of free enterprise, I believe that the marketplace will ensure that the handful of franchise companies with less than scrupulous business practices will not survive the scrutiny of serious investors. That is why I believe that disclosure protection laws, rather than relationship laws, provide the greatest benefit to prospective franchise investors.

In preparing for what I might share with you today, I took advantage of the open and strong communication lines within the KOA system. I called the President of the company, and we chatted about the legislation in general, and specifically some of the reasons state legislatures and Congress have been asked to consider getting involved in contractual matters.

I'd like to share some of our conversation with you. KOA has always shared earnings information with prospective franchisees during the disclosure process. However, because the size of campgrounds varies significantly, so do the revenue figures for those campgrounds (depending upon size and location). And ultimately, a franchisee's earnings will depend largely upon the hard work and business acumen of the owner. But even a government mandate requiring disclosure of earnings claims, while well-intentioned, would lead to unreasonable reliance on that information by prospective franchisees and create a disincentive to conduct a thorough evaluation of the investment. In the end, government regulation of any sort is no substitute for hard work, thorough investigation and a realistic appraisal of the investment (whether or not it is a franchise).

Secondly, KOA has for many years provided territorial protection for its franchisees. That is something that works for KOA, but that may not work for other franchise systems. I don't believe that we should ask the federal government to make business decisions about these kinds of issue, which relate to the particular industry and do not lend themselves to a uniform approach like federal legislation. While we see this kind of provision as a benefit to the system, it may not work in other systems. We shouldn't ask the federal government to unilaterally make those kinds of decisions.

We as a system feel there is an implied good faith and fair dealing when each party signs the contract. We also believe there are laws upon the books presently that can address problems that arise. We don't feel we need more laws. We simply need to enforce the ones on the books now. While some may claim an unwillingness, or inability to deal with them, laws exist. Fraud and mismanagement have no place in franchising; any more so than any other business contract.

Do we think additional federal franchise laws will harm our franchise system? Absolutely, especially if reliance on legislative remedies takes the place of communication within systems. And our system is a good example of an old company, which has survived because of leadership from both sides of the contract. Most importantly because we insist upon strong lines of communication. Any potential law which would hamper our ability to continue to do so, or any law which would suggest it is a respectable replacement for good franchise communications and practices would not be beneficial.

One thing I continue to be amazed about is the number of franchisees who simply sign on the dotted line without ever reading the contract, without ever consulting an attorney, or studying other materials before making a choice to buy the franchise. No amount of legislation will ever protect, or make successes, out of those individuals.

There are many of us who have an opinion about franchising, and I believe that my positive outlook is shared by the majority of those who have been involved with franchising. Unfortunately it is often the tragedy that makes headlines, while the success stories go largely unnoticed. I recognize that there are stories and examples of franchisees who have not been successful in their business ventures. In that regard, franchising is like any other enterprise - there are successes and there are failures, and there are no guarantees. But as I said before, the federal government cannot legislate a remedy to ensure that an investor makes a sound business decision. I believe that additional government regulation of franchise relationships would be a disaster for the largest segment of the small business community - franchising.

There are great opportunities in franchising, for women and minority entrepreneurs in particular. Franchising has provided an outlet for the creative energies of an entire generation of entrepreneurs. Safeguarding franchising will preserve this opportunity for the next generation of businessmen and women who want to be in business for themselves, but not by themselves.

As one who firmly believes that franchisors and franchisees must continue to work together to make franchising a successful enterprise, I want to thank you for inviting me here this morning.

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