Lawrence Cohen Oversight Hearing

Franchising has made it possible for millions of people to achieve their ""American Dream.""…Do we need further regulation or legislation to change it?…I think not.

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

Oversight Hearing on the Franchising Relationship
Lawrence ""Doc"" Cohen

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

LAWRENCE "DOC" COHEN

Good morning, Mr. Chairman and members of the Committee.

I began my career in franchising 20 years ago when I became one of the earliest victims of "corporate downsizing." Of course, in 1978 we just called it "getting fired."

Through pure chance, I saw a store in a shopping mall in Atlanta, Ga. selling chocolate chip cookies. There were lines of people queued up to buy the cookies and I thought that I might like to get in on what appeared to be the proverbial "Gold Mine."

This was a very new business concept and it was difficult to obtain much information about the success of cookie stores since, outside of California, there were very few of them in existence. However, as a resident of California at the time, I set out to visit as many of those locations as I could find and finally decided to pursue obtaining a franchise from the Great American Cookie Co.

For someone who was accustomed to receiving a paycheck every week from a corporate payroll department, this was a very scary decision. Do you know how many 29-cent cookies you have to sell to pay the rent in one of those regional malls?

Undaunted by the fear of that question, and by the way, without having the answer to it, I pushed forward with my quest to become a franchisee and with the pursuit of my American dream of owning my own business. I never thought about investigating franchising to see if it was a legitimate means of doing business. In those days, there was no FTC Franchise Rule, no federal requirement of pre-sale disclosure by franchise companies to prospective investors. But I pushed forward just the same.

Great American Cookie Co. agreed to sell me a franchise and promised me that I could have the entire state of California. Fortunately, they never asked to see my financial statement or I would most likely not be sitting here today. I didn't have a dime to my name. I spent the next 3 months looking for a location for my first store and finally obtained one in a new mall being built in Mission Viejo, about 20 minutes from my home. I was elated, and boarded the first plane I could get to Atlanta to sign my franchise agreement. My life was about to change, but not in the way that I had planned. The franchisor informed me that they had just realized that California DID have a disclosure law and that they had not registered in the State. Therefore, they could not sell me the franchise for a store in California. This is how I was introduced to the world of franchising.

This was a traumatic experience, but I was not willing to give up my dream. As things turned out, I bought a franchise to open a store in a new mall in Lafayette, Louisiana and moved there to build and operate the business. Huntington Beach, Ca. to Lafayette, La. - talk about your culture shock. But Lafayette was good to me. I loved the city, I loved Louisiana, I loved the people and they loved my cookies. The rest is history. I went on to open 35 units of Great American Cookie stores, earning gross sales beyond my expectations and creating 300 new jobs along the way.

In the process, I learned a great deal about franchising. Franchising is not an industry - it is a means of distribution, one of many ways of doing business. It involves an agreement between two parties who contract to do business together. That contract sets out the various obligations and responsibilities of each party. It states that the franchisor will provide certain services and that the franchisee will live up to certain requirements that are designed to protect the franchisor's brand, products, reputation and the franchise system itself. It does not guarantee that either party will make a profit from the relationship.

My attorney told me that the agreement I was being asked to sign was extremely one-sided and that he could not advise me to sign it because the contract gave the franchisor too much control. I think the word my attorney used to describe the document was "onerous." I read the agreement. I had the benefit of legal counsel. I understood the agreement and my obligations. No one forced me to sign that contract. I could have walked away, but I decided to go forward - my dream was not going to be denied.

My first store was very successful and 8 months later I opened my second unit, which was also a winner. Within a year, I opened unit number 3. This one nearly put me into bankruptcy. It was then that I learned the meaning of the word "onerous." There was little I could do to get out of the losing store. The contract was "iron clad" and could not be broken without risking the loss of my two profitable stores. But I knew then, just as I know now, that the true essence of a franchise agreement is that of a partnership, a kind of marriage where the parties need to rely on each other and to help each other.

I went to my franchisor and told them of my situation. I asked for their help and they agreed to help me. Together, we went to the landlord and worked out an abatement of rent. The franchisor reduced and deferred my fees and I was eventually able to turn that store around. Today, it is one of the best stores in the group.

This was an important lesson for me, because it was the first time that I really understood the real nature of the franchise relationship. In the years that followed, the Great American system grew rapidly. As more franchisees came into the system, we began to have more issues arise between us and our franchisor. There were times when the relationship bordered on adversarial, but we continued to work within our system to identify and solve the problems that we had.

In 1985 we established a Franchisee Advisory Council to work with management to address issues, and while it was not easy, we were able to accomplish changes in our system that made the system better. Many of these were serious issues that dealt with provisions of our contract, but by continuing to communicate, we were able to solve most of the problems that we encountered.

In 1996, Great American Cookie Co. made a decision to allow representatives of our franchisee association work with them to rewrite our franchise contract. We spent a year on the project and ended up with a document which was much more practical and which adequately protected the rights of all parties. We did all of this without the need to use the courts, without the need to file grievances with state or federal agencies, and without the need to seek government regulation.

Looking back, I see now that both the franchisor and franchisees were maturing, as our businesses grew. As a result of this growth and changes taking place, we encountered issues that could not have been anticipated at the beginning of our relationship. But the key to our success was mutual respect and cooperation, something that you really cannot legislate. Each franchise system, as it grows and changes, will encounter such issues, and the franchisor and franchisees must work together if they want to succeed.

I believe, and my experience confirms, that good people, who share common goals, can sit down together to work out differences that may seem to put the parties worlds apart.

I can think of no better example of this than a series of events that began, for me, on July 1, 1997. On that day, I woke up to what I thought would be my worst nightmare. I received a telephone call asking if I had heard a rumor that Great American Cookies was about to be purchased by Mrs. Fields Cookies - our chief competitor. I could not imagine a worse situation. Nineteen years of fighting with them for market share and locations. Nineteen years of effort to build the Great American chain into one of the great franchise systems in the world. Nineteen years of relationship building about to be destroyed.

But that nightmare turned into pleasant dreams. Management at Mrs. Fields worked with the leadership of our franchisee association and addressed our fears and concerns. We talked about our issues, about the pride we had in our brand and product, about overlapping markets, about support and marketing. We did not agree on every issue that we discussed, but we did agree on most. We were able to turn that agreement into a written document, and now, almost a year later, we are still very pleased to be a part of the Mrs. Fields System and the increased opportunities that the merger provided to our franchisees.

It is important to note that neither Mrs. Fields nor Great American Cookies had any contractual or legal obligation to talk to the franchisees about the merger of the two entities. Our franchise contract provided no rights to the franchisees in matters of the sale or merger of the franchisor. However, because the parties recognized the importance of the relationship, they were willing to address the concerns raised by the franchisees. This is the nature of franchising. Communication between the parties is essential to maintaining the relationship.

Six years ago, at the request of Great American Cookie Co., I became a member of the International Franchise Association (IFA). I was asked to serve on IFA's Franchisee Advisory Council (FAC) and represented that council on numerous IFA committees. I served on and became vice chair of the Franchise Relations Committee, served on and became vice chair of the Awards Committee. Last year I served as chair of the Franchisee Advisory Council and in that capacity became a voting member of IFA's Executive Committee and Board of Directors. Serving on the FAC has allowed me to meet leaders from many of the country's most recognized franchise systems including McDonald's, Burger King, Wendy's, Uniglobe Travel, Holiday Inn, Jani King, Dairy Queen, Mail Boxes, Etc., Kwik Kopy, Cendant, Tricon and others.

During my term as chair, I visited the annual conventions of 15 franchise companies and spoke to their franchisees. Working with so many people in so many systems and getting to know both franchisors and franchisees has convinced me that people can and do work together to improve their businesses.

I am convinced that the current federal and state laws that require pre-sale disclosure by a franchisor to a prospective franchisee are sufficient to enable people to make informed decisions before investing in a franchise. I do not believe that federal legislation is needed and would oppose any type of legislation, federal or state, that would attempt to regulate or interfere with the ability of private parties to enter into a contractual relationship. I have the benefit of legal counsel to advise me on those issues. It is important to recognize that each system is unique and that contracts must be written to reflect those differences. Maintaining system standards, brand integrity and the value of the franchisee's investment is critical. Each system must have a contract that protects those essential elements of a franchise. Attempts to prescribe by law what franchise contracts must contain, and what they cannot contain, would only undermine one of franchising's greatest strengths - which is its flexibility and adaptability to fit many different types of businesses.

I do believe that franchising works because hard working people establish bonds of trust and relationships that enable them to work together toward a common goal. Franchisees have as much responsibility to further that relationship as do franchisors. While franchisors bear most of the responsibility for supporting the system, I believe that franchisees have an obligation to contribute as well - to give something back - to assist the franchisor whenever possible to make the system better and more successful.

The marketplace is the final test for franchising, and for each franchise system. When I look around at the hundreds of thousands of businesses that have developed, grown and prospered, I can only conclude that it must be working pretty well, most of the time, if not all of the time. Good franchise systems succeed when they build excellent relationships with their customers, employees and franchisees. The marketplace rewards these franchise systems with more customers, more employees and more franchisees. Franchisors cannot succeed without successful franchisees, and a franchisee cannot succeed without a strong and successful franchisor. We need each other.

At Great American Cookies, I was a founder of our Franchisee Advisory Council, was a founder of our Independent Franchisee Association and acted as unofficial "ombudsman" for 19 years. During the last five years, I have helped other systems establish advisory councils or associations and have consulted with several systems on the issues of franchise relations. I believe that my experience qualifies me to make an informed judgment about the health of franchising. Franchising has made it possible for millions of people to achieve their "American Dream." Do we need further regulation or legislation to change it?

I think not.

Thank you for inviting me to make these remarks this morning.

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