Tensions between business owners, operators heighten as legislation divides camps

Susan Kezios, president of the AFA…said she’s been surprised by the support such legislation is gaining among “white, Republican males who tell me that this (franchising) is not free enterprise anymore; it’s like indentured servitude.”

Dallas Morning News
July 22, 1999

Tensions between business owners, operators heighten as legislation divides camps
John Kirkpatrick

Joe Katin is getting sick of gravy.

In the past few weeks, he’s spent too many frustrating hours arguing about gravy with the International House of Pancakes, he says.

The Plano businessman is not some dissatisfied diner. In the past 25 years, he has put together a string of 25 franchised IHOP restaurants, including several in the Dallas-Fort Worth area.

Trying to get IHOP’s corporate staff to reapprove a chicken-fried steak gravy he’s used for 20 years has been just one of a long series of maddening episodes with the California company, he says.

Real-life nightmares, Katin says, have included IHOP’s putting company-owned restaurants near his, sucking away revenue. And the company, he says, forces him to spend small fortunes remodeling his
restaurants every five years, while IHOP isn’t as tough on its own restaurants.

IHOP says it treats its franchisees fairly and works hard with them to “solve problems and create a more enjoyable experience for the customer.”

Different perspectives
The gravy dust-up is merely the latest entry in a growing catalogue of tensions between American franchising companies and their franchisees.

For people who yearn for some degree of independence and wealth, franchising has long been seen as the ticket. Having heard stories of early McDonald’s franchisees who now lounge aboard yachts, they hope to do the same.

But the companies and their franchise operators have increasingly found themselves at odds over the past decade. Disputes reach all corners of the industry.

Further inflaming relations are efforts in Congress to strengthen the hand of franchisees against franchise companies. A trade group representing franchise companies says such initiatives would wreck the industry. Many franchisees applaud the idea.

Critics of franchising companies cite a litany of complaints: that some franchising companies unethically terminate franchises when it benefits the company; that franchisees are financially punished or harassed when they complain, especially publicly; and that companies devastate a franchisee’s businesses by planting another franchise store nearby.

Among franchisees, “a lot of them have been burned badly,” said Ann Dugan, a franchising expert at the University of Pittsburgh. Still, the system works “if you have a knowledgeable franchisee and an ethical

More parity needed
The standard contracts that franchisees sign are too often inequitable, and “the franchisers need to build more parity in the contracts, to make it level,” she said.

Franchisees too often sign the contracts without understanding the implications, she added. “Many individuals spend more time analyzing the stock market than they spend analyzing a franchise they’re going to put $200,000 into.”

Even when armed with knowledge, aspiring entrepreneurs can let emotions take over.

Tom Niesen had a lawyer check out the contract before he bought a franchise for sales-training centers in Texas. “The lawyer said, `This is a problem, and that’s a problem.’ And I said: `Too bad. I’m going to do it anyway.’”

As a former sales manager for a large company, Niesen knows that “we all buy things emotionally.”

He hasn’t gotten everything he expected from the franchising company and plans to renegotiate the contract when the time comes. But he’s not embittered. “You can ask me, and everyone has, ‘Would you do it over again?’ Yes, I would.”

Niesen took all his savings and the proceeds from his 401(k) plan to start his business, which he named Acuity Training Systems. Four years into the business, he has sales-training centers in Dallas, Fort Worth and Austin, Texas.

Financially, he said he’s doing well — yet not as well as he hoped. “The amount of money I’ve brought in has met my expectations. The amount I’ve spent to bring it in has not.”

Legislative wedge
Advocates for franchisees have grown in recent years. Among them is the American Franchisee Association, formed in 1993. Billing itself as “the franchisee’s watchdog,” the AFA has about 7,000 franchisees who own more than 15,000 outlets.

The group serves as something of a foil to the International Franchise Association, a powerful lobbying and trade group that limited its membership to franchising companies and no franchisees until a few years ago.

Illustrating the rivalry between the two are their differing positions on potential federal legislation that would further regulate the franchising industry.

Congressional attempts to rein in franchisers pop up with some regularity. The latest initiative is being led by a North Carolina Republican, Rep. Howard Coble, a member of the Judiciary Committee.

Coble believes that franchising has become a minefield, with franchisees at a distinct disadvantage in dealing with franchising companies.

With Republican and Democratic co-sponsors, Coble introduced the Small Business Franchise Act near the close of the 1998 legislative session. He plans to introduce a version of the bill this year, perhaps with some tweaking.

Coble’s chief of staff, Ed McDonald, said the congressman has been moved by constituents who are franchisees. “Over the years, the complaints that have come through our office have increased dramatically,” McDonald said.

The Small Business Franchise Act horrified some franchisers. The American Franchisee Association likes it. The International Franchise Association loathes it.

At the IFA’s headquarters in Washington, D.C., there’s a great distaste for many of the bill’s provisions. One deals with “encroachment” — the term used when a franchising company puts one of its outlets near an existing franchisee, either owning the new outlet itself or selling it to another franchisee.

The bill said franchising companies can’t open an outlet within an “unreasonable proximity” of another, under certain conditions.

“Nobody knows what’s unreasonable,’” said Matthew Shay, the IFA’s vice president and general counsel. “If there’s a Uniglobe travel agency in downtown Dallas that serves the anchor tenants in a building, is it unreasonable to have one nearby that doesn’t serve those clients?”

The bill also gives franchisees rights that often go beyond state laws and Federal Trade Commission rules.

Shay said the franchising industry would be wrecked by the bill, forcing companies to keep franchisees who don’t live up to standards. As a result, franchising companies would only open company-owned units, he said.

Susan Kezios, president of the AFA, said franchisers who oppose the bill “are arguing about losing their unfair advantage. As far as we’re concerned, this is remedial legislation.”

And she said she’s been surprised by the support such legislation is gaining among “white, Republican males who tell me that this (franchising) is not free enterprise anymore; it’s like indentured servitude.”

Getting into a franchise can cost loads of money or not. Starting a top-name burger joint might require several hundred thousand dollars. At the other end, some cleaning-service franchises can go for about

Even some displeased franchisees agree that franchising has its benefits. “The good thing about the franchise system is that you have a proven name with a proven concept,” said Katin, the IHOP franchisee.

“You have instant sales the minute you open the door. You have a product people are familiar with. … I think IHOP is one of the better companies, and they can be bad. I can only imagine what the others are like.”

Katin’s IHOP restaurants do well, with expected sales of about $52 million this year. But he notes that he was obligated to pay IHOP about $5 million last year for royalties and other expenses. And then there’s the frustration, he said.

Don McClure, whose Dallas law firm represents both franchisees and franchising companies, said he’s witnessed just about every nasty thing that can happen in the relationship.

Franchisees often must make payments for advertising that the company controls. Sometimes the ads just don’t bring in customers, he said. And if the ads work, franchisees in smaller markets may receive no benefit because the ads appeared only in larger towns.

Ego can be a big issue, too, McClure said.

“I’ve seen situations where highly successful franchise systems with very successful franchisees still get combative with each other. What I’ve learned over time is that it gets down to the psychological point of who did what for whom.”

Franchisees can grow resentful after working day and night to become successful, believing the franchising company did little to help, he said. On the other side of the coin, a franchising company might feel that the franchisees’ success is largely due to the company’s concepts and management.

The University of Pittsburgh’s Dugan believes some franchising companies are figuring out that they must make more concessions and calm the waters.

“Franchisers have not come to the table with big smiles and hugs for everybody, but the bigger systems are realizing they have to provide more equity in the contracts,” Dugan said.

“The pendulum has swung, and now they know there has to be some parity.”

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Risks: Ineffective marketing, Advertising fund put into general franchisor's coffers, Unfaithful servants, Bad faith and unfair dealings, Tied contracting, Preferential treatment, Encroachment (too many outlets in area), Dissident leaders, Must buy only through franchisor (tied buying), International House of Pancakes, IFA, International Franchise Association, IFA, American Franchisee Association, AFA, Political champions, U.S. Federal Relationship Legislation, McDonald’s of…, Siren song, Punished for talking to press, Controlling, trapping or defeating the franchisee, Imbalance of information and power, Blame the franchisee, Cannibalization of sales, Tied contracting, Franchisors want the minimum regulation they can get away with, Indentured servants, United States, 19990722 Tensions between

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