Indie shoestore footloose and franchise-free

Breaking her 20-year franchise agreement with Fleet Feet, a national chain of specialty running stores, wasn't easy, but Gallardo says it was the best thing for her three stores, which generate just under $5 million in sales a year.

Washington Business Journal
May 4, 2001

Indie shoestore footloose and franchise-free
Douglas Fruehling

When regular customers drive by Lea Gallardo's running store in Falls Church these days, they often do a double take. The store's old "Fleet Feet" signs have been replaced with ones that say "Metro Run & Walk."

They park, run into the store and see Gallardo.

"Oh, it's still you!" they tell her. "Good!"

It's an understandable reaction: Gallardo has operated the Fleet Feet store — and two others in Springfield and Rockville — for 10 years, but she recently dropped her affiliation with Fleet Feet and went independent.

Breaking her 20-year franchise agreement with Fleet Feet, a national chain of specialty running stores, wasn't easy, but Gallardo says it was the best thing for her three stores, which generate just under $5 million in sales a year.

"Our businesses went in different directions," the 55-year-old mother of one says.

The franchise company, she says, is committed to providing shoes and apparel for die-hard runners. But she wanted to welcome all kinds of runners — and even walkers. She even began working closely with programs that train novice runners, raising money for charity. Over the years, she learned to be "very, very inclusive," Gallardo says.

The changeover began in 1999, when she held her first discussions with the franchiser and her attorneys. About a year ago, she came up with and trademarked the new name. The end came in February, when she debuted the new name.

The process — including attorney's fees, sign changes and new stationery — cost around $30,000, she says. She also paid a $100,000 settlement fee to Feet Fleet, based on past and future royalties.

Gallardo says she expects to have covered all of the costs by 2002.

"I spent 10 years building the Fleet Feet name in the suburbs, so changing and going forward as Metro Run & Walk is not an overnight thing," she says. "It's going to be an ongoing process for many years to come."

How do you go about breaking your affiliation with a franchiser and attaining independence?

Andrew Sherman, a capital partner in the D.C. office of McDermott, Will & Emery and an adjunct professor in the MBA programs at the University of Maryland and Georgetown University, offers guidance:

Over the last three decades, franchising has emerged as a popular expansion strategy for a variety of product and service companies. Recent International Franchise Association statistics demonstrate that retail sales from franchised outlets comprise nearly 50 percent of all retail sales in the United States, estimated at over $900 billion and employing nearly ten million people in 2000.

Notwithstanding these impressive figures, franchising as a method of marketing and distributing products and services is really only appropriate for certain kinds of companies. Despite the favorable media attention that franchising has received over the past few years as a method of business growth, it is not for everyone. There are a host of legal and business prerequisites that must be satisfied before any company can seriously consider franchising as an alternative for rapid expansion.

And not all marriages between the franchiser and franchisee are meant to last forever. Some franchisees evolve into feeling that the franchiser has done little or nothing for them in exchange for their weekly or monthly obligation to pay royalties, or that the system has failed to keep up with current market trends or that their protected territory —or lack thereof — has become too competitive and that they need a larger market to survive.

Whatever your reason for wanting to leave the franchise system may be, your decision to end the relationship prior to the end of the term of the franchise agreement should be considered carefully and with the help of an experienced franchising lawyer. There are many key legal issues which require analysis. First, most franchise agreements do not allow for unilateral termination by the franchisee, especially if there has been no clear evidence of default by the franchiser.

However, most progressive franchisers have no desire to have an unmotivated franchisee in their system and may prefer to negotiate with you rather than treat the remainder of the term of the agreement as indentured servitude. There will be many issues to negotiate and you should renew each provision of your franchise agreement carefully. Problem areas may include: restrictions on your ability to sell or transfer the business without the franchiser's consent, the franchiser's right of first refusal to buy your business, the post-term-covenant, not-to-compete, the obligations you have not to use the franchiser's brands or trade dress (which will probably require a complete redesign and new signage for your business) and mandatory jurisdiction and law to govern clauses in the event that your proposed departure leads to formal litigation.

In looking at expenses for our new office buildout, how do I know if the tenant improvement allowance offered by the landlord will cover my buildout expenses in the new space? I would like to negotiate a realistic amount before finalizing my lease.

Mollie Vardell, a partner in Arlington-based LyrixDesign, an architectural design firm specializing in architecture and corporate interiors, advises:

There are three key individuals that need to assist you in this matter: your broker, your architect and a contractor. At this point in the process, your architect has probably already prepared a space plan which illustrates the configuration of your new space. It will also help confirm that the space meets your program needs at move-in and hopefully throughout the term of your lease.

After space plan approval, it is essential to have a pricing plan prepared by the architect. This plan must identify existing conditions, demolition and new work. It must also make allowances (square foot or lump sum dollar amounts) for new carpet, wallcovering, specialty lighting, HVAC upgrades, electrical modifications and any custom items such as millwork.

Next, you must identify a contractor to prepare a preliminary cost estimate of the work. Most contractors will prepare cost estimates at no charge as long as they are able to bid on the final job. The contractor must visit the new space to review the existing conditions with the pricing plans in hand. If there are any building standard items such as ceiling tile, lighting, or hardware which the landlord requires you to use, these specifications must be provided to the contractor. The contractor should provide a schedule, and prepare pricing by trade so that you can see how costs are allocated. Pricing should be reviewed by the architect to ensure compatibility with the plans.

Assuming the design and pricing is in alignment with the project goals, the broker has the information needed to negotiate a construction buildout allowance that is commensurate with the work. Keep in mind other costs not included in the construction pricing such as data and phone cabling, phone system, engineering and architectural fees and moving costs.

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