Financial Performance Representations in Digital Space – Friend or Foe to Franchising?

At what point do you believe a Financial Performance Representation crosses the line outside franchise disclosure requirements?

As discussed at various break-out sessions during the recent IFA Convention, social media has created many opportunities to present and discuss franchise opportunities across and through multiple channels, often linking from one social media platform to another. As many franchisors jockey for a competitive edge and increase their social media efforts, it’s important not to lose sight of franchise disclosure requirements.

The practice of embedding financial information within online press releases, blogs and even within Facebook posts, appears to be growing. Certainly, publishing this information by itself doesn’t create an FPR. But, directly or indirectly referring candidates to the information is an FPR, and if the information is not part of a franchisor’s Item 19, it becomes an improper FPR.

Considering the linking capabilities within social media, often to the point of creating a cross-platform, multi-tiered effect, some so-called, self-professed industry professionals apparently believe they can get away with improper FPRs. Especially, as social media is still “relatively new” and growing into new areas, misunderstood by many, and virtually under the radar of most authorities.

It appears the thought is, if enforcement of franchise disclosure is lacking in traditional areas, social media has become the new wild west!

Beyond the obvious illicit practices and potential ramifications to unsuspecting franchise candidates, what also causes reason for concern is the impression it makes upon start-up franchisors that follow suit – often, not even realizing the practice may be improper. After all, they see it being done by individuals who they believe are reputable franchise professionals. So, why not follow the same practice that they unsuspectingly come to believe is actually a best practice?

Sure, everyone is responsible for their own actions, and ignorance is not a legal defense. However, if these illicit practices continue within franchising, more and more will participate to the point of it becoming a common practice, with many believing it has become a best practice. Momentum picks up with so-called thought-leaders promoting the practice as an effective lead generation strategy, influencing even more franchisors. Some will be unsuspecting. Some will just jump on the bandwagon.

At what point will these practices be considered to be out-of-control and intolerable, and detrimental to franchising?

How would your franchisees answer this question, “Does your franchisor have integrity?”

Integrity is what you do when nobody is watching!

Some franchisors appear to believe that when a person asks for the franchisor’s FDD they need not give it.

Why? Here is, slightly edited a franchisor’s broker’s answer,  which appeared on a major business social network.

“Because they [franchisor] are not required to provide an FDD upon request.

Here is the excerpt from the FTC 2008 updated ruling:

“Upon reasonable request, franchisors also must furnish a disclosure document to a prospective franchisee earlier in the sales process than 14 calendar days before the franchisee signs or pays.

The failure to comply with a reasonable request for an earlier delivery is an independent violation of the Rule. This does not mean that a franchisor must tender a disclosure document to any person who asks for a copy.

Rather, it applies where the parties have taken steps to begin the sales process.”

The problem is that many franchisors begin a validation process with the prospective franchisee, but believe that they haven’t “taken steps to begin the sales process”.

But, the way I see it, is if a candidate is on a validation call then I think it’s hard to dispute that you’re not knee deep in the sales process!

Some brokers will argue otherwise.

“If I took a lead to many franchisors and after the first call said to the franchisor, “the candidate would like to reasonably request an FDD at this time” most of them WOULD indeed laugh or explain their “sales process” to me where the FDD is provided after the application which comes after the webinars and other phone calls.

I can only think of a handful of times where an FDD was provided after the first call with a franchisor.”

Irrespective of FTC Franchise Rule enforcement, it’s not the candidate’s duty to know that they are entitled to an FDD upon reasonable request, it is the duty of the franchisor to comply with the FTC Rule.

If you as a broker or the franchisor has a bona fide prospect considering a particular franchise you as the broker must communicate an FDD request to the franchisor. The franchisor must fulfill the request and track and record all FDD requests.

Even if the FTC is not watching, it is not okay for franchisors and brokers to break the rule. I recommend taking a look at The Franchise Sellers Handbook. It’s a great resource and most likely will answer a lot of questions that you may have.

Remember, integrity is what you do when nobody is watching!

*Reprinted from International of Association Franchisees and Dealers Feb 2012

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Social Media Policies Within Franchising: The Debate Continues

In the continuing debate about making the case for social media policies within franchising, below is an article by Attorney, Chad Finkelstein, expressing his opinion on the matter. So, as a franchise professional, we’d love to hear your opinion as well!

Franchising and Social Media
by Chad Finkelstein

As posted: Financial Post on October 25, 2010

Whether you are a franchisor or a franchisee, the realities of social media likely already affect you. Franchisors need to determine whether, from a marketing perspective, it makes sense for them to have profiles on forum such as Facebook, Twitter and MySpace. Many already do, but depending on the nature of your business, it is not always an ideal method of promotion.

If that type of online marketing suits the strategies of the franchise system, then the next question to ask is whether franchisees should be permitted to have their own social media websites – for instance, a Facebook page for that particular franchised location. The franchisor will need to decide whether the benefits of widespread marketing on these popular websites outweigh the costs of giving its franchisees that much control over advertising the brand.

Accordingly, it is a good idea for franchisors to develop social media policies, and for franchisees to ensure that those policies are not too restrictive. If you are an existing franchisor or franchisee, your franchise agreement likely already states that franchisees cannot conduct any internet advertising without the consent of the franchisor. While that may have made sense at the time it was drafted and agreed to, the practical realities of business today means that franchise law in Canada has to evolve to reflect new technologies and marketing platforms.

As a result, franchisors should consider adding social media policies to their standard agreements, and franchisees should consider requesting them where they do not already exist, so that the franchise system as a whole can benefit from this new world of online marketing.

Chad Finkelstein is a franchise lawyer at Gowling Lafleur Henderson LLP in Toronto.

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What is IFA Fran-Guard?

The International Franchise Association‘s new, greatly expanded franchise sales management and compliance program will help franchisors take proactive steps to reduce risks, manage growth, and build a stronger, healthier franchise system. IFA Fran-Guard covers both the legal and business aspects of compliance with a series of modules designed or CEOs and senior executives, franchise development professionals, in-house counsel and franchise attorneys, paralegals and compliance managers.

CEOs and Senior Executives

Not only does a system-wide compliance program protect your franchise it can make it more profitable. Modules cover the Business Case for Compliance, Franchise Sales Growth & Management, and Best Practices.

Franchise Development Professionals

There’s more to compliance than legal requirements. Learn how a sales management and compliance program can increase your effectiveness and help drive franchise sales.

In-house Counsel, Franchise Attorneys, Paralegals and Compliance Managers

It’s important to integrate all aspects of franchise sales management and compliance from disclosure to franchise sales, field support, and operations. IFA Fran-Guard modules cover practical steps to implement a system-wdie compliance program.

All CFEs and CFE Candidates

IFA Fran-Guard has been incorporated into ICFE’s professional development program. IFA members who successfully complete the IFA Fran-Guard program will receive an ICFE Fran-Guard Certificate. All modules are approved for CFE credits.

Where is IFA Fran-Guard Available

Programs will be offered throughout the year at various IFA meetings and conferences and in different formats to make participation more convenient. Courses will be presented online via IFA University and through a series of webinars. A schedule of upcoming sessions may be found on the IFA website.

Fran-Guard Discussed on Franchise Today

Recently on Franchise Today, Paul Segreto welcomed as his guest, David French, Vice President, Government Relations at the International Franchise Association. Paul and David discussed franchise compliance and the development of the IFA FranGuard Program previously introduced at the IFA Convention in San Antonio. Listen On-Demand

About the International Franchise Association

The International Franchise Association, the world’s oldest and largest organization representing franchising, is the preeminent voice and acknowledged leader for the industry worldwide. Approaching a half-century of service with a growing membership of more than 1,100 franchise systems, 10,000-plus franchisees and more than 500 firms that supply goods and services to the industry, IFA protects, enhances and promotes franchising by advancing the values of integrity, respect, trust, commitment to excellence, honesty and diversity. For more information, visit the IFA Web site at

Source: International Franchise Association

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Misinformation About Franchisors and Bankruptcy (Updated)

Recently, I pointed out to the franchise community, an article on about franchisors and bankruptcy. Having worked with a franchisor that was forced into bankruptcy, I knew the article was way off-base, the alleged facts entirely inaccurate, and the suggestions directed at franchisees alarming to say the least. I knew I could not sit back with a clear conscience thinking that franchisees may act on this misinformation.

Since then, Dan Daszkowski, the person listed as the author of the article, “How to Prepare for Franchisor’s Bankruptcy” contacted me and explained his position in the matter…

“Hi Paul, Thanks for pointing this out to me. This was totally my fault because I hired a writer that I felt was knowledgeable in this area to write this article and blog post and they obviously were not.

As an Guide I am able to hire subcontractors to write and I only do this from time to time when I feel someone is more qualified than I am to cover a certain topic. Obviously I made a bad judgment call with this writer and I am glad you pointed it out. I have taken down the article and blog post to avoid any further confusion and so I do not mislead any franchisees that are currently in this situation.

I understand your frustration but I think you took it a little far in your blog post “Read Mr. Daszkowski’s bio and tell me if you believe he has the experience and knowledge to render legal advice about franchising, bankruptcy or about anything!” I have deleted the incorrect information from and it would be great if you can delete this post as well. I am fully aware I do not have the experience to give legal advice but the rest just seems like a personal attack…”

Well, here’s my response to Mr. Daszkowski:

My only goal in writing my post was to point out and emphasize the misinformation provided in your article. As information published on the internet has the capability, if not probability, of lasting forever, I wanted to be certain there was no mistake the information provided in the article was inaccurate and that you could not possibly be mistaken for an attorney.

You stated to me that you felt I took the issue a little too far and personally attacked you. I am sorry that you feel that way but I do not regret my actions and statements as they were obviously instrumental in addressing inaccurate information and unwarranted advice that could have been catastrophic to any franchise system facing bankruptcy.

Speaking from experience, I have seen franchisees blindly follow similarly wrong advice as provided in your article only to be ordered by the United States Bankruptcy Judge to remit all withheld royalty payments to the franchisor within five days of his decision. Unfortunately, many of the franchisees had “spent” the monies that should have been earmarked for [eight months] royalties causing a near-catastrophic series of events as they had to come up with thousands of dollars they no longer had in their possession. The potential consequence for not abiding by the order: contempt of court and possible jail time!

When all was said and done, the franchise system unraveled and franchisees that may have survived, even as independents, ended up out of business or ironically, in bankruptcy. As for the brand and trademark, as well as the franchise agreements, as I recall, they were considered assets of the franchisor, and subsequently within the jurisdiction of the Bankruptcy Trustee.

So, [Mr. Daszkowski] thank you for pulling down the article to avoid any further confusion and to prevent franchisees that are currently in a bankruptcy situation from being misled.


Paul Segreto

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Yikes! Help or Yelp for Customer Service Issues?

In working with franchise clients on integrated franchise marketing strategies, including social media, a large part of our effort is directed towards improving Search Engine Optimization (SEO). Google Real-time Search Results play a big role in this and as we know, these results are based upon social media activity and content.

Another aspect of SEO that goes hand-in-hand with search rankings is Local Business Listings Management which basically addresses local search results through a plethora of sites, including many customer review sites such as Yelp! But, what to do about negative customer reviews is always on our minds when they push their way towards the top of the search results. Especially, if the negative review is unwarranted. Or, if the negative review was legitimate, but the issue resolved. Should a negative mark be left out in the open for all the world to see? What are the potential repercussions if the comment is posted and tweeted throughout social media channels and we know this activity will be picked up in Goggle’s Real-Time Search Results. Potentially, this becomes a Circle of Life that we want to avoid. But, at what cost? Yikes!

Well, as the old Fram Oil Filter commercial states, “You can pay me now, or pay me later.” Translation for the franchise community: Dedicate some resources towards improving customer service practices now, or pay to try to remove the negative comments online later, which is not easy to do for a variety of reasons. Some of which may not be the most ethical as the customer review sites feel they have control of your destiny, and want you to pay dearly to relinquish the control back to you. Yikes, for sure!

The following post about one of the more popular review sites, Yelp! and such practices, was written by franchisEssentials Guest Author, Megan Erickson of the Dickinson Law Firm. As you may know, Megan is the author behind the recently launched Social Networking Law Blog. Previously, we posted an article by Megan that proved very popular in franchise circles, Employer Social Networking Policies.

Yelp! Faces Federal Class Action Lawsuit

Bad online review? Interested in buying your way out of it?

Yelp is a popular interactive website allowing its users to create and access reviews of local businesses and services.  The site now faces serious accusations of unfair business practices.

After Yelp! received some bad press for what many believe to be shady advertising practices, a class action lawsuit was filed yesterday in a California federal court. According to a press release posted on the Yelp Class Action Website:

“The lawsuit alleges that Yelp runs an extortion scheme in which the company’s employees call businesses demanding monthly payments, in the guise of ‘advertising contracts,’ in exchange for removing or modifying negative reviews appearing on the website.”

I first learned of the lawsuit via this post by Bradford Schmidt.

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Are You Getting Positive Bottom Line Results From Your Social Media Efforts?

Social media has definitely gone mainstream and many franchise organizations have embraced it for a variety of reasons. Some are utilizing it to create or improve brand awareness. Others are using it to drive business to franchise locations and/or to create interest in their franchise opportunity. And many have embraced it just because they believe they must, or feel they may miss the proverbial boat.

In any event, there are questions that franchise executives should be realistic about in answering as they continue their social media efforts and work towards effectively integrating the same with traditional marketing.

* What are the objectives for using social media within our franchise system?
* Has a comprehensive social media strategy been developed consistent with our goals?
* Are our social media efforts integrated with our overall marketing strategy?
* Are our social media efforts specifically targeted for optimum effectiveness?
* Are we effective in our social media efforts?
* What are our bottom line results?

Although all six questions listed above are important in evaluating your social media strategy and efforts, the last two questions may be the most important. Truly knowing and understanding the level of effectiveness of your social media efforts, and it’s affect on your bottom line, is essential to achieving your franchise marketing and development goals and objectives.

That’s where franchisEssentials can help!

FREE Social Media Assessment ($1200 Value)

franchisEssentials FREE Social Media Assessment has been designed exclusively for franchise organizations. Basically, the assessment is a 48-step Social Media Checkup that evaluates primary and secondary elements of social media efforts, explores franchise-related issues within social media messages, identifies specific opportunities per established and defined goals and objectives, establishes a baseline for quantifying and analyzing social media metrics, and provides a grade for each specific social media component being utilized as well as for the entire social media program.

Upon completion of the FREE Social Media Assessment, a debriefing session is scheduled to explain the results of our findings in full, concise detail and to provide best-practice recommendations for improvement in specific social media efforts, and for the social media program itself. Including the preliminary meeting which typically takes approximately 30-45 minutes, the actual assessment and evaluation, and the debriefing session which takes 45-75 minutes, the total process should be completed within four days.

Ask yourself the questions listed above, and unless your answers are honest and provide you will full satisfaction in your current social media efforts, we strongly suggest you take full advantage of franchisEssentials FREE Social Media Assessment. It really does make good business sense to do so!

Start Now!

To schedule a preliminary meeting, and/or to learn more about this FREE service or any of our franchise marketing and development services, please contact Paul Segreto by email or by phone at 832.838.4822.

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Employer Social Networking Policies: Part II

The following was written by franchisEssentials Guest Author, Megan Erickson of the Dickinson Law Firm as follow up to Employer Social Networking Policies that we reposted on this site last week. As you may know, Megan is the author behind the recently launched Social Networking Law Blog.

In response to last week’s post, one of our readers commented, “I look forward to your further insights in this area. It is something that “MUST” be thought out by companies today. They really have two choices. A policy of engagement in the Social Networks or staying out altogether. And if they engage they need to seriously engage their employees and impress upon them how being active in social networking sites means that they are a representative of their company and that in the long term their actions will affect the company’s rep in the world.”

Employer Social Networking Policies: Pre-Drafting Considerations, Part II
by Megan Erickson of the Dickinson Law Firm

As [recently] noted, I plan to write a series of posts addressing social networking policies in the workplace. In [recent post] post, I discussed some things an employer may want to think about before drafting social networking policies — including some things to keep in mind when starting with a sample policy. I’ll build upon that by offering a few considerations here for employers to ponder as they begin thinking about drafting, updating, or maintaining a social media policy. This list is by no means exhaustive, but is meant to help employers focus on personalizing social networking policies (and hence, make them more effective).

* Don’t be afraid to take care of some groundwork before involving an attorney, but focus these initial efforts on identifying the company’s business interests, needs, goals, and expectations as they relate to the policy. This will make your lawyer’s job much easier, and may save your company time and money. For example, if you want to encourage social media use among your employees for marketing purposes, your policy will set the parameters within which your employees operate. The framework for such a policy will significantly differ from an employer whose primary goal in establishing a policy is something else (such as the protection of confidential information).

* Brainstorm how the policy should address both: (1) online activity which occurs on company time or using company resources (i.e., blogging at work, Facebooking on company laptops, etc.), and (2) online activity, regardless of when or where, which may have implications for your business (i.e., complaining about work on personal blog from personal computer after-hours that discloses trade secrets).

* Thoughtfully consider how far the restrictions should go. Keep in mind practical considerations. Not only do many studies suggest it’s not good for morale or recruiting to ban all social networking sites or Web 2.0, an all-out ban will be difficult to enforce. Take a realistic approach, and bear in mind ad-hoc policing could easily lead to selective enforcement issues down the road.

* How do you monitor employee technology use? Federal and state privacy laws should shape your policy.

* Consider quirks of your particular workplace technology that might present special considerations. For example: Do employees have company-issued web-enabled cell phones? Do you want policies addressing text messaging? Pagers? Off-duty conduct on company laptop during non-work hours?

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Employer Social Networking Policies

social media and the lawThe following was written by franchisEssentials Guest Author, Megan Erickson of the Dickinson Law Firm. Megan recently started Erickson’s Blog on Social Networking and the Law. The blog addresses legal issues relating to social media and Web 2.0. Megan states, “This blog is in its early stages, so I hope you’ll continue to check back as I add content and get a chance to make improvements.”

Rush Nigut, who publishes the blog, Rush on Business, recently posted, “Now that’s a blog that will have a never ending flow of posts. She already has an interesting array of posts… This is one blog I’ll be sure to follow.”

Employer Social Networking Policies: Pre-Drafting Considerations & Dangers of Sample Policies
by Megan Erickson of the Dickinson Law Firm

Employers often want to know more about permissible or effective social networking policies for their employees. Of course, there’s no such thing as a “one size fits all” social media policy for employers, but I think readers might find it helpful if we took some time to address important considerations involved in drafting, updating, or maintaining a policy addressing employees’ online activities. With that goal in mind, I’m going to begin a series of entries specifically tackling some of those issues.

Pre-Drafting Considerations

These issues arise even before the policy drafting begins — so that’s where we’ll start. The planning stage of an employer’s social networking policy defines the later effectiveness of the policy. It may be wise for information technology personnel, human resources professionals, other internal company decisionmakers, and legal counsel to sit down together to determine the employer’s business interests, needs, goals, and expectations under the yet-to-be-drafted policy.

Sample Policies or Model Guidelines: Don’t Forget to Assess the Company’s Unique Needs

It’s important to keep in mind that although model policies or sample guidelines may offer some helpful “nuggets,” those policies derive from unique business considerations – which may or may not align with the business interests of other companies. For example, many employers look to the IBM Social Computing Guidelines – one of the first publicly available social media policies. While I do think IBM’s policies are lovely, all the attention given to IBM’s guidelines (and model policies in general) easily distracts employers and discourages them from carefully analyzing their own unique objectives.

As a technology company, IBM has been motivated to actively encourage employee use of social networking. Other employers probably do not have the same motivations. More than 10 years ago, when most employers were trying to limit employees’ online activity, IBM was encouraging its employees to use, learn, and participate in online activity; the company continues to advocate its employees’ participation in Web 2.0. The overarching business interests of a technology company like IBM (i.e., promoting use of online media for marketing and business reasons) may conflict with the overarching business interests of other employers (i.e., perhaps a greater need to protect proprietary business information).

In sum, if human resources professionals at Acme, Inc. look to a sample policy for drafting guidance, they should always bear in mind that the fundamental principles underlying IBM’s (or anyone else’s) guidelines may not best serve the interests of Acme. At the risk of sounding very “lawyer,” I now point out the obvious: social networking policies, as with most employment policies, require individualized attention and should be specifically tailored to the needs of each employer.

Sample Policies or Model Guidelines: Quality Control

The other problem with examples found online is quality control. Googling “social networking policies” may give an internet user a list of results, but it generally doesn’t disclose things like: who drafted the samples, the employer’s jurisdiction and applicable law, or the business interests driving the policy. In other words, the policy could have been drafted by an idiot, it might address too much or too little, and Company A may be focused on helping its sales team effectively use Facebook as a marketing tool while Company B just wants to keep its associates from divulging confidential financial information on MySpace.

Without properly assessing the business interests and concerns the employer wants or expects its social media policy to address, the resulting policy will be of little value to the employer. Before drafting any guidelines, employers should focus on the fundamental framework for and guiding principles behind their anticipated policies.

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New York State Tax Law Update and Changes

Recently, franchisEssentials Guest Author, Kathryn Rookes, submitted an article New York State Tax Law, which was posted on this site on July 23, 2009. The article was about a tax law passed by New York State that establishes specific reporting requirements for franchisors in the State of New York. Subsequently, Kathryn submitted a follow up article regarding updates to the state law. The update was posted on this site on August 6, 2009.

In her continuing efforts to keep the franchise community updated with additional changes to the New York State Law, Kathryn has detailed the recent changes accordingly.

New York Tax Law Changes
as submitted by Kathryn Rookes, Attorney, FSB Legal

The New York State Department of Taxation and Finance has made some changes to its new reporting requirements for franchisors.

First, the NYSDTF has implemented an extension procedure for franchisors that are unable to meet the deadline. The extension must be filed before the due date (first due date is September 20, 2009) and once filed, is automatic. The extension is for 90 days.

Next, the NYSDTF has waived some of the information that it previously required, including audited gross sales of a franchise if the franchisor has audited and found gross sales to be different from what the franchisee reported and the amount of sales that a designated supplier has made to a franchisee.

The NYSDTF also has made changes to reporting requirements if the royalties are not paid as a percentage of gross sales.

Finally, the NYSDTF will waive penalties in some situations, when the information filed is incorrect because the franchisee supplied incorrect information to the franchisor without the franchisor’s knowledge.

Kathryn is an experienced franchise attorney and a member of FSB Legal, a virtual law firm. She is one of the very few franchise attorneys in the United States with experience in a government regulatory practice (Maryland Division of Securities), private practice, and as in-house counsel. With this diversity of experience, Kathryn understands the issues that franchisors face on a daily basis.