Franchise System Operational Issues

• Author: Brian Cole, Andra Terrell, John Richardson, and Sandra Wall
• Pages: 231-312

231

CHAPTER 3

Franchise System Operational Issues*

Brian Cole, Andra Terrell, John Richardson, and Sandra Wall

Contents

3-1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

3-2. Operations Manuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

(a) Getting Started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

(b) Establishing the Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

(c) Developing Standards and Procedures . . . . . . . . . . . . . . . . . . . . . . . . 236

(d) Team Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

(e) Tips on the Creation and Organization of the Manual . . . . . . . . . . . . 238

(f) Distribution of Operations Manual . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

(g) Updating the Manual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

(h) Monitoring and Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

3-3. Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

(a) Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

(b) Best Practices for National and Local Advertising Funds . . . . . . . . . 246

(c) Best Practices for Individual Expenditures . . . . . . . . . . . . . . . . . . . . . 246

3-4. Vicarious Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

(a) What Is Vicarious Liability? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

(b) Sample Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

(i) Reasonable Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

(ii) Conspicuous Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253

(c) Special Cases—Employment and ADA . . . . . . . . . . . . . . . . . . . . . . . . 253

(i) Vicarious Liability in Employment Matters . . . . . . . . . . . . . . . . . 254

(ii) Vicarious Liability and the Americans with Disabilities Act . . . 256

(d) Practice Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

(i) The Franchise Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

(ii) Disclaim Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

*Portions of this chapter are adapted from the previous edition of this book, published

by the Forum on Franchising in 2000. In particular, this chapter draws heavily on the prior

edition’s chapter 3 (“Franchise Records Management”) by Charles B. Cannon, Jerry Love-

joy, and Ken Minami, and chapter 4 (“Practical Considerations to Address Franchise

Agency Issues”) by Donnell J. McCormack Jr., and Sheri A. Young. The authors of the cur-

rent chapter express their appreciation to the authors of those chapters in the prior

edition.

bri81013_03_c03_p231-312.indd 231bri81013_03_c03_p231-312.indd 231 9/28/11 9:39 AM9/28/11 9:39 AM

232 Franchise Law Compliance Manual

(iii) Require Conspicuous Franchisee Disclosure of Independent

Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

(iv) State Only Standards or Rights the Franchisor Intends

to Enforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

(v) Require Indemnification from Franchisee . . . . . . . . . . . . . . . . . 259

(vi) Require Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

3-5. Direct Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

3-6. Records Management and Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

(a) Objectives of a Records Management Program. . . . . . . . . . . . . . . . . . 265

(b) Design and Administration of a Records Management Program . . . . 267

(c) Records Storage and Retrieval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267

(d) Paper Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268

(i) Records Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

(ii) File Check-Out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

(e) Electronic Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

(f) Protecting and Safeguarding Records . . . . . . . . . . . . . . . . . . . . . . . . . 275

(g) Records Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276

(i) Typological Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277

(ii) Functional Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278

(h) Length of Time to Retain Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279

(i) Administering a Records Retention Program . . . . . . . . . . . . . . . . . . . 283

(j) Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286

3-7. Purchasing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288

3-8. Compliance Programs and Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290

(a) Compliance Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290

(b) Franchising Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290

(c) Quality Inspectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290

(d) Business Reviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292

(e) Avoiding Waiver Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293

(f) Support Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293

(g) Business Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294

(h) Cautions Regarding Giving Support . . . . . . . . . . . . . . . . . . . . . . . . . . 294

3-9. Audit Program and Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295

(a) Developing an Audit Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296

(b) Mystery Shoppers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297

(c) Auditing through the P.O.S. System . . . . . . . . . . . . . . . . . . . . . . . . . . 298

(d) Purchasing Reviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298

(e) Practical Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298

3-10. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .299

Form 3-1: Operations Manual Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303

Exhibit 3-1: Sample Completed Operations Manual Update . . . . . . . . . . . . . . . 304

Checklist 3-1: Records Management Program Checklist . . . . . . . . . . . . . . . . . . 305

Exhibit 3-2: Sample Records Retention Schedule . . . . . . . . . . . . . . . . . . . . . . . 308

bri81013_03_c03_p231-312.indd 232bri81013_03_c03_p231-312.indd 232 9/28/11 9:39 AM9/28/11 9:39 AM

Chapter 3 Franchise System Operational Issues 233

3-1. Introduction

Franchisors dedicate significant time and energy to developing and delivering

particular products and services to the ultimate customer. Of potentially equal

importance to the long-term success of the business, however, are the structure

and operations of the franchise system. Does the franchisor have the right tools in

place to manage the system successfully, and has it communicated its expecta-

tions adequately to its franchisees? This chapter gives practical advice for struc-

turing franchise system operations—drafting operations manuals, formulating

advertising programs, avoiding common liability issues, and creating records

management, purchasing, and compliance and audit programs,

3-2. Operations Manuals

As a matter of trademark law, a franchisor (or, for that matter, any owner of a

trademark) must control the nature and quality of the goods and services used

with the mark if it licenses another to use the mark. No franchise law in the

United States specifically obligates a franchisor to exercise these controls through

an operations manual—but the general assumption is that all franchisors will

provide an operations manual. One of the requirements of Item 11 of the Uniform

Franchise Offering Circular (UFOC) Guidelines1 for preparing a franchise disclo-

sure document (FDD) requires that the franchisor either disclose the table of

contents of the franchisor’s operations manual in the FDD or make the operations

manual available for review before the prospective franchisee buys the franchise.

No explicit exception is made for a franchisor that does not have an operations

manual.

The assumption that all franchisors have an operations manual is consistent

with the legal definition of “franchise,” which (for example, under the Federal

Trade Commission (FTC) Rule2) makes the existence of a franchise dependent

upon the franchisor providing significant controls or significant assistance. While

it is possible to meet the definition of a franchise without providing an operations

manual, an operations manual serves multiple purposes. Among other things, an

operations manual provides regularity to the franchisor’s training and assistance

and provides guidance to the franchisees to assure that the controls exercised by

the franchisor are applied more consistently.

Despite this assumption about the existence of operations manuals, there

have not been many cases addressing the need for an operations manual. One of

the few is Kohr v. Gropp & Lehman Enterprises, Inc.3 In Kohr, the franchisee com-

plained about the inadequacy of the training and the informality of the operations

manual (which consisted of a few typewritten pages), despite the fact that he

stated that he had sought out a franchise from a smaller and less formal franchisor

than McDonald’s and Wendy’s. The court found that the training and operations

manuals were crude, but that the franchisee had not been misled as to what he

was going to receive. Further, the recitals in the franchise agreement about the

bri81013_03_c03_p231-312.indd 233bri81013_03_c03_p231-312.indd 233 9/28/11 9:39 AM9/28/11 9:39 AM