Date: 4/30/97 3:40pm
Subject: 16 CFR Part 436
Comments on: 16 CFR Part 436
My name is John Rachide. I am a franchisee with DominoÆs Pizza and serve as the chairman of our franchisee association, the International Franchisee Advisory Council (IFAC) which is also a member of the American Franchisee Association (AFA).
IÆve been with DominoÆs for seventeen years. I began my career with DominoÆs as nearly all DominoÆs franchisees did, at the bottom. I started young at the age of nineteen as a delivery person working my up through the ranks to become a manager and later to become a franchisee. The process of "buying" a franchise really started long before I ever heard of a UFOC.
In order to own a franchise at DominoÆs, a candidate must complete a year as a store manager. The decision to purchase a franchise happens at the time a commitment is made to the management program. Oh sure, itÆs possible to walk away after the year is up and you receive the UFOC. But who wants to throw away that much time and effort?
Since most of the candidates for these franchises are too young to have any prior business experience, they are at a tremendous disadvantage in the process of acquiring their first franchise. However, like myself, most enter their first agreement enthusiastically. Few, if any, have experienced the pain that veteran DominoÆs franchisees experience when they were forced to renew their ten year franchise agreements on significantly different terms with no reasonable alternative.
The following facts make it impossible for a DominoÆs franchise to choose anything but to sign the renewal agreements as presented:
1. The franchisor grants a guaranteed renewal if, and only if, the franchisee agrees to sign "the then current Standard Franchise Agreement" at the time of renewal. This, like all other aspects of the contract, is non-negotiable.
2. The franchisor makes substantive changes almost every year to their "Standard Franchise Agreement" without negotiating these changes in any meaningful way with representative franchisees. At the expiration of the original ten year agreement, the terms can be nearly unrecognizable.
3. Multiple store franchisees have separate franchise agreements for each store that expire at different times. Each agreement has different terms based on the date the store opened or the date the contract renewed.
4. If the franchisee chooses not to renew, the franchisor may purchase the assets of the store at a price set out in the contract that is significantly below the market value of the store. If the franchisor chooses not to exercise this right then the franchisee must close the store (losing their investment) or find another buyer.
5. All buyers of DominoÆs stores must have at least one year of current management experience in the DominoÆs system or be a current franchise owner. This limits the entire pool of operations-qualified buyers to less than 4,000 individuals. Most of these persons do not have the financial wherewithal to purchase a store. Most of the ones that can afford to buy already own stores. The franchisor limits current franchise owners to purchasing additional stores that are less than fifty miles from their current operations.
6. All buyers of multi-store packages of DominoÆs stores must have at least eighteen months of multi-unit supervision in the DominoÆs system or be a current franchise owner of at least one year. This limits the entire pool of operations-qualified buyers for multi-store packages to less than 1,500 persons. This, together with the financial and geographic restrictions dictated by the franchisor, effectively foreclose the market on multi-store packages.
7. All DominoÆs franchise contracts prohibit the franchisee from owning any other businesses. We canÆt develop any other opportunities unless we sell our stores. When we sell our stores, few of us can command a price great enough to capitalize another business because of the small pool of potential buyers.
No one of the restrictions listed above (and they are only a few of the many restrictions created by DominoÆs standards) is indefensible by the franchisor. However, taken as a whole, they form an almost perfect trap that puts all the financial power in the hands of the franchisor.
It is not likely that a new, young franchisee (someone willing to work for a year or more in a program to become qualified to buy a franchise) is going to understand that they will be trapped by entering into the franchise agreement. Even though everything I describe above could be imagined after reading the UFOC, few honest business persons would have such an imagination. Franchisors have spent millions of dollars developing these elaborate traps. Franchisees simply canÆt see the situation until they are stuck in it.
Even during the years of their first agreement, most franchisees think things are going great. The realization that they are trapped does not occur until they are forced to sign the renewal contract. Many franchisees are shocked to learn that the assets of their business are barely worth enough to pay off the liabilities. At least by signing the agreement they are able to keep their job.
For many franchisees, the relationship amounts to indentured servitude.
The FTCÆs role has focused on the "pre-market" for franchise sales. While this is a good start, it is not enough. Existing franchisees need protection from the unscrupulous behavior of some franchisors after the contracts are signed. The use of "standards" and "procedures" to modify the current agreements and the use of radically different unnegotiated renewal agreements deprive franchisees of the value of their business without compensation.
The Franchise Rule should prohibit this sort of behavior.
Franchisors have many other tools at their disposal to reduce the value of the franchiseeÆs investment. Among these are:
1. The use of arbitrary and cumbersome approval processes that are not spelled out in disclosure documents. These processes make alternate sourcing of goods and services next to impossible if the franchisor wants to keep these profit centers to themselves. This restraint of trade allows franchisors to charge supra-competitive prices in their exclusive distribution systems.
2. The use of confidentiality agreements to prohibit communication between current or prospective franchisees and disgruntled or abused ex-franchisees that the company has bought out.
3. The requirement that outgoing franchisees sign general releases and waivers forcing them to give up any rights and claims they may have.
4. The requirement that franchisees sign post-term covenants not-to-compete that prohibit them from earning a living outside of the franchise.
5. The use of retaliation against franchisees involved in franchisee associations that work to educate or rally the franchise group.
6. The use of encroachment to lower the cash flow of units the may be coveted by the franchisor or owned by a "troublesome" franchisee.
7. The mismanagement of cooperative advertising funds under the care of the franchisor.
The FTC should prohibit franchisors from engaging in the behaviors described above.
In the disclosure stage of the purchase and renewal process, the franchisor should be required to disclose the existing of and contacts for all franchisee associations in their system. This would allow prospective and renewing franchisees the opportunity to learn the real world environment of the franchisorÆs system.
The FTC should require the franchisor to disclose to existing franchisees, on request, the complete and up-to-date list of franchisees names, addresses, office phone numbers and fax phone numbers.
If the FTC canÆt take a more proactive role in protecting the interests of existing franchisees from greedy or overbearing franchisors, then the Franchise Rule should be abolished.
The way things stand now, franchisors use the Rule to hide behind. By meeting the minimal pre-sale disclosure requirements, franchisors are able to say "You knew what you were getting into" when this is obviously not true. No new franchisee can understand the schemes that a creative franchisor might develop over the extended life of a franchise contract.
Existing franchisees deserve a chance to reap the benefits of their labor. Without better protection, their current situation will get much worse before it gets better.