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A Baker’s Dozen from the Cookie Lawyers on Compliance
Franchising World March 2007
Review these 13 practical tips for an effective franchise sales compliance program. There are a number of fringe benefits that come with serving as inside counsel to a well-established, multi-brand franchise company. The free cookies are perhaps the most obvious in our case, though there have been fewer of them since our test kitchens moved across town. One of the benefits is the opportunity to periodically coach franchise executives from start-up systems on best practices and franchising fundamentals based upon nearly 30 years of this franchise’s experience. Among the most important of those fundamentals is the development of an effective program to enable franchise systems to comply with the myriad laws and regulations that govern the offer and sale of franchises. No one will dispute the fact that a solid franchise sales compliance program benefits franchise companies in all stages of their life cycles. In new systems, good sales practices pay dividends from the first sale. Mature systems need to follow a well-designed program to manage a larger number of transactions. The pages of franchise publications are full of articles discussing the things one should include in a franchise sales compliance program. The program should describe applicable state and federal laws, and provide the sales team with the tools they need to navigate disclosure rules, identify and avoid unauthorized earnings claims, enforce waiting periods and comply with best practices. Developing the program, however, is often the easy part. Making sure it gets used effectively–ensuring that both franchise system and franchisees reap the benefits that come from good sales compliance practices–takes ongoing attention and diligence from dedicated franchise professionals inside the system. The following practical tips can help franchise companies establish a culture for the proper care and feeding of their franchise sales compliance programs, and increase the odds that the program stays relevant and protects and enhances the sales process.
Assign Clear Accountability
Avoid “Cookie-Cutter” Content
Use it Early and Often
Broaden Your Audience for the Best Results
Make it Simple and Accessible
Remember That Your Outside Counsel is Your Friend
Don’t Forget the Franchisees
Remember the Carrot as well as the Stick
Embrace Change
Prioritize Education
Communicate
Have an Action Plan for Potential Violations
Don’t Procrastinate Review the additional information adjacent to this article for some other resources to help your franchise system realize the benefits that flow from good franchise sales compliance practices. Take it from the cookie lawyers: it is worth the effort. Michael Ward is executive vice president and general counsel and Rena Miller is assistant general counsel of Mrs. Field’s Famous Brands. Ward can be reached at 801-736-5710 or mward@mrsfields.com and Miller can be reached at 801-736-5666 or rmiller@mrsfields.com.
Appoint one person within the organization to lead the charge on franchise sales compliance. This can be an in-house counsel or franchise paralegal, if there is one, or another franchise professional trained to recognize the issues and take steps to encourage compliance. Experience has shown that it is best to appoint someone who is not directly involved in franchise sales or compensated for completed transactions, so that natural checks and balances are built into the program.
There are a number of publications and products available to help a system develop and implement a compliance program. While these can be excellent resources, a program will be most user-friendly and effective if it’s customized to reflect the business. Employees are most likely to use and embrace training programs that use terminology and examples from their own world. For example, incorporate real situations that a sales force has actually encountered as “do’s” and “don’ts.”
Make sure that relevant portions of the franchise sales compliance program are incorporated into orientation training for new employees. Underscore its importance by conducting ongoing training frequently. Our franchise compliance administrator participates in sales and operations meetings on at least a semi-annual basis to give the sales force access to updated compliance training. This can be accomplished in a cost-effective way by taking advantage of venues, such as franchising conventions and forums where the entire field staff is usually present, and conducting training via Web cast and conference calls. If your company has a newsletter or employee handbook, include franchise sales compliance information to keep everyone updated on issues and developments.
Many franchise companies make the investment to train their legal and sales staffs as part of their compliance programs, but often overlook other employees that are more peripherally involved in the sales process. Operations personnel are often placed in sales situations, particularly with existing franchisees. Your trainers should know enough to recognize compliance issues, such as earnings claims, particularly if any training of prospects occurs prior to entering into the franchise agreement. Sales coordinators and administrative assistants need to understand the reasons behind their day-to-day activities, such as why it is important to keep complete files, including UFOC receipts, compliance questionnaires and other documentation required by the program. Even the CEO, CFO and other executives can benefit from understanding the constraints and conditions that franchise laws place on sales staffs, particularly when analyzing performance and setting projections. It is also more likely that executives will support and prioritize your compliance program when they fully understand the costs of non-compliance.
One-on-one training is best with new employees, but compliance programs may get more use when they incorporate Web-based training, easy reference tools and full access to the program administrator for regular Q&A sessions. Also consider having a training module and related tools posted on the company intranet for easy access by anyone who is interested in knowing more.
Don’t wait until there is a potential violation to talk to outside franchise counsel about franchise sales compliance. Most seasoned franchise counsel have compliance program training and tools available for their clients and are willing to play an active role in helping you to develop and implement a solid compliance program.
Protecting the franchise system from claims and violations is just one goal of a good program. The best franchise sales compliance practices are designed to ensure that franchisees are fully-disclosed and informed when they make their franchise purchase. A compliance program should include features that assist franchisees, to the extent possible, in the due diligence process, such as store visits, discovery days, and closing events that incorporate disclosure questionnaires and a final opportunity to ask and answer questions.
Sometimes it is easy to focus a great deal of attention on the negative, highlighting less than perfect compliance, potential violations and honest mistakes. Don’t forget to accentuate the positive as well. Even non-monetary recognition for following best practices can encourage a team to take compliance seriously. And while the topic is about rewards, don’t forget to let your insurance company know when the franchise system develops and implements a solid compliance program. In some cases, a program may qualify the franchise company for credits or reduced rates on franchise errors and omissions coverage.
Even the best programs can benefit from regular review and improvement. The program administrator should take the time to read industry publications, talk to other systems about their practices, research developments in franchise laws and regulations, and perhaps most importantly, survey the sales force to understand ways to keep the compliance program at the cutting edge.
Encourage the sales force and other team members to take advantage of the educational opportunities developed by franchise organizations such as the International Franchise Association. If possible, have at least one sales professional or franchise administrator on staff at all times who has completed the IFA’s Certified Franchise Executive program. Look at the expense as a worthwhile investment. Participate in the seminars and workshops presented at the IFA’s annual convention and by association-member suppliers who offer regional and local franchise sales compliance training. If the company uses a broker network, require evidence that their sales force has received proper training and certification.
It can be quite a challenge to make sure that the program administrator is aware of developments within the system that can affect the sales compliance program. Implement a communication plan to keep the administrator apprised of and involved in events such as changes to the sales force, commencement of sales activities in new territories, amendments to the uniform franchise offering circular or other disclosure documents, proposed new sales tools, and advertisements or other communications related to franchise sales activities—before they are used. Err on the side of over-communication.
Whenever there is a rule, there is an opportunity for the rule to be broken. It is bound to happen, so be proactive. Have a method where individuals can anonymously report any suspected violation of or failure to adhere to the program. Make sure the program administrator is trained in proper steps to address the violation. Some errors and omissions can be “cured” without affecting the underlying transaction. In other cases, it may be necessary to “kill the deal” to protect the parties. This is a situation where it always pays off to consider the big picture.
Just as lawyers are known to put off doing their own wills and doctors are often the last to schedule an annual physical, franchise companies tend to put their compliance program on the back burner, even though it is a critical part of smart and profitable growth. Make the time today to develop a new program or review and improve one that is already in place.
