From the February 1996 issue of Entrepreneur

Some franchising issues are so familiar, they're almost like family. They may pop up just a little too often and sometimes tend to irritate, but you're stuck with them.

Recently, two perennial franchising issues experienced significant changes. The Iowa Franchise Investment Act acquired a significant amendment that mixed new controversy with the old, while the Uniform Franchise Offering Circular (UFOC) underwent its first complete renovation since its creation in 1974.

The Iowa Blues

The debate has raged fairly consistently since 1992, when Iowa passed what is widely considered the most onerous franchise law ever. Some considered Iowa a guinea pig of sorts; though controversial issues such as franchise relationships, encroachment and termination had long inspired franchisors and franchisees to spout theories about what would happen if legislation were enacted, Iowa just went ahead and did it.

More than three years after enacting the law, Iowa legislators have finally attempted to clear up some of the regulation's stickier details. "These changes were helpful from the perspective of franchisors," says Mary Beth Trice, a partner with San Francisco law firm Bartko, Zankel, Tarrant & Miller. "However, the statute has gone from being ambiguous to being more unwieldy."

The addendum to the law, passed in the summer session of 1995, addressed several issues, including the transferability, renewal and termination of franchises. The encroachment provision, however, stole the show. As it was previously written, the encroachment provision made it unlawful to open locations within an "unreasonable proximity" to existing franchisees' outlets.

"Not only was it difficult to determine what 'unreasonable proximity' might have been, but the measure of damages was also questionable," says Trice. "In the [amended] version, the focus has drifted away from the geographic proximity of the business and instead talks about recovery when the placement of a new outlet under the same trademark has an adverse effect on a franchisee."

Rather than settling the matter, however, Trice believes this extensive change may create a whole new round of squabbles. "It's potentially more problematic than a provision that speaks to [geographic] proximity," she explains. "We went from a situation where franchisors knew they couldn't put a franchisee too close to an existing franchisee to a situation where franchisors have to look at whether the placement of a new franchisee is going to have an adverse impact. We sort of traded off one set of questions for another."

One aspect of the new act that seems definitive is the way in which franchisees can allege encroachment: They must prove that the new franchise unit has adversely impacted their sales by 5 percent or more. Still, this requirement worries some franchisees, who fear it will be difficult to pinpoint the cause of financial losses. "Because this [provision] isn't very clear," says one franchisee, "I'm concerned with how it will be interpreted."

Yet Trice points out that Iowa franchisees still have more reason to feel secure than do their counterparts nationwide. "Surely this has to be viewed as a law enacted to protect franchisees," she says. "To say that franchisees have lost rights in Iowa is not correct. The statute still creates extraordinary potential for remedies on the part of franchisees that they wouldn't enjoy in most other states."

It's an environment franchisors are all too aware of. "I'm not sure the solution passed is acceptable to everyone, but I think it's a little better defined than the law we had before," says Bill Kimball, chair of the Iowa Coalition for Responsible Franchising and president of the Des Moines-based franchise Medicap Pharmacies. "But Iowa still has the most restrictive law in the country, and I question whether that's good for the state."

Among industry insiders who have been observing this real-life experiment, the consensus seems to be that something isn't working. Neither franchisors nor franchisees seem particularly thrilled by the law and, according to Kimball, some legislators are saying "this was a mistake and should be repealed. The political reality is that it would have been impossible to [get this law repealed] this past session. But I wouldn't discount the possibility in future years."

UFOC Spells Relief

In most industries, "deadline" is a dreaded word. However, in franchising, the January 1, 1996, deadline for the new format UFOC was greeted with more of a sigh of relief than a whirl of last-minute activity by franchisors.

No longer waffling between the old and the new formats, the Federal Trade Commission (FTC) and the states that require franchise registration now accept only the new format. And surprisingly, according to franchise attorney Andrew A. Caffey, the companies that were way ahead of the deadline outnumbered the companies doing the last-minute shuffle. "[In November 1995,] probably more than 90 percent of the companies were already using the new document," says the Washington, DC, attorney. "The new format was first announced in April 1993, so we've had a long phase-in period."

Though the transition went fairly smoothly, Caffey believes a couple of aspects sparked confusion. "Initially, it was announced that there would be a one-year phase-in in 1994, and that the new format would become mandatory six months after the last of the registration states adopted the new format," says Caffey. "As it turned out, the states of Virginia and New York took a long time to adopt the new format. New York finally adopted it late in the summer of 1995, which would make the mandatory deadline February or March 1996." Rather than setting the deadline into the year, the FTC decided to make the cutoff point January 1-a matter of common sense to those companies whose fiscal year corresponds with the calendar year but a source of aggravation for those companies that weren't quite prepared.

As expected, another bone of contention seems to be the interpretation of the new UFOC's language. "Franchisors and the Franchise Bar Association are getting wildly different comments and responses among states and even among examiners in the same state," says Caffey. "That's to be expected in the first year of a new format. There are multiple interpretations and lots of different ways to read these unusual new requirements."

And even though the changes are in, it's not over until the state examiners sing. "Franchisors can expect another bruising renewal season," Caffey says. "We're anticipating that examiners will reread these documents and come up with a whole raft of comments on the same documents submitted last year."

A major objective of the new UFOC was to relay the information in "plain English"-to make the document more reader-friendly. But do these changes ultimately make the document even more confusing? "Applying the plain English standard to inherently complex provisions that are delivered to enormous franchise corporations with teams of corporate lawyers is nothing short of absurd," contends Caffey.

However, for the most part, Caffey believes the changes in the UFOC satisfy the basic objectives its designers aimed for: to create a shorter, easier-to-read document. Caffey also appreciates the elimination of the franchise agreement from the UFOC text and the inclusion of more information on advertising, co-ops and the computer equipment required.

Perhaps most important, Caffey says the new UFOC "expands by tenfold the requisite number of franchise owners to be included. The new format has clarified addresses and phone numbers of franchisees, providing new nuggets of information that will be of great help to investors."

Opportunity Watch

Adventures in Advertising

2353 130th Ave. N.E., #110
Bellevue, WA 98005
(800) 374-7328

Description: Specialty advertising products and creative promotional programs

Business Began: 1980

Franchising Started: 1994

Franchise Fee: $24.5K

Total Start-Up (Excluding Franchise Fee): $42.5K-64K

Royalty: 0-7%

Number Of Franchisees: 16

Seeking: Nationwide

How would you describe a typical franchisee? "We attract people with professional sales, business and marketing backgrounds who are looking for a franchise where they can use their prior business skills in sales and marketing," explains Dan Carlson, founder and president of Adventures in Advertising. "These are people not interested in running a typical fast-food or cleaning franchise."

How do you ensure your franchisees succeed? "We offer a very thorough two-week training program in Seattle where our franchisees receive the necessary administrative training and learn how to make sales presentations," says Carlson. "We also do a demographic profile of their territory and help them identify potential clients." -Lourdes Aguila

Toy Traders

4334 Leland St.
Chevy Chase, MD 20815
(301) 654-TOYS

Description: Retail operation that buys and resells used toys

Business Began: 1980

Franchising Started: 1995

Franchise Fee: $20K

Total Start-Up (Excluding Franchise Fee): $30K

Royalty: 5%/1.5%

Number Of Stores: 2

Seeking Franchisees: Nationwide

How did the Toy Traders concept originate? "My sister, Andrea Moore, came up with the idea 15 years ago as a solution to the problem of what to do with her children's old but reusable toys," says company president Lewie Bloom. "We opened our first store with merchandise Andrea acquired from garage sales as well as her own used toys. The concept is particularly popular with parents who want to teach their kids the value of taking care of things as well as the benefits of recycling. The success of our stores prompted us to try our hand at franchising last year."

What support do you offer franchisees? "We are involved with all aspects of the franchise-financing, leasing, store design and layout," says Bloom. "We train the franchisee in all aspects of running a business, from the administrative side to merchandising to repairing the broken toys. For those franchisees who do not want to take the time to acquire merchandise, Toy Traders will supply them with their first shipment of toys."