The Future Of Franchise Laws

The Encroachment Issue

FZ: One of the big issues between franchisors and franchisees has always been encroachment. Can you talk about the encroachment provisions of the Small Business Franchise Act?

Kezios: If your loss of gross revenue is due to encroachment, you're going to see it the very day, the very week at the latest, that the other unit opens up. The Coble-Conyers bill doesn't say you can't encroach. It says, yeah, you can encroach, but if you encroach and the harm to the franchisee is 10 percent or greater of their gross sales, then you've got to pay money to the franchisee over a period of time to make him whole.

Kaufmann: The encroachment provisions of the proposed Small Business Franchise Act amount to nothing more than a truly selfish power play by existing franchisees who don't want to see other franchisees share the wealth. If I'm the first franchisee of McDonald's here in Manhattan, clearly I don't want to see another McDonald's restaurant anywhere in Manhattan. It's a totally illogical sentiment on my part. It's totally selfish on my part. Yet if I'm that first McDonald's franchisee in Manhattan, I want to be illogical and selfish, because then I'll get all the business to myself, keep everybody else out, make myself a fortune and inhibit anybody else from doing so. Of course, what that does to the McDonald's system is prevent it from any expansion in Manhattan.

Aside from sheer greed, the encroachment provisions of the proposed Small Business Franchise Act will have absolutely no benefit to any party, franchisor or franchisee. Let's remember something that a lot of franchisee advocates would have you either not know or forget: The reason franchising has proved so successful is franchisors understand, as other nonfranchise chains do, that the name of the game is market penetration, market expansion, economies of scale and adequate advertising curves. To draw customer traffic to your franchise network, you have to have a sufficient number of units in each marketplace to generate enough advertising investment, which will lead vast numbers of consumers to your outlets. It's that advertising coupled with the increased name recognition of a vast number of units in any given market that has accounted for the vast success franchising has enjoyed over the past 40 to 50 years.

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