One of the first tests of the new agreement and negotiation process came this year when Taco John's rolled out Taco John's Mexpress, an alternative distribution system using freestanding carts and kiosks. The franchisor figured since the carts and kiosks weren't entirely new franchises, they didn't represent significant competition. The franchisees disagreed -- loudly. But, says Sims, Taco John's eventually came to see that "our franchisees played an integral role in building our brand, too." The agreement was modified to say that Taco John's won't expand Mexpress in a franchisee's protected area without written franchisee authorization.
* * *
"You agree that the Restaurant will: purchase all food products and beverages; menus; paper and plastic products; packaging or other materials; and utensils, only from distributors and other suppliers we have approved. . . . If you would like to purchase any items from any unapproved supplier, you must submit to us a written request for approval of the proposed supplier."
Most franchisors require franchisees to buy supplies or ingredients from one source or a list of approved sources, even if items can be found cheaper elsewhere. This purportedly provides economies of scale, protects trade secrets, and helps the franchisor maintain product consistency. The Taco John's franchisees, although they recognized the need to control product quality, wanted to be free to shop around. "But too many sources for a company our size is not economically feasible," argues Sims. "We don't have the same distribution clout as Hardee's or Burger King." They compromised with multiple sources for all equipment and nonproprietary items. Franchisees who find a better price from an unapproved source can submit a request to get the source approved.
* * *
"You agree to pay us . . . an advertising media fee . . . equal to three percent (3%) of the Net Sales of the Restaurant. . . . The Advertising Media Fee may be increased or decreased by no more than one-half of one percent (0.5%) per calendar year upon the affirmative vote of two-thirds (2/3) of the Taco John's franchisees. . . .
"You agree to pay to the Advertising Production Fund . . . [a] fee of one-half of one percent (0.5%) of the Net Sales of the Restaurant. . . . The Advertising Production Fund will be administered by . . . the 'Advertising Production Committee' . . . which will be made up of both Franchisees and our representatives. . . . The Advertising Production Committee will determine what materials will be produced using the Advertising Production Fund. . . . "
Another common franchisee complaint is that while franchisees must contribute a percentage of their sales toward an advertising fund, they have no say over how that money gets spent. At Taco John's, both sides knew they were being outspent on media (where and when advertising will run) and production (the actual creation of ad materials). The old contract specified a franchisee media contribution of 2% of sales, but competitors were spending 4% and up. They compromised on 3%. They also set the advertising production contribution, which had varied in previous agreements, at 0.5%. Either side can change these percentages: the franchisor needs approval from a majority of franchisees, whereas the franchisees can adjust the rates with a two-thirds majority vote. And while the franchisees have no say in media allocations, they do control the advertising production committee, so if they don't like how a campaign has been designed, they can simply vote not to give it a production budget.
* * *
"To renew the Franchise, the Franchisor, the Franchisee and its owners shall execute the form of standard franchise agreement . . . we are then customarily using in the grant or renewal of franchises. . . . Those agreements may contain royalty, advertising and other fees that differ from those contained in this Agreement. . . . "
Franchisee advocates have griped about how inequitable it is for franchisees to have to sign a different agreement when they renew after their initial term expires. But Taco John's management and the franchisee representatives believed that there's no way the franchisor could look 20 to 30 years into the future. "Who knows what the industry will look like in 2015?" says Sims. "There's got to be the flexibility that you get a then-current document when you renew." Says Batteen, "They could really put it to us and change things completely. But the new agreement also gives us remedies we could use against them," such as the aforementioned arbitration.
"We shall have the right to terminate this Agreement effective upon delivery of notice of termination to you, if you . . . [f]ail to develop or open the Restaurant as provided in this Agreement . . . provided that you will have thirty (30) days from receipt of written notice from us to cure any of the aforementioned defaults provided however that termination by us will not be arbitrary or capricious when compared to our actions with respect to other franchisees in similar circumstances. Furthermore, we shall have the right to terminate this Agreement . . . if you . . . [o]perate the Restaurant in a manner that imminently endangers the public health and safety. . . . "
The franchisees wanted the franchisor to have the power to come down on franchisees who weren't complying with standards. "We didn't want to take any teeth out of the document," says Batteen. The agreement grants a period of 30 days for franchisees to remedy any transgressions. (Many agreements specify a 30-day period for the franchisor but none for the franchisee.) The franchisor doesn't have to wait 30 days if there's a risk to the entire system, like a rogue franchisee endangering the public health with an E. coli problem. "This protects our investment," says Batteen. Some franchisors yank licenses first and ask questions later. "We would like to have had more teeth here: how much more can you be harmed in 30 days?" says Sims.
* * *
