September 2010 Archives

September 17, 2010

Geographic Considerations in Choosing a Franchise

The decision whether to purchase a franchise requires thoughtful consideration of numerous factors.  It is common for prospective purchasers to be blinded by the success of the franchise's national reputation.  A national reputation with hundreds of profitable locations, however, does not guarantee that every potential location will be profitable.  Before making the decision to buy a franchise, prospective franchisees should carefully examine the demographics of the proposed location.  

Take for example, a successful franchised sandwich shop located in Chula Vista's Terra Nova Plaza at the intersection of East H Street and the 805 freeway.  This is a high traffic location that some commercial tenants have classified as an "A" center.  While this is a hypothetical example, there can be little doubt that a national franchised sandwich shop in this mall will be profitable, perhaps extremely profitable.  Put that same franchise in one of Chula Vista's Eastlake or Otay Ranch shopping areas and you will almost certainly show a different result.  While these communities are rich, diverse and beautiful, they have suffered greatly from the current struggling real estate market.  This writer is convinced that Eastlake and Otay Ranch will recover and thrive, but for now business owners in the area have accepted their reality.  This is not to say that the national franchised sandwich shop cannot be successful there. It merely is to suggest that a prospective franchisee would be unwise to move forward without seriously considering this economic reality.
Of course, this example is dependent on recessionary factors.  Other demographics may prove important to the sandwich shop's success.  There may be less demand for a sandwich product in minority communities like San Ysidro and more upscale communities like La Jolla.  It will also likely be more successful in high traffic business centers such as downtown San Diego.  The point is to evaluate the demographics before assuming the franchise will be successful.
September 8, 2010

To Franchise or Not To Franchise

As with the purchase of any business, purchasing a franchise in San Diego requires careful consideration of the company, its operations and profitability and the economic climate.  Franchise opportunities abound and they offer purchasers the unique ability to operate a business using an existing and successful business model.  With proven systems already in place, it is generally easier to operate a franchise than to start a new business.  However, the franchise model does not guarantee success.  Different markets, unfamiliarity with the business type, economic swings, geographic differences and other factors can combine to ensure failure in one locality where another thrives.   This article briefly addresses some of the more important considerations prospective purchasers should look at before making the decision to buy a franchise.  

Most importantly, the prospective purchaser should learn as much about the franchise as possible.  It is important to analyze the franchise disclosure carefully, to contact existing franchise owners and to visit the franchise headquarters.  Ask the following questions: How many individual franchises are there?  What type of training is offered?  What is the company's reputation?  What are the typical profit margins?  What are the company's plans for growth?  The answers to these questions help to inform the ultimate decision.  In addition, the prospective purchaser should perform its own a market analysis.  An independent evaluation will look at the uniqueness of the product or service, the vulnerability of the business to market fluctuations and the franchise's historical profitability.  If a thorough independent evaluation isn't practical, at least take a look at the differences and similarities between the proposed location and other successful locations.  If the demographics are completely different, it could be a red flag requiring heightened scrutiny.  

Armed with an in-depth understanding of the business model, the prospective purchases can next consider whether the purchase of the particular proposed franchise makes sense for them individually.  What level of expertise do they have in the particular business?  What kind of start-up capital is required and how might they raise it?  What are the franchise fees and will the profit margins be high enough to cover them?  How long will it take to recoup the initial franchise fees?  What is the term of the franchise agreement?  What are the franchise's operational requirements?  What about leasing obligations?  It isn't wise to take short cuts when answering these questions.  Where possible, enlist the services of an accountant, business attorney and/or financial advisor with experience in assisting clients with franchise businesses.

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September 3, 2010

Trade Secrets - Protecting Customer Lists

San Diego businesses typically invest significant resources in the development of customer lists, but often fail to adequately protect them.  Companies may believe that such lists are automatically protected "trade secrets".  However, without affirmative steps designed to ensure that confidential lists fit within the definition of a trade secret, customer lists are at risk.  In California, customer lists are considered trade secrets if the lists are valuable because they are kept secret (information that "derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use"), and if the business takes reasonable steps to protect the lists.  The greatest risk comes from the company's employees.  In order to maximize protections, companies should take the following affirmative steps:  

Maintain physical security:  Customer lists should be isolated from other company information and clearly labeled "Confidential".  Computer files containing customer lists should be password protected and each file marked "Confidential".  When computer lists are accessed, the computer should flash the user a confidentiality reminder.  Hard copies should be kept under lock and key with the cabinet and individual files clearly labeled "Confidential".  In addition, employee access should be limited to those employees that actually need it.  These physical security measures serve as a constant reminder to employees and others that the company's customer lists are indeed confidential.  

Require non-disclosure (confidentiality), non-compete and non-solicitation agreements:  Require employees to sign non-disclosure, non-compete and non-solicitation agreements.  Requiring employees to sign non-disclosure agreements puts them on further notice that the company's customer lists are confidential.  It's important that the non-disclosure language specify the company materials intended to be confidential.  Courts are inclined to strike contract language that is too broadly worded.  Non-compete clauses limit an ex-employee's ability to hire on with competitors.  Such clauses are generally unenforceable in California.  This is because courts are reluctant to place restrictions on an individual's ability to seek new employment.  However, their inclusion in employment agreements can affect how departing employees behave.  Where enforceable, non-compete clauses are typically limited in time and geographic scope.  Non-solicitation agreements are less burdensome than non-compete agreements and therefore are more readily accepted by courts.  In non-solicitation agreements, employees agree not to solicit a company's existing customers or prospective customers.  Whichever state your company resides, it is important to have your attorney carefully draft non-disclosure, non-compete and non-solicitation language to ensure enforceability.

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