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13 Franchise L.J. 39 (1993-1994)
Franchisor Liability in the Market-Development and Site-Selection Process: Location, Location... Liability

handle is hein.journals/fchlj13 and id is 39 raw text is: Franchisor Liability in the Market-Development and Site-Selection Process: Location, Location... Liability? by Gaylen L. Knack and Troy A. Bader* Minneapolis, Minnesota Gaylen L. Knack Troy A. Bader Every franchisor and franchisee has heard the quote: The three most important factors in developing a successful retail business are location, location and location. During periods of economic uncertainty and heightened competition for consumer dollars, the selection of a quality site for a franchised business is becom- ing increasingly important. Yet, while both franchisors and fran- chisees acknowledge the importance of a site, both parties often pay too little attention to the site-selection process. Franchisees too often discount independent professional advice and person- ally handle the process of selecting a site for their franchised business. Franchisors tend to shy away from aggressive com- mitments to franchisees and, instead, opt for lukewarm pledges such as reasonable assistance. The effect of a poor site-selec- tion decision has always created problems for franchisees. Because of recent activity in the courts, Congress, and state leg- islatures, franchisors may be forced to accept greater responsi- bility for those decisions. Accordingly, franchisors should no longer casually address the site-selection process. This article examines franchisor involvement in various phases of the market-development and site-selection process and potential liability franchisors may confront as a result of such involvement. While there are a myriad of issues associated with site selection, the issues that franchisors and franchisees are likely to encounter most frequently are examined. This arti- cle begins with a focus on issues associated with market devel- opment generally and the polarized issues of saturation versus encroachment, then narrows to examine more closely individual site-selection issues and the varying degrees of franchisor assis- tance in the site-selection process. *Mr. Knack is a principal and Mr. Bader is an associate in the Minneapolis firm of Gray, Plant, Mooty, Mooty & Bennet, P.A. Market Development-The Broader Perspective The Desire for Unit Development The strength and success of any franchise system rests large- ly, if not entirely, in the goodwill consumers attribute to the name, trademarks, products, and services associated with the system. The key to developing consumer goodwill is creating name recognition. Probably the most effective method of creating name recog- nition in any market, other than advertising, is to establish the franchise system's presence through planned unit development. As additional units are developed in a particular market, con- sumers more frequently encounter the franchised name, trade- marks, products, and services. Additional unit development also creates growth in sales promotion funds. Through proper use of those sales promotion funds, consumer exposure to the fran- chise system can be even further expanded and their awareness of the products or services associated with the system enhanced. Additional unit development, particularly with a start-up or maturing franchise system, should also increase interest among prospective franchisees. As the pool of prospective franchisees grows, franchisors may also realize that the quality and enthusi- asm of the pool have improved. This larger, better-qualified pool of prospective franchisees will help foster continued unit development through which the franchise system may ultimate- ly achieve optimum market penetration. Unfortunately, franchise systems are often unable to achieve optimum market penetration. Some systems cannot create suffi- cient interest in the franchise concept to facilitate the unit devel- opment that is fundamental to market penetration. Others fail to sufficiently control development and new units actually have a significant adverse impact on existing units. If either situation occurs, a franchisor may encounter franchisee rebellion. Many causes of that rebellion, however, may be avoided. Insufficient Market Penetration One of the most significant problems that can bridle a fran- chise system is the inability to develop new units. This inability may be caused by a number of factors, including insufficient interest in or acceptance of the franchised concept, insufficient name recognition, unavailability of affordable and attractive sites, and excessive competition. Whatever the cause, the rami- fications of an inability to develop new units can be significant. If a franchise system does not have an existing pool of quali- fied franchise prospects, it may not be in a position to act quick- Fall 1993 Franchise Law Journal 39

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