How to Draft an Effective Franchise Agreement

Contain statutorily required provisions Avoid conflict with statute (MCL ) Adopt distributor obligations as described in statute. Define expectations/standards Define undefined terms Utilize MCL to modify behavior Have proper termination procedures

1. A Supplier Shall Not: 1. A. “Fail to provide each wholesaler of the suppliers brand or brands with a written agreement which contains, in total, the supplier’s agreement with each wholesaler and which designates a specific sales territory. …”

Provisions that coerce, or attempt to coerce a wholesaler to accept delivery of any beer or other commodity which has not been ordered by the wholesaler. Provisions that coerce, or attempt to coerce a wholesaler to accept delivery of beer or another commodity ordered by the wholesaler that was properly cancelled by the wholesaler pursuant to procedures agreed upon by the supplier and wholesaler.

Provisions that coerce, or attempt to coerce, a wholesaler to do an illegal act. Provisions that require a wholesaler to agree to any provision limiting its right to sell the brand or brands of any other supplier unless the acquisition would materially impair the quality of service of the brand or brands of beer of the supplier seeking to impose the limitation. Provisions that requires tied in sales (must purchase this beer in order to purchase this other beer).

Provisions that request a wholesaler to provide profit and loss statements, balance sheets or financial records as a requirement for renewing or retaining an agreement. Provisions that allow a supplier to withhold delivery of beer ordered by the wholesaler or change a wholesalers quota if not done in good faith. A provision that requires a wholesaler to contribute or participate in any local or national advertising fund controlled directly or indirectly by a supplier

Provisions that fix, maintain or establish the price at which a wholesaler sells the beer. A provision that allows a supplier to require or prohibit any change of the wholesalers (brand) manager or successor manager. Require disputes to be arising out of the franchise agreement to be determined through the application of another state’s law, in federal court in another state.

Sales must be confined to designated sales territory. Wholesalers are required to devote reasonable efforts and resources to sales and distribution of all of its assigned brands and maintain reasonable sales levels. Wholesaler required to give written notice of intent to transfer brands. Transfers without supplier approval are statutorily null and void.

Annual Business Plans: Sales goals – Think about how measured! Call frequency Brand support (POS etc.) Promotional budget (distributor controls how $ spent but guidelines acceptable) Reasonable inventory requirements Brand rotation/code date compliance Product storage/transportation Depletion reports/ site inspection Drive along Training requirements Master distributor? Must say no if don’t want!

Brand manager/successor manager standards: Craft Experience Knowledge of industry Training ???? Just be reasonable Proposed transferee standards: Craft experience Staff craft experience Financial Health Reputation in market Previous relationship Other Brands ???? Must be reasonable

Talking about terms not defined in the liquor control code and more specifically the franchise law (MCL Examples: Fraudulent conduct (15 days) Ineligible for sale (15 days) Plan of corrective action (good cause)

MCL (6)-(8). Also known as the Good Cause Termination Procedure. View and use as tool to correct problematic behavior with the threat of termination being a big stick. Can only do if: Have written franchise agreement Have defined expectations and standards

Good Cause Termination process: Distributor is not in compliance with a provision of the franchise agreement that is both material and significant to the business relationship. If no written franchise agreement how do you prove? If expectations and standards are not in the franchise agreement how do you prove? The supplier has known about the failure for less than two years. Wholesaler was given written notice by the supplier

Distributor given an opportunity to comply – 30 days to submit a cure plan and an additional 90 to comply. If no cure plan submitted in thirty days – terminate Significant ability to address what needs to be in cure plan, if not in the plan supplier can terminate Once plan agreed to distributor must complete in 90 days or terminate. This is a significant right that a strong franchise agreement enhances. Vast majority of distributors comply, release brand or sell without litigation.

Three types of terminations: Good Cause – discussed above and will most often modify distributor behavior. Immediate Insolvency of distributor Revocation of distributors license for more than 60m days Felony Conviction (10% ownership interest). 15 days Fraudulent conduct with supplier- Definition of fraud is important because it can expand the situations where 15 day termination can apply. Distributor sells outside of territory- Don’t unintentionally expand or could lose this. Sale of ineligible brand. Not sure what this means so define it to expand the application of this provision.