franchisee and recite therein the franchisor's objections concerning the franchisee's business operation. The franchisee, upon receipt of the notice, should be afforded a reasonable time within which to comply with the franchisor's reasonable suggestions and recommendations. If the franchisee does not comply with the recommendations of the franchisor, then termination may occur. In the event that a termination does ultimately occur, it would seem reasonable that the franchisee should receive compensation equal to the fair market value of the buildings, machinery, materials, and facilities and equipment used in the marketing of the franchisor's product; however, no compensation need be made for goodwill if the termination occurs as a result of conscious malfeasance or willful failure of the franchisee to perform the duties imposed upon him under the franchise agreement.

Finally, it should be expressly provided in section 6 that the burden of proof is upon the franchisor to establish that a termination occurred for reasons of "conscious malfeasance or willful failure of the franchisee to perform the duties imposed upon him under the franchise agreement."

F. ASSIGNMENT

At present, most franchise agreements preclude a franchisee from assigning his contractual rights thereunder to a third party. Other agreements provide that a franchisee may assign his rights under the contract to a third party upon condition that he first acquire the written consent of the franchisor to the assignment.

Therefore, the ultimate disposition of the franchisee's contract is subject to the complete control and discretion of the franchisor, who may refuse to permit an assignment. I respectfully suggest that S. 2321 be amended so as to provide that an arbitrary refusal by the franchisor to permit an assignment by a franchisee to a third party, should be deemed an act of termination, if the franchisee so elects. If the franchisor arbitrarily prohibits a franchisee from making a sale to a third party, then the franchisor should be required to make payment to the franchisee in an amount equal to a bona fide good faith offer made by a third party to the franchisee. In the absence of such a provision, the franchisee remains subject to the discretion and control of the franchisor and he is not an independent businessman possessing the normal incidents of business ownership.

G. CONCLUSION

There can be no doubt that the common practices of vertical price fixing, territorial and customer restrictions, tying agreements, and exclusive dealing can be successfully attacked and prosecuted under the antitrust laws, as they now exist. However, it is oftentimes impossible for a franchisee to finance lengthy and expensive litigation against his franchisor. In fact, my personal experience has demonstrated that an attempt by a franchisee to institute or commence litigation alleging anticompetitive practices oftentimes results in the termination of the franchise agreement by the franchisor, which act completely demoralizes the franchisee and places him at the mercy of his franchisor.

S. 2321, if enacted, will serve as notice to franchisors that they may not arbitrarily and without good cause terminate a franchise agree

ment and thereby hopefully eliminate or substantially reduce the constant threat confronting a franchisee that if he does not follow the instructions of his franchisor, even though such instructions include anticompetitive practices, he will have an effective remedy available to him that can be pursued with less cost and time than would be involved if he was to pursue his remedies under the present antitrust laws.

As a member of the bar, I truly welcome legislation such as S. 2321 and I am confident that the enactment of this bill will foster competitive forces in our economy. I sincerely hope that the recommendations and amendments to S. 2321 which have been presented in my statement, as well as in the statements of my associates, will be given your serious and careful consideration and that you will act favorably upon such recommendations and amendments.

Thank you for your attention this morning.

Mr. HOPKINS. The next statement will be read by Aaron Wiss, the executive director, Beer Distributors of New Jersey, partner in the firm of certified public accountants of Wiss, Pachman & Weismann, and author of the panel titled "Financial Management for Beer Wholesalers."

Mr. Wiss.

STATEMENT OF AARON WISS, EXECUTIVE DIRECTOR, BEER DISTRIBUTORS OF NEW JERSEY, PARTNER IN THE FIRM OF WISS, PACHMAN, WEISMANN & CO., CERTIFIED PUBLIC ACCOUNTANTS

Mr. WISS. Thank you.

Thank you, Senator Hart, and your fellow committeemen for the privilege to appear before you and express my views on S. 2321, the Franchise Competitive Practices Act of 1967.

Because of the failure of American industry in its dealings with its franchises to eliminate its abusive practices through the medium of self-regulation, it is recommended that this committee report S. 2321 favorably and that Congress adopt said legislation which will establish the foundation upon which we can build understanding and cooperation essential for prosperity, security, and thus, a better America.

Having been in practice as a certified public accountant for over a score of years, I have acquired more than a reasonable knowledge of the franchisor-franchisee relationships in many industries. My comments this morning, however, will be directed primarily to the brewing industry because of my special expertise with it and, furthermore, because it graphically illustrates the position of a franchisee in any industry without self-regulation and without Government regulation in said area. May I reemphasize that my remarks are equally applicable to all industries that depend on franchisees to distribute the product of a franchisor.

It is my intent, first, to illustrate the concentration in American industry and its effect upon the franchisor-franchisee relationship. The concentration of manufacturing in the hands of a few giants, controlling the major portion of the national market, has been in continuous progress for the past 30 years and has accelerated at a rapid pace in the past decade-notably automobiles, textiles, and the brewing industry close behind. From a total of 752 brewers in 1934, there

were less than 100 remaining at the end of 1966; yet the total production of beer is more than 21/2 times as great as it was then.

The concentration trend is further illustrated by noting that in 1947 the top 10 brewers accounted for 30 percent of sales while the figure in 1967 will probably approximate 63 percent. Yet in 7 out of 10 U.S. industries the four largest firms account for a greater percentage of output than they do in brewing. As the number of brands becomes fewer, so correspondingly do the number of distributors.

Such continued concentration has its toll on the manufacturer, distributor, and the consumer, and as the competition becomes keener and the battle for survival fiercer, the outlays of cash become greater, the investment in capital assets more substantial and the profit margins narrower, both for the manufacturer and the wholesaler. As the number of manufacturers diminishes and with it the number of available brands, so, correspondingly, do the number of opportunities for a franchisee to replace a lost franchise. Therefore, the tremendous cash investment in inventory, equipment, and related facilities and the many years of blood, sweat, and tears of the franchisee and his employees with many years of seniority, can, under present conditions, come to naught overnight.

With this potential of being wiped out at the whim of the franchisor, the franchisee becomes but the pawn to be maneuvered to the best interests of his supplier (but not necessarily to the best interests of the consumer) to the degree where every suggestion becomes a veiled command with the final result being the elimination of free enterprise. To corroborate my observations, let me quote the president of one of the top breweries in America as to what major problems confront brewer-wholesaler relations, which are equally applicable in most other industries where franchisees are utilized (address delivered February 1965 to U.S. Brewers Association National Convention in San Francisco and the situation is still applicable today).

*** There are a great many (drawbacks to industry solidarity) ** 1. Overnight checkouts.

2. Dictation by breweries of the brands which wholesalers handle and, what is even worse, demands by breweries that brands be smothered.

3. Dictation by breweries to wholesalers on pricing and on dealing.

4. Demands by breweries that wholesalers engage in illegal practices.

He concluded his remarks with a strong appeal:

The choice is between legislation and an industry code, between self-regulation and regulation by Government.

However, all we have had in 33 years is minimal progress by two to three brewers in their own limited way attempting to improve their relations with their franchisees. I compliment them on their efforts to improve the security and peace of mind of the wholesaler, but the rate is too slow, the accomplishments too little, too nebulous by too few. To allow them to continue without Government regulation will end up as the story of Sisyphus, which I told the brewers in my address at the same U.S. Brewers Association National Convention in San Francisco, which bears repetition at this time.

*** Sisyphus, a character from Greek mythology who was ordered by Pluto to roll a big stone to the top of the hill; it became an endless process of trying, probing, falling, resting, and trying again-always just trying but never succeeding.

Since we cannot allow the situation to continue uncorrected, and consistent with our American tradition when industry fails to eliminate its abusive practices by self-regulation, our Government must help to fill the void, the only alternative available to protect the small businessman, and, incidentally, at the same time help the big businessman, despite himself, is to adopt the legislation contained in S. 2321, subject to the recommended revisions set forth below.

I deem it a pleasure to compliment Senator Hart and his cosponsor, Senator Magnuson, for introducing this bill, which is such a giant step in the right direction. And, with your permission, I request the privilege to recommend the expansion of section 2(b) and the clarification of section 3(c), and amendment of section 5.

Section 2(b) provides for the exclusion from this bill of those manufacturers whose product represents less than 25 percent of the franchisee's gross sales or receipts.

A franchisee who loses 25 percent of his sales, either by dollars or units, could revert from a successful operator to a marginal one, and, frequently, to a loser. The reasons for this are basic. It is not possible to suddenly reduce operating expenses in direct proportion to a drop in sales. For instance, if you are selling 500,000 units and making 3 cents per unit or $15,000, when you suddenly drop sales to 375,000 units, your profit does not drop to $11,250. It may drop to zero or show a loss, because many expenses remain fixed and others are, at best, semivariable; you do not suddenly change warehouses and reduce occupancy costs by 25 percent, nor dispose of six of your 24 trucks, nor fire the sales manager or office manager and bring in lower price replacements, or cut down on service. In fact, the opposite could occur. Higher priced talent and additional cash investment may be needed to help find a product to replace the lost franchise.

It is recognized that to include all franchisors under the law could make the law impractical, if not impossible to enforce. However, it is my opinion that 25 percent would exclude too many and the law could end up offering more protection to the larger franchisees, who could more comfortably afford the loss of a product, than the smaller franchisees, because more capital is generally available to them and their position by virture of their size in the various industries, which would make them less vulnerable to domination by the franchisor. Therefore, I favor that the percentage be reduced from 25 percent to 10 percent. Section 3 (c) provides for "the payment to the franchisee of a sum equal to the reasonable value of the franchise, including goodwill." The above phraseology lacks the mechanics for the determination of such value.

Goodwill is generally defined as the value of all favorable attributes relating to a business enterprise and demonstrated by its earning power.

However, in computing the value of a franchise, in addition to goodwill, let us not overlook how many thousands were spent in hiring, training, firing, and hiring more personnel until an efficient team was built up; how many thousands were spent in building customer relations and product acceptance in the new market area; how many thousands were lost in the early years of operation until the objectives of a successful operation were achieved.

The classical valuation of goodwill is what a willing buyer would pay a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The above statment is simple but its fulfillment most difficult, even under ordinary business conditions. However, the franchisor-franchisee cannot come within the terms of the definition. Can you conceive how neither party is not "under any compulsion to buy or sell ***"? Because of this imbalance of power, it is necessary to provide guidelines in this section to minimize the extent of arbitration and litigation.

Since there are many different types of industries involved, all with their own unique problems, it would be presumptuous for me to prescribe, at this time, a single panacea which could provide for an equitable settlement for both the franchisor and franchisee in every industry. My suggestion would be that this committee empower a panel of experts drawn from divergent segments of industry to develop the guidelines by categories, such as service industries, heavy manufacturing, appliances, direct consumer sales versus sales to jobbers and retailers, et cetera.

By no means do I wish to convey the thought, however, that this is an impossible task. It can be done and it must be done or the results will be costly litigation which would arise without such guidelines. We must also bear in mind that the franchisee does not have the legal talent nor the wherewithal to combat the giant franchisors in a court of law.

Should you consider me qualified, I am happy to offer my services to serve on such a panel.

To merely illustrate that a solution to the problem of evaluation of goodwill is possible the following formula, though by no means the only one, is presented as an illustration for use in the brewing industry:

(2) The annual income (after reasonable compensation for working management and income taxes) for the pre ceding 5 years was $20,000 per annum.

B. Solution:

(1) A fair return on investment capital plus excess profits capitalized at 15 percent which shall constitute goodwill.

(2)

Mr. Wiss. In those circumstances where there is a definite uptrend or downtrend, a weighted average method of establishing income may be preferable.

Now, if you accept the above as a reasonable method of calculating goodwill, then you will appreciate the significance of the following experiences, which graphically illustrate the tenuous position of the franchisee. Within the past couple of years, our office closed two estate