Playing by the Rules
By signing a franchise agreement, franchisors and franchisees begin a relationship based on mutual trust and confidence. The other franchisees in the system will also be relying on you as well, because how well you perform has a direct impact on them and their businesses.
Because of the rise of customer reviews, written on Twitter and review sites like Yelp, Google, and Trip Advisor, what happens in London no longer just impacts Manchester and Oxford — it also impacts San Diego and Miami. We live in an ever-shrinking world. Everybody wants you and your business to succeed. If you follow the franchisor’s system you just might do that, but for certain, if you don’t, your operation is likely going to suffer and possibly even fail. Your failure won’t only impact you, it will also impact the other franchisees in the system. So remember: The whole team is counting on you to play by the rules.
Meeting franchise system standards
Franchising has an interesting dynamic missing from most other types of expansion strategies. The owner of the brand and the operating systems has little to no control over how the business is managed and operated on a day-to-day basis. That is the responsibility of the franchisees.
Most franchisors trust that the franchisees will operate the businesses with pride in the system and rely on the franchisees to independently manage the business in a way that consistently delivers to every consumer the brand promise of the system. Franchisors drill and drill their franchisees on system standards to ensure that they understand what the system’s brand means to consumers. Franchisors do so when first meeting franchisees during discovery day, at training sessions, during franchisee meetings, in the operations manual, in franchise newsletters, in webinars, through the system’s field consultants, and every other chance they get. Franchisors celebrate publicly those who execute the standards well and may expel from the system those who don’t. And in all cases, franchisors constantly emphasize the importance of brand standards in an effort to maintain the value of the brand, support the pride everyone has in it, and ensure that the consumer can rely on the franchise system’s brand promise.
Maintaining a system everyone can be proud of requires that everyone meet the system’s brand standards — at every franchisee operation and at every company-owned operation.
“Selecting franchisees that can independently deliver to the high brand promise of a home care brand like BrightStar Care is what has allowed us to grow and today lead in our industry segment,” says Shelly Sun, founder of BrightStar Care and chair of the International Franchise Association. “During our discovery days we are not selling the prospective franchisee on the BrightStar Care system. Instead they are selling us on why we should trust them to operate in their local markets using our brand. After all, while we license our system to franchisees, and they share a brand with all of the other franchisees in our system, it is our franchisees that are going to be the ones solely responsible for delivering to BrightStar Care’s high brand standards. I have grown BrightStar Care with a personal commitment that while I am not with every patient every day, our selection, training, accreditation requirements and support of our franchisees is to give our patients and their families the confidence required in selecting BrightStar Care to care for their needs.”
As powerful as the brand promise can be in achieving success, not achieving the goal of brand standards consistently can be a franchise system’s greatest risk and threat. It only takes one franchisee who doesn’t “get it” to cause significant damage to how the public perceives the entire system. In the age of the Internet and social media, nothing is local anymore. Every violation of brand standards that negatively impacts any customer experience can potentially become a system-wide problem. Because of that, franchisors and franchisees take brand standard violations very seriously.
Franchising isn’t perfect. Great franchise systems are simply careful and corrective. It is expected in a franchise system that when problems occur at a location, a good franchisee will take immediate and independent action to fix the problem before anyone becomes aware that anything bad even took place. When there is a dirty bathroom or a lack of proper fizz in the soda, good franchisees correct the problem instantly, because such things are important to how the public views the entire system.
When problems aren’t fixed, or they repeat and continue, that’s when franchisors generally step in to address how to bring the franchisee’s business back into compliance. Franchisors do so because meeting brand standards is important — not just to the franchisee’s business, but to everyone that shares the brand with them.
How does this work? Most of the time (unless the violation is creating a public hazard or is considered extreme), the franchisor’s field consultant contacts the franchisee and works with them to understand the brand standard and fix the situation. In mature franchise systems, the role of the franchisor’s field consultant is primarily to provide the franchisee with coaching to help improve the business and bottom-line performance. Although good field consultants don’t see their job as primarily a policeman for the brand, in a sense they are. An important part of their job is brand integrity, and therefore enforcing standards and assisting franchisees to return to operating standards generally is their responsibility, because they’re the ones visiting the franchisee’s business location.
If problems are severe or repetitive, franchisors usually beef up their oversight of the franchisee’s location to ensure that the franchisee makes the necessary corrections and monitor the situation going forward to make sure the violations don’t reoccur. If violations do continue, franchisors can invoke the remedies available in the franchise agreement, which can include notices of default with a period of time to cure, and ultimately termination of the relationship. However, nobody benefits when it becomes necessary for a franchise contract to be terminated, and although the franchise agreement will contain this right, termination is not that common for many reasons.
Supporting and watching the system
The field staff are a franchisor’s front-line troops and are the real troubleshooters in franchising. They are the members of the franchisor’s staff who work directly with franchisees.
The field staff may go by many names, including field representatives, field consultants, or regional managers. Of the various names franchisors use to describe their field staff, for most brands field consultant is the most accurate because the major role of the field staff is to act as a consultant to the franchisee. A field consultant’s primary job should be to help franchisees improve the performance of their operations. Field consultants stay in regular contact with franchisees by phone, e-mail, and in person to identify problems, answer questions, and bring solutions and ideas directly to the franchisee.
In some systems, field consultants are also involved in local training, but more and more today they work with the franchisee’s internal trainers to help them better train their own staff independently. Field consultants aren’t the same as general managers and have no role in the franchisee’s management or day-to-day control over their business — including the franchisee’s human resource policies.
Field consultants and franchisees must develop a relationship of mutual confidence and respect in order to maintain a positive working relationship. The field consultant’s job is to work with the franchisee to assist them in improving their businesses. They conduct regular inspections of the franchisee’s location, discuss any deficiencies, and make recommendations on changes that may be needed. The job of the field consultant — in good systems — is to help franchisees increase the equity they have in their businesses by working with them to continually improve their performance. This includes addressing situations when the franchisor’s standards aren’t being met, for example, if the staff is not in uniform or the merchandise displays are empty or dirty, and also evaluating financial performance.
Not all the work done by field consultants is in person. With the availability of a host of communication tools today, much of the support many franchisees get is conducted electronically. But in most franchise systems, field visits are relatively frequent.
The timing of the visits may be scheduled or unscheduled. In some systems the timing of visits varies depending on a host of factors that may include social media reviews or the franchisor’s analysis of the franchisee’s financial and operational indicators. In mature systems, the franchisor obtains this information from monitoring Yelp and other review sites or through reports and other information that the franchisee routinely provides, usually electronically and often through an online point of sale (POS) system.
In other franchise systems, field visits are few and far between, and support is not routinely provided by the franchisor. That level of support may be perfectly in line with the promises made by the franchisor and agreed to in the franchise agreement.
The Web and social media
Social media is make-or-break for brands today. It’s an effective tool, especially for franchisors that aren’t in day-to-day contact with franchisees.
To a great extent social media has replaced customer comment cards and has done it in a way that is instantaneous. Consumers of all ages are aware of these social media sites, and many regularly leave reviews — both positive and negative. Using social media in this way is more the norm than the exception today. There are few good businesses, including franchisors, that don’t regularly monitor Yelp and other Internet review sites for comments about their businesses. In addition to the franchisor and consumers who regularly review these sites, other franchisees in the system do also. Social media also alerts the field consultants and others in the franchisor’s organization when problems arise so that effective action can be taken.
Mystery shoppers
Mystery shoppers are usually employees of companies that specialize in shopping a chain’s locations and reporting back to the company what the customer experience is really like. To ensure that the mystery shopper provides the information the franchisor wants to learn, the franchisor develops a checklist about the aspects of the shopping experience it wants to focus on and trains the mystery shopping company on how the brand experience should be delivered. Mystery shoppers are used in many industries, from restaurants and retailers to carpet cleaners, hair salons, gas stations, auto repair shops, and just about every other segment of franchising. But because of social media and other problems inherent in these snapshot reviews, fewer franchisors are using mystery shoppers today than in the past.
Your customers
Good franchisors take customer comments — whether delivered through social media, comment cards, or a toll free number — very seriously. When comment cards or any information about a franchisee’s location comes to the franchisor, if the franchisor responds, it usually just lets the consumer know that the comment has been received and the franchisor has forwarded it to the franchisee. Franchisors don’t generally solve the problem directly, because it’s the responsibility of the franchisee as the owner and operator of the franchised business, and not the franchisor, to deal with local issues as they arise. The franchisor expects the franchisee to deal with customer complaints directly, and when that fails to occur, there are generally tools available in well-designed franchise systems for the franchisor to effect corrective actions.
Fellow franchisees
The other franchisees in a franchise system can also be the eyes and ears of the system. It is expected that franchisees will shop their fellow franchisees and when concerns about how a franchisee is operating the business arise, the other franchisee will often discuss this directly with the franchisee and with the franchisor. This makes sense because one bad performer can harm the brand and therefore the other franchisees’ business.
Franchisees don’t think they’re interfering in someone else’s business. Each unit is part of the whole; they are just protecting their own equity interests. Some of the most effective advisors a franchisee can have are the more experienced franchisees in a system. In a way, those experienced franchisees become part of the franchisor’s support team. The reason is quite simple: From whom would it be better to get advice than a peer who understands the reality of day-to-day operations, has been through the exact same problems with the exact same brand, and from experience knows the tricks?
Success and failure of any business are generally tied to how well the local operator performs. It’s the franchisee’s responsibility to do a self-audit of operations. It’s a good idea for franchisees to periodically review the operations manual and training materials they’ve received to ensure that their business is up to snuff. When they need help, it’s their responsibility to ask for it from their franchisor as well as from other franchisees. The franchisor may not know that a problem exists unless the franchisee brings it up.
All knowledge and assistance doesn’t flow from the franchisor’s well. The franchisor is licensing the franchisees a system — not operating the business for them. In addition to seeking assistance from the franchisor and other franchisees, a franchisee should seek professional outside advice when it is required. For example, local accountants can help improve the recordkeeping, which helps get a better handle on the business, and local marketing experts can help create cross-merchandising opportunities with other merchants (subject to a franchise system’s standards) and help develop ways to target new customers. Franchisees should attend management classes at the local university and send their management team to classes too — that team is running the show when the franchisee isn’t there.
The responsibility for execution excellence is that of the franchisee and not the responsibility of the franchisor.
Attempting to change the system
There are no successful businesses that don’t evolve. Consider how different McDonald’s is today in look and product offering from where it was in 1955. Although many of the changes we see taking place in franchised brands comes from the franchisor, ideally, every system should also encourage ideas from franchisees. After all, franchisees are the ones on the front lines, and they may see ways to tweak the system. Most franchise agreements contain provisions addressing how a franchisee can propose changes, including new products and services, alternative suppliers, marketing approaches, and the like. If a franchisee has an idea to improve the system, he or she should always propose it. The franchisor may not adopt every change — in fact, it may only adopt a few. But it’s important for the franchisees to have a role in advancing the system by making recommendations they believe will improve the system’s overall performance.
Franchisees have a much better chance of having their proposed change accepted if the new idea improves the system, fortifies the brand, doesn’t infringe on uniformity, and enhances a franchisee’s profitability. Franchisees also improve their chances for success if they present their proposal in a professional manner and garner the support of other franchisees and their field consultant before approaching the franchisor. Some franchisors have new product committees as a subset of their franchisee advisory council (FAC). Franchisees should talk to members of the FAC and the franchisor’s management team to determine what criteria are used for recommending approval of new products and services.
Franchisees with a great idea should speak up. But don’t be insulted if the franchisor says no. A franchisor has to look at the overall system and determine how it serves the customer. The great idea may not fit in the overall scheme of things. Good franchisors are open to ideas, but the franchisor’s job is to make the hard decisions — and sometimes the decision is no.
Franchisees should be wary of franchisors who approve all suggestions willy-nilly, especially those that compromise product lines and quality standards. That lack of discretion is evidence of a weak system and can destroy the basic concept a franchisee is buying into. In the vast majority of franchise systems and franchise agreements, if a franchisee’s idea is approved, the improvement is the franchisor’s property, and the franchisor reserves the right to use it and make it part of the franchise system — without paying the franchisee any compensation.
Building a Relationship with Your Franchisor
In franchising, as in any relationship, franchisees are bound to have ups and downs. The key is to be part of a system in which the seesaw tips toward the higher end.
Without a doubt, there can be a love-hate relationship between the franchisee and the franchisor in some franchise systems. It can be very confrontational, and disputes are sometimes substantial and involve litigation.
In evaluating a franchise opportunity, prospective franchisees should check out any past or present litigation involving the franchisor. The franchisor is required to disclose certain litigation history in Item 3 of the franchise disclosure document (FDD — see Chapter 4 for more). If the franchisor has been involved in a number of lawsuits, research the lawsuits listed before you buy into that franchise system. One of the roles your legal advisor can play for you is evaluating the cases in which the franchisor has been involved and give you guidance on whether it is an indication of a strong franchisor that is protecting the brand, a weak management team that manages the system through litigation, or franchisees who have real problems with the relationship with the franchisor.
Being a team player
When a franchisee signs a franchise agreement, the parties are committing to a long-term relationship. The franchisee is promising to uphold his or her end of the bargain (pay royalties, abide by the operations manual, and so on), and the franchisor is promising to meet certain obligations (support services, brand identity, and so on). That is the relationship drawn on paper by the lawyers. The contract is long and detailed and contains representations and acknowledgements that both parties are agreeing to and that both parties have the right to rely upon.
The relationship begins from the very first moment a franchisee meets the franchisor and continues through initial training, the grand opening, field consultant visits, phone calls, e-mails, newsletters, continuing training, updates to the operations manuals, and annual meetings. Communication is a very important component of this relationship and it is a two-way street. Taking part in communication keeps franchisees and franchisors current on each other’s businesses, keeps the relationship fresh and open, and helps evolve the system and keep it moving forward.
Although legally the relationship is based on the contract that the franchisor and franchisee sign, how the relationship actually performs is based on mutual trust and respect. Often the relationship grows into a friendship. A franchise relationship is a long one, and working with people you like is always a good situation.
Being a team player usually tops franchisors’ most-wanted list of franchisee traits, because they want you to be willing to abide by the premise of the ongoing franchise relationship. That’s why veterans are in such demand in franchising today — they understand discipline, how to execute a predetermined strategy, and most assuredly know that they can use their personal skills to outperform the plan. The franchisor is the coach — the designer of the plays, the person responsible for the whole team. The franchisee is the superstar — the one who makes all the plays work, the person whom the rest of the franchise team relies on to perform well. This basic relationship, in which everyone depends on everyone else, doesn’t change even as the franchisee matures in the franchise system. An added bonus to franchisors is that the great-performing franchisees are the models that all of the other franchisees want to emulate.
Even though a franchisee is a superstar, that doesn’t give them the right to make changes to the system without the franchisor’s permission. Also, even though the franchisee will receive support from the franchisor, being a superstar, they’re not solely reliant on that support. After all, the franchisor isn’t managing the business or even directing the franchisee on how to manage the business. It’s merely licensing to the franchisee a system and providing them with guidance and support. Whether the business is a success or a failure is the responsibility of the franchisee and not the franchisor. This is important to understand. “If every prospective franchisee fully understood Michael and Joyce’s description of the roles of the two parties to a franchise agreement, there would be far less conflict and more positive focus on what it takes to be a successful franchisee,” says Jeffrey Tews, a 10-year franchisee with BrightStar Care.
Getting what you need from the relationship
Franchising is not a fee-for-services relationship, and it’s important for franchisees to remember what they’re paying for with their royalty payments. What a franchisee is getting for the initial fee is the right to join the system, and the continuing royalties are for the continuing right to use the franchisor’s trade name and membership in the system, so long as the franchisee remains in compliance with the system.
Your contract with the franchisor will define what services you will contractually receive — and in most great systems the franchisor does more, just as most great franchisees execute better than others. The franchisor’s ultimate success is tied to the franchisees. The services provided by the franchisor support the franchisees so they can stay in the system and succeed, thereby benefiting the franchisor.
As franchisees mature in a franchise system, their need for support changes. Just as experienced multi-unit franchisees need a different level of support than single-unit franchisees, the level of handholding a franchisee needs in year five is less than required in year one.
What won’t change is that, every week or every month, franchisees pay royalties to their franchisor. And as sales go up, usually so does the size of the payment. Although some franchisors’ royalty schemes make adjustments with lower royalty rates for franchisees with higher sales or multiple locations, most don’t, and this sometimes is a formula for dissatisfaction for some franchisees. After all, if a franchisee needs less support as he or she matures in the system, why should the payment be larger? Some franchisees may even ask, “What has the franchisor done for me lately?”
The hard answer is that the fees paid to the franchisor generally allow for the use of the franchisor’s brand name and marks and access to the operating system, as provided for in the franchise agreement. Unless and only to the extent that the agreement provides for field support or other services, the franchisee may not be entitled to receive more services. The answer to the question “what has the franchisor done for me lately” is answered simply — it has allowed the franchisee to continue using its brand and operating systems per the franchise agreement. Under many agreements, that’s the bargain agreed to, and that’s what the franchisee is paying for.
In evaluating a franchisor, ask some basic questions:
- Is the franchisor growing and creating critical mass in the markets in which it is entering?
- Is the franchisor’s staff doing research and development into new products and services?
- Is the franchisor working on new ad campaigns?
- Is the franchisor ahead of the technology curve to keep franchisees competitive?
- Is the franchisor looking for ways to reduce costs — including labor costs — by adopting new methods and solutions?
- Is the franchisor examining opportunities to expand the system through e-commerce?
- Could the franchisor turn on a dime in response to changing customer demands and market conditions?
- Does the franchisor have an active franchisee advisory committee, empowered to help improve the business and look at new opportunities?
- Are franchisees involved in strategic planning for the franchisor?
- Does the franchisor subscribe to the International Franchise Association’s Code of Ethics and its Statement of Guiding Principles (found at
www.franchise.org)?
The following sections discuss a few support services that most franchisors typically provide.
Research and development
Great franchisors stay one step ahead of the competition. Key functions of a good research and development (R&D) department are to understand changes in the market, see opportunities for new products and services the franchisee can sell to the public, and introduce those new products and services to the marketplace in a way that benefits both the consumer and the franchisee’s bottom line.
Most franchisors use their company-owned stores as test locations before they try out new products or methods at franchise locations. Others, working with their franchisee advisory councils, also test new products and procedures with their top-performing franchisees. In launching new products or services, and when retiring other products and services, good franchisors typically go through an elaborate process that includes the following:
- Gathering consumer research
- Examining other industries and competitors for ideas for new products and services or other uses for existing products and services
- Seeking franchisee input
- Lining up suppliers needed for the new product or service
- Testing products or services in test facilities to determine ease of preparation or assembly, ability to achieve consistency, time required to deliver the product or service, and so on
- Determining what existing equipment or technology will be used and what new equipment will be needed
- Developing training materials on the new product or service
- Determining inventory requirements
- Planning advertising and promotions
- Verifying economic viability and return on investment
- Testing in company-owned or franchisee-run facilities
- Having a measured launch in different markets to see how the public accepts the new product or service and to determine whether any regional modifications will be required
All that is done before a new product or service is launched. Even great franchises begin to lose market share when the public gets tired of their products, their look, or their services — or when the public just wants something new. A current example is found in the quick service restaurant (QSR) burger market as new and better burger concepts enter the fray with offerings more attractive to consumers.
Office support
We’re in a period of change in franchising — primarily due to the actions of the National Labor Relations Board (NLRB) and the Department of Labor (DOL), which have been on a crusade of late to support labor unions in their organizing efforts. A major change by the NLRB and DOL has been to re-define the relationship between the franchisor and franchisee as joint employers. (See Chapter 9 for more on this.) Under a joint-employer relationship franchisors would be responsible for some of the actions of the franchisee — including how they manage their human resource practices.
Because of the re-definition of joint employment, many franchisors that previously provided beneficial office support to franchisees are slowly eliminating many of those beneficial services. It is likely that you will find that some of the services franchisors currently offer will be reduced or eliminated. If that happens, it will be unfortunate for both the franchisee and the franchise system as a whole. You should discuss with your franchisor if it’s planning on reducing any of the support services you’re counting on.
Fees for services
Although some franchisors have offered certain services for an additional fee, many modern franchisors have moved away from offering an a la carte–type support system where the franchisee pays for services as it goes. There are several reasons for this change. The main reason is that often the franchisee that most needs the additional service, such as additional field support, may not be willing or able to pay for it. The franchisee then suffers, as does the franchise system overall.
Any fees for services performed by the franchisor will be listed in Items 5 and 6 of the franchise disclosure document (FDD — see Chapter 4). Prospective franchisees should review the fees charged and ask existing franchisees about fees and the benefit of that support in their due diligence. Don’t assume that all types of support are included in your royalty payments. Some of the fees for services commonly found include training of managers and employees, reservation systems (for hotel or car-rental franchises), proprietary software, marketing, and special field support.
At times, you may think that the franchisor should offer you more support. You might even expect additional service because the franchise salesperson told you that you would receive it. And it may have been the practice of the franchisor in the past to provide those services — even though it had no obligation to do so under the franchise agreement.
A franchisor’s policies may change, but the franchise agreement reflects the terms of the bargain you both agreed upon.
The franchise agreement is the key to understanding the obligations of the franchisor and the franchisee. Just because one party to the bargain wants more services, or doesn’t live up to the contract, the other party is not necessarily obligated to perform those additional services — or ignore the other party’s contractual requirements. If you’re getting more services from your franchisor than what the agreement requires, say thank you. Such support shows that your franchisor cares. In a great relationship, the franchisee will also exceed what the franchise agreement requires. The street goes both ways.
Dealing with Change
Time for a wake-up call. Does everything with your franchisor seem same old, same old? Or has something changed while you were snoozing? Just as people pass from infancy to adolescence to adulthood to old age, franchises go through stages, too. These phases can greatly affect the franchisee-franchisor relationship — for better or worse.
Changes in a company’s growth, financial state, support staff, and even competition all can contribute to subtle or blatant swings in support services, communication, operating requirements, and other aspects of the relationship. If your franchise system isn’t always looking for ways to change and improve, it won’t be long before the competitive advantages you were looking for at first will be gone.
When the franchise system changes
Consider this: A franchisor adds more and more units nationally and internationally. Since the beginning of your relationship, your field consultant has visited your retail store each month, spending four to six hours with you, going over marketing, operations, scheduling, and other important matters. Then your field consultant is assigned the added responsibility of overseeing the development and support of locations in a country with a name you can’t even pronounce. The consultant visits you quarterly now, rather than monthly, and spends only 30 to 40 minutes with you before rushing off to another franchisee. Your support from the franchisor has declined.
Here’s another example — same franchisee, same system: Instead of going international, the franchisor begins franchising another product or diverts attention to the development of an e-commerce business or buys or starts another franchise system. The franchisor uses the training, operations, and field personnel from your franchise system to support the development of the new product or the new franchise system. Same results: The support you came to rely on is no longer there.
Read your franchise agreement. You probably were never promised weekly or monthly visits that lasted four to six hours; you just grew accustomed to them. Still, a reduction in the frequency and length of meeting with your field consultant is no reason to be complacent. You might even want revenue from e-commerce activities, but you likely are not legally entitled to it (see the next section, “When conflicts occur”).
Ideally, as a franchise chain grows, the size of the support organization should also grow. For example, if the optimum ratio of field consultants is 1 to every 30 franchisees in a system, and the franchisor doesn’t add a new field consultant to service new franchisees, the number of units that that field consultant is responsible for will increase, and the consultant’s ability to service each franchisee as they did in the past will decrease.
This is not always immediately an issue, though. For example, if the growth is through existing franchisees opening more units, multi-unit franchisees often need less hand-holding anyway. Also, higher density of units may mitigate this impact, as the field consultants can get from store to store more easily. Technology can also allow a field consultant to handle additional locations very effectively. Many mature franchisors use cell phones, e-mail, automated sales reporting, webinars for training, distance learning, videoconferencing, and so on to make their field consultants more efficient and effective. But as a general proposition, as the number of locations increases, franchisors should add personnel so that the ratio of field and headquarters support staff remains sufficient. That is franchising at its best.
When conflicts occur
Smart franchisors and franchisees work hard every minute of every day to forge lasting and positive relationships with each other. Franchisees need to have confidence in their franchisors, and vice versa. The recipe doesn’t get any more wholesome than this: honesty, integrity, and open communications.
Communication has to flow in both directions to work. A franchisee may have a problem and be angry that the franchisor is not helping, but does the franchisor even know that the franchisee is having a problem? If something is on a franchisee’s mind, it’s their responsibility to call the field consultant and ask for assistance. If the field consultant hasn’t taken care of the problem sufficiently after notice, then it’s up to the franchisee to call the franchisor’s regional or headquarters personnel. Franchisors may not know something is broken unless you tell them, and communicating that you have a problem now is the best way to avoid a bigger problem later.
Imagine this scenario: Despite your best efforts, sales have been down for the past two months, and you’re looking at a potential cash problem in the coming few months. You’re upset and worried about meeting your financial commitments to the bank, to your suppliers, and to your franchisor. Don’t wait until you have no money in the bank and are in default to ask for help. Call your franchisor and ask for advice. But don’t demand that the franchisor waive your royalties simply because you have a cash problem. The franchisor didn’t sign up to be your banker or your guarantor.
What franchisors can do is look at your operations, see whether they can find the problem, determine whether a quick fix may work, help you prioritize your cash flow, lend you some other support, and maybe — but not often — work with you on a temporary deferral of your royalty obligation.
If the problem is that you really can’t run an effective franchise or just are unhappy with the relationship, then discussing with the franchisor how you can exit your business with the most equity you will be able to garner through a sale to another franchisee or to a new franchisee, or even the franchisor, may be the best way to solve your dilemma. When changes occur that affect you negatively, speak up. Talk to your franchisor. Find out whether the change is permanent or temporary. See whether you can work out a compromise position that satisfies both of your needs. Talk to the other franchisees who are affected. Talk to the leadership of the franchise advisory council. Often, when franchisees come together to talk to a franchisor about a problem, the franchisor and the franchisees work it out together — but sometimes they don’t, and that’s often when the relationship between the parties begins to experience difficulties.
Although working through the chain of command is the best way, don’t be afraid to voice your concerns to a higher level if you’ve received less than legendary service or don’t get a satisfactory response. Good franchisors need to know when their field consultants and other personnel are doing a good job and when they aren’t responding or performing. Also, consider putting your serious concerns in writing. Your written communications don’t need to be threatening, but a letter often helps convince your franchisor of its staff’s inadequate performance. Even more effective: Call and set up a time to go to the franchisor’s headquarters for a face-to-face meeting with the decision makers. There’s no better way to solve problems than sitting down and talking through the issues. And, at the earliest stages, doing so without threats or the involvement of lawyers is generally the best approach.
Open communication between you and the franchisor may build your relationship and possibly avert or quash any friction. Your goal should be to resolve any disagreements in the least costly, least time-consuming, and least adversarial ways if you want to continue being a franchisee.
Disputes sometimes occur that the franchisor and franchisee can’t work out. Before going to blows in a lawsuit, many franchisors require that (as provided for in the franchise agreement) franchisees first meet with them and an impartial mediator. Some franchisors, instead of going to outside mediation, set up internal mediation units that include other franchisees, and some appoint an ombudsman (an employee of the franchisor who is paid to be an advocate for the franchisees) to look into disputes.
The International Franchise Association (IFA) has an ombudsman program you may want to consider: www.franchise.org/self-regulation-ombudsman.
Reaching Out to Your Fellow Franchisees
Your fellow franchisees are a big part of the team, and as the newest recruit, you want to hear their take on the game, the coach, and the other players. Think of existing franchisees as the live version of an operations manual — they live and breathe the system every day, so they know what playing by the franchise system’s rules is like.
Building a relationship with other franchisees goes beyond simply tapping their knowledge. They’re also great sources of inspiration because they usually have already confronted the same issues you may be facing. Finding out the routines they use to drive execution excellence or how they’ve successfully dealt with a similar problem is not only helpful but also inspirational.
Franchisees who share a geographic area often get together to discuss common issues, including marketing, spending and costs, training, and operations concerns. Many franchisors today also have intranets with chat rooms so that franchisees can talk to each other to discuss problems and offer advice and solutions.
Good franchisors encourage this type of communication. Franchisees get together to plan local promotions, create local buying cooperatives, or just update each other on what is and isn’t working in their businesses. In short, other franchisees provide a valuable support network.
One way to connect is through local chapters of organizations, like the IFA, which has established a monthly networking group for franchisees, franchisors, and suppliers. These meetings, held in cities around the United States, are called franchise business networks. The great thing about these monthly meetings is that you get to meet franchisees and franchisors from not only your own system but from other franchise systems. They’re another way to build a support network of franchisees and learn from them. Even franchisees in a different industry will face many of the same challenges you have faced regarding staffing, retention, competition, and employee motivation. Many of the suppliers who come to the meetings can also provide you with advice. To see if a franchise business network group meets in or near your city, go to www.franchise.org/franchise-business-network.
Even if you don’t make an effort to reach out to your fellow franchisees, they will find you. You will meet at regional meetings, annual conventions, franchisee advisory council or franchisee association meetings, perhaps even on the Internet, or maybe on the intranet the franchisor has set up for the system.
How do you go about getting to know other people who share your franchise name? Most franchisors will be happy to provide you with a list of your fellow franchisees. Ask for it. You should also attend your regional, area, or convention meetings, which is the easiest way to meet franchisees you may not know and a good way to see old friends again.
Joining advisory councils and associations
Franchisee advisory councils and franchisee associations (don’t fret, we explain the difference shortly) give order to the franchisee universe. They are communication vehicles among franchisees, and between franchisees and franchisor. As a franchisee, you want representation. And you want a system that welcomes quality input.
Franchisee advisory councils
A franchisee advisory council is a committee established by the franchisor and composed of franchisee representatives. It may also have representatives from the franchisor-operated units. Its purpose is purely advisory.
Here are some of the ways a franchisor can use the advisory council:
- To present new ideas and get feedback from franchisees before rolling them out system-wide
- To solicit suggestions on improvements to products, services, and system support
- To review marketing and advertising strategies
- To discuss new technology
- To discuss new suppliers
- To assist the franchisor in looking at conflicts in the system
Franchisees can use the council to influence the company’s direction, network with peers, and voice complaints. In a council, franchisees are heard more loudly and clearly than they’re heard as individuals. Even if you don’t sit on a council, you can raise your points by contacting one of the council’s members, who can then speak for you.
Often, a franchisor will establish criteria on who may sit on the council. If a franchisee is in default, for example, they’re usually not invited to the big table. No one should really want advice or input from someone who is not in compliance with system standards — no matter how many locations they may own and operate.
Councils often spin off other committees, such as an advertising committee that provides input into advertising decisions, a buying committee that looks at cooperatives or other joint efforts for purchasing products and services for the system, and even a technology committee to look at new software or robotics to reduce labor and improve unit performance.
When you’re speaking to the franchisees of a system, ask about their views on the advisory council. What does it do in their system? Do they get reports on the council’s activities? Get the name of the head of the council or the local representative and give them a call. You want to understand whether the council is well run and empowered by the franchisor to have a meaningful role in the system.
Franchisee associations
Unlike franchisee advisory councils, franchisee associations are usually independent organizations, made up of dues-paying franchisees that come together when no franchisee advisory council exists or if the council is not viewed as adequately promoting their interests. They may function like a council, but franchisee associations set their own rules, membership requirements, and agendas. Membership dues usually fund them, whereas the franchisor more often than not picks up the tab for its franchise advisory council.
Historically, many franchisee associations were started because of a systemic crisis. For example, the franchisor may have been on the verge of bankruptcy or introduced a radical new product, service, or standard into the system without adequate testing, a change in management may have occurred, or the franchisor may have dramatically revised the terms of its new and renewal franchise agreements. Franchisee associations have frequently also been formed on the verge of system-wide litigation.
Today, while many franchisors are leery and resist franchisee associations, other franchisors have recognized that an independent association is not a bad idea and may make a positive contribution to the system, as long as its leadership acts responsibly and listens to the legitimate concerns of its constituency. Many of these franchisors have cautiously developed procedures to include associations as part of the process to maintain and grow their systems. In some systems, the franchisee associations are granted specific rights under the franchise agreements.
For a franchise system to have both a franchisee advisory council and an independent franchisee association is not unheard of. Moreover, the lines between a franchisee association and a franchisee advisory council aren’t always clear-cut. Some groups have elements of both types of organizations.
Franchisee associations can be beneficial to both the franchisor and the franchisees. It takes work on both sides to make the relationship work. Although neither of the authors of this book is anti-lawyer (Joyce is, in fact, a very well-recognized lawyer herself, who works with franchisors, franchisees, and franchisee associations), the relationship between associations and franchisors works best when it is built on achieving results valued by both the franchisor and the association. Some lawyers — by training — can often change the dynamics ideal for a positive relationship. We guess it has something to do with their spending too much time at the bar.
There are many successful franchisee associations. The Coalition of Franchisee Associations (the CFA) is an association of franchisee associations with the mission “to bring franchisee associations together to share and exchange ideas.” It may be a good source of information if you’re interested in forming or joining a franchisee association. Check out www.thecfainc.com for more information.
Being number one in a class of one
All this concern about interacting with other franchisees is well and good. But what if you are it? Maybe it’s a new franchise system, and you were brave enough or smart enough to be the first. When you’re the first franchisee, you don’t have another franchisee to check with about a franchisor’s follow-through — or anything else, for that matter. You’re a pioneer and are going to need to go it alone.
Some prospective franchisees find being number one exciting, anticipating a great surge in the value of the business as the chain grows. You have reason to be cautious, however. Just because a company has a franchise disclosure document (FDD — see Chapter 4) doesn’t make it qualified in a business sense to be a franchisor. Remember, all you need to be a franchisor in the United States is a compliant FDD. A franchisor doesn’t need to have any operating locations, doesn’t need to have any profitable operating locations, and doesn’t even need any experience in the business in which it is going to be offering franchises. Not all franchise opportunities are equal, and you need to make your determination to become a franchisee based on facts, not emotions.
Without the input of other franchisees, you need to scrutinize the company much more carefully, because the network you’re joining — for the foreseeable future — may be just you.
If the management of the franchise system you’re looking at also operates another franchise system, check out the franchisees in the other system to at least get a sense of the company’s management.
If you’re thinking about being the first franchisee, you need to weigh the potential risks against the potential rewards. Support services may be lacking, systems may still be evolving, and buying cooperatives to give you lower prices may not be available. In fact, almost everything the franchisor will know about franchise system operation and franchisee performance will come from working with you. Unless your franchisor has done its homework and is experienced, you’re about to pay for the privilege of being a guinea pig.
But as the first franchisee, you may get your pick of location, negotiate a better franchise agreement, and obtain concessions that subsequent franchisees won’t get.
You may want to consider a form of “prenuptial agreement.” Part of what you’re expecting is that the franchisor will grow and you’ll be part of a franchise system — with all the benefits. What happens if, a year from now, you’re still alone? Or if in five years, just you and one other franchisee are in operation? Not all new franchise systems grow — in fact, based on our experience, many don’t. Negotiate a walk-away clause that gives you the option to leave the system before your franchise term is finished if the franchisor can’t grow the franchise system. Pick a number — a good one is the number that the franchise salesperson has been telling you the system will grow to during the next year or two. Have your franchise attorney discuss other options with you.
Being a franchisee of a new system is a tossup. You may be getting in on the ground floor of a great opportunity, or you may be joining the crew of the Andrea Doria. (Everybody uses the Titanic as a metaphor for disaster; we thought that, as franchise executives, we should be more innovative.)
Following the franchise rules