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Was reading through a well written article authored by Keith Kanouse titled, “The Franchisee’s Dilemma”. The IAFD article discusses the unilateral contractual bond between Zee and Zor – and, how the economic relationship changes over time causing material differences in the terms and conditions to the franchise agreement during the life of the contract and at the end of term renewal – as compared to what the franchisee originally signed.
Perception is everything - Franchisees are sold into a “Partnership” that is truly a “Master-Servant” agreement. Franchisees are given a unilateral contract on a take-it-or-leave basis and expected to sign it because the franchisor makes an argument of superior “Brand” [trademark] management competence to the world.
The franchisor community argues that it needs total flexibility in making changes to the franchise system and to the franchise agreement to reflect changes in technology, market conditions, franchise and other laws, demographics, etc. These are all valid considerations.
Mr. Kanouse argues the reality is that material changes in the franchise agreement are economically driven by the Franchisor at the expense of the “existing” franchisees:
In reality, these changes are made unilaterally by the franchisor, not so much as a result to reactions to changes beyond the franchisor's control, but really as a result of the franchisor's desire to increase its income, to draft around adverse court decisions which favor franchisees or otherwise to improve its own self-interest, at the expense of its existing franchisees.
He identifies 3 main causes of material changes to your franchise agreement to be - 1) franchisor’s “current” financial position, 2) long term financial planning, and 3) adverse litigation outcomes. However, there’s a 4th reason to include that I’ll expand on a bit – 4) changes in trademark ownership due to whole business securitization “true sale” structures.
The Ambac insurance policy provided Ambac Assurance Corp with the “Control Rights” over the Master Issuer – DB Master Finance LLC – the ultimate parent company for franchisors - Dunkin’ Donuts and Baskin-Robbins. The “control rights” are defined in Cathleen J. Matanle’s - head of AAC’s credit and portfolio risk management group – 2nd affidavit filed on August 17, 2010 [PDF Pg 2]:
Ambac’s contractual rights include right to approve amendments, waivers and consents, right to access records, rights to receive information, rights to remove certain transaction parties with ongoing administrative responsibilities, rights to declare events of default, trigger events and early amortization events and rights to direct enforcement actions and the exercise of remedies, including the disposition of collateral. These rights, individually and collectively, are referred to herein as “control rights.”
The Master Issuer – DB Master Finance, LLC – owns both - 1) the franchise agreements and 2) the trademark. Based on the Ambac Matanle affidavit, it’s safe to say that Ambac controls both Franchisors – DD and BR. For a securitization to be consummated efficiently the collateral documents must be a “standard” form contract like a mortgage agreement. Therefore, the Franchisee must understand who is controlling the Franchisor’s “control rights” when they look to negotiate their franchise agreements with a franchise system that is owned by a bank or a securitization entity (master issuer).
With the above inclusion being a reasonable explanation for a franchisor to cause material contractual changes – we can then add to Mr. Kanouse’s franchisee dilemma resolution list of options to include:
3) Go to directly to Wall Street and deal with your Franchisor without the burden of dealing with a 3rd Party Master Servicer that does not own the “control rights” to make any changes to your franchise agreement.
By Master Servicer, I mean - Dunkin Brands, Inc – the biggest abuser of illusionary franchise “control”. In reality, Ambac decides on any and all changes/modifications/addendums to the franchise agreement until the securitization is recapitalized or if Ambac declares insolvency. Any “current” negotiation efforts will be stalled until there is a Master Issuer change of control event.