Franchisees Negotiating Franchise Agreements, Part IV: Systemwide Issues

In the four sections of this article, I've addressed franchisee considerations in negotiating franchise agreements.  The purpose of the article is to help franchisees to spot issues and to brainstorm.  The article, however, is no substitute for retaining an attorney with good judgment and a deep knowledge of franchise law.

IV. SYSTEMWIDE ISSUES FOR FRANCHISEE ASSOCIATIONS 

Some issues are best addressed at the system level as they require system-wide changes.  The franchisee association should take the lead on these issues.  (How an association should prepare for and do this is for another article.)  In this Part IV, I address the systemwide issues that are best addressed by the franchisee association.

Advertising fund expenditures.  Franchisees want accurate reporting; limits on general overhead expenses that could be absorbed by the franchisor; and a prohibition on spending from the fund to recruit new franchisees.  In good systems, the franchisor and franchisee address these issues proactively and the funds' activities and accounting are transparent.  In not-so-good-systems, franchisees have to push hard for information, mistrust exists, and conflicts regularly arise. 

Rebates.  The franchisor's FDD should spell out precisely its policy on rebates.  The franchisor should keep franchisees abreast of developments with suppliers, and accounting should be transparent.  If concerns arise, the association should raise them directly and seek concrete solutions.  

“System” changes.  Franchisor agreements generally allow the franchisor to change the "system," and it's in the franchisees' interest that the franchisor  regularly update the business model and require franchisees to comply with the updates.  Franchisees want to make sure, however,  that franchisors don’t impose costly changes on franchisees under the guise of a system change, when what is really required is a contract amendment by which the franchisor should offer the franchisees some benefit in exchange for accepting the new cost.  In good systems, franchisors address changes proactively and seek franchisee buy-in before imposing changes.  In not-so-good systems, franchisors impose the changes unilaterally, and the franchisees then rebel. 

Franchisor competition with franchisee.  Franchisees want to avoid having the franchisor compete with the franchisee by the internet or otherwise.  Or, if competition is an inherent part of the system, it should be tightly defined or limited.  If new competetive opportunities arise, the franchisor should seek to find a win-win approach with the franchisees to exploit the new opportunity.  If the franchisor unilaterally seeks to exploit the opportunity, the franchisees need to protect themselves. 

Franchisor merger or sale.  Franchisees want a say in a franchisor's sale or merger to make sure that the buyer is trustworthy and committed to growing the brand.  Franchisors do not want to make any concessions here.  But a smart buyer should seek out the association to make sure that the transition is smooth and that the system is based on the level of trust needed to grow and prosper.

This is the final part of a four part series. Read the entire series:  Part 1 |  Part 2  |  Part 3 | Part 4