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The economic rationale for franchising is this: the franchisor picks local experts as franchisees; these local operators must, on average, be experts otherwise the franchisor would be better off with a company store.The local operators must be better than what the franchisor could hire as employees.
Call this the "local expertise thesis", or LET.
LET leads to a number of important observations. First, the local experts need to have their own channel of communication to educate and advocate. Second. the franchisor cannot deliver to the local experts the same sort of services and benefits an employee would come to expect. Third, the local experts control the brand even if they don't control the legal trademark - after all, it is the local experts which are maintaining the brand's integrity.
The recognition of these principles in franchising lead, in part, to the formation of a new trade association dedicated to the creation of independent franchisee associations - the International Association of Franchisees and Dealers.
Last week, Paul Segreto, in his Legal Eagle Radio Series, chatted with me about several topics about independent franchisee associations and the role of the new trade association, International Association of Franchisees and Dealers.
The entire talk can be accessed here, but I want to summarize the hour long discussion.
1. Ideal role of independent franchisee associations in franchise relationships.
Most independent franchisee associations start out as litigation groups, and then fade away after the legal battle has concluded. But, the real job of communicating between the franchisor and the franchisees has just begun. Minimally, the IndFa has to operate as an alternative communication channel between the franchisor and franchisees. It also has to educate, advocate and provide member benefit programs.
As the franchise system moves from being controlled by the original entrepreneur to private equity to a public corporation, this channel of communication becomes more important.
2. The difference between independent franchisee associations and franchise advisory councils.
The IndFa is a membership based business whose revenues increase based on the vendor/member circle of life. The more benefits from vendors an IndFa can provide, the more membership increases. The more members, the more vendor programs become available. In some cases, the vendor programs become the basis for a franchisee cooperative.
A franchisee advisory council is a group of hand picked franchisees that the franchisor wants to use as a sounding board.
3. How the relationship between these associations and councils can be fashioned to work well together.
There is no conflict between an IndFa and the franchise advisory group, as each are providing different communication channels to the franchisees.
There is no need for the franchisor to "recognize" the IndFa - if the IndFa is providing the necessary services/benefits to the franchisees which the franchisor cannot, it is in the franchisor's economic interest to have regular discussions with the IndFa. (One example of such a service is counselling the franchisee on how to avoid sexual harassment claims.)
4. Alternative dispute resolution options and the Arbitration Freedom Act.
Peter Silverman has pointed out that currently mediation when concluded successfully doesn't have to be reported under section 3 of the FDD.
Independent franchisee associations should be working with their franchisor to construct their own unique dispute resolution mechanism, much the way auto dealers, GM and BMM for example, have done.
5. Upcoming convention for the International Association of Franchisees and Dealers in Indianapolis, Indiana.
The first IAFD convention is less than a week a way, and a number of BMM regulars will be attending. Our job at the IAFD is to take the local experts from a system and give them a bigger platform to address and help all franchisees. We are particularly happy to David Melton from Dominos talking about his experiences with system change in franchise association. David is the author of Hire the American Dream, and an expert on reducing staff turnover amongst minimum wage employees. I have read his book and highly recommend it.
The entire convention is stacked with great information and we hope you can make it. But if you cannot check back on the convention blog to follow the conversations.
In closing, I would like to thank both Paul Segreto and Joe Caruso for inviting me on to the Legal Eagle Seminar, check out the other guests.