Why Are There So Few Effective Franchisee Associations?
There are many misconceptions about franchisee associations. The purpose of this article is to dispel the myths and to focus upon their genesis and management; their purpose; and their results or consequences.
I wish to acknowledge that some of the analytical positions taken and recommendations made are done in consideration of the excellent work done on this subject by my friend and colleague Michael Webster, an outstanding Canadian franchise attorney in Toronto, and by my other Canadian friend of significant wisdom and great experience, Les Stewart. Their comments may frequently be seen on the principal franchise Internet blog site BlueMauMau.
What now passes for franchisee associations is for the most part not even close to an effectively functioning mechanism. They are in large measure social and engaged in supplication – asking for mercy societies. It is easy to diagnose a franchisee association as effective or ineffective. What is its history of success in protecting/improving the quality of the return on its members’ franchise investments? Everything else is irrelevant.
Unfortunately, they are almost always born out of a substantial history of franchisor abuse. Had they been established and professionally managed earlier on, the franchisor abuses that finally got them going in a fitful and incompetent manner probably would never have happened. Early on formation of a professionally organized and managed franchisee association is the best prophylactic against future abuse. (Do I have something to sell here? You bet I do. Competent professional association establishment and management is what I am selling.)
Others, like the nascent Irish Franchisee Association and the Australians, are also being born out of the reaction to franchisor abuse coupled with the perceived inability to obtain redress of grievances through conciliatory negotiations with ridiculously obstinate and abusive franchisors, the absence is adequate legal remedies and a government in the pocket of the franchisor lobby. Just one litigious franchisor in Ireland could probably shut down the Irish association simply by settling its lawsuits and ceasing to misrepresent the past performance of shops that are being resold in a monstrous churning campaign. South African franchisees are also experiencing the Swine Flu ethics of modern franchising, and they are also trying to deal with it. But they are not yet getting anywhere either. Even in China, franchisor abuse inquiries are growing rapidly. China is especially disappointing to me, because in their political system it ought to be much easier to deal with predatory business practices. China is now one of the top four economic engines on the planet. That means there is a lot on their plate. Maybe because of that, franchise abuses have simply not yet blipped on China’s radar. Furthermore, maybe because of China’s political system it is not as easy to establish private groups to contend against business abuses.
The central issue in franchisee association formation and management is militancy. Since the purpose of forming and managing a franchisee association is to protect the franchisees’ investment value against invasion by an over reaching and opportunistic franchisor, this is all about money. There are only two possible consequences. Either the association effectively protects the value of the franchisees’ investment - sometimes despite very limiting and restrictive franchise contract language - or it doesn’t. Politics within the association itself has little to do with it. Because the politics within the association can quickly emasculate its effectiveness, professional management is the best bargain on the planet. More and more, the really effective franchise associations are found to be under professional guidance.
Today many franchise opportunities are sold under false pretenses and are not of investment quality. Since so few franchise investors spend the money for competent due diligence on the deal and on the legal issues, they find themselves trapped into five or ten year terms on extremely high risk business models that are not the proven systems they were said to be. There are clauses in those contracts that make formal dispute resolution impracticable – mediation followed by mandatory arbitration that is not subject to appeal, and post termination penalty clauses that give their franchisors claims against them they never believed were possible. These deals are easy to see as needing the most militant possible independent franchisee associations. Some have been so bad that no franchisee association could make the critical difference under any circumstances. That is why pre investment deal due diligence is indispensible. Legal due diligence alone is almost worthless, as there can be no such thing as a “fair” contract on a bad business deal. Contracts cannot save bad investments. Organizations that confer fair franchising awards and certificates upon franchisors that offer bad investments are even more destructive than the bad franchisors. Their imprimatur is then used by the scammers to sell more of their bozo deals.
Where the franchise opportunity purchased is in fact a viable business model, franchisor options in the franchise contracts allow for the imposition of extraneous additional royalties and fees by giving the franchisor the right to require purchases only from designated vendors who pay the franchisor for that right and then charge exorbitantly high prices for what the franchisees are required to buy from them. The franchisor can also require the franchisees to add on systems and features purchased from the franchisor or from others who pay the franchisor a commission. The franchisor can – and frequently does – require advert fund payments that become a slush fund for franchisor use because the franchise agreements recite that the funds do not have to be spent on adverts in the franchisees’ areas in any proportion to payments made, and that the funds can also be used to advert and promote the franchise opportunity sales program itself. The fact of the matter is that the money is not used in the manner the franchisees thought they were required to be used.
Encroachment that eats into sales of existing units is always a temptation when new unit sales start to slow down. Since most franchise contracts don’t provide for real territory exclusivity, and franchisor Internet sales are usually an exception to any territorial protection language anyway, the militant franchisee association is the only recourse for the franchisees.
Even if there is a benevolent franchisor in the beginning, changes in market conditions cause benevolence to change to forcible extraction of fees out of perceived necessity on the part of the franchisor. Good people sell to bad people. Bad people take all the advantages that the contracts allow bad people to take. One of an acquiring company’s motives for buying a franchisor is that they see ways to extract higher charges from franchisees than the current franchisor management is achieving. Franchisees seeing the coming sale of their franchisor to people with abusive relationship histories in other franchises they control have only their militant franchisee association to help thwart the sale.
No matter how good the franchise relationship may seem at first, there is always – yes always – a profound need for franchisees to protect their interests against these and other adverse vicissitudes.
Where there is an opportunity to take greater revenue out of franchisee pockets and transfer that to the franchisor, one may not count on loyalty and salesmanship to talk a needy/greedy franchisor out of going forward with the program. Only militant confrontation will work. Many organizations that thought aggressive franchisors could be “reasoned with” have perished or lie useless at the end of their assumed mission’s failure. Some end up paying the rent by selling awards to abusive franchisors who then use the awards to sell more franchises to new suckers.
How and When Do You Establish a Real and Effective Franchisee Association?
An independent franchisee association is not the same as a franchise council or other group formed and controlled by the franchisor. An independent franchisee association is established and totally controlled by the franchisees of a franchise system. The former model is not going to be of any help when there is an issue requiring limitations of franchisor plans, agendas and actions seen by the franchisees as harmful to themselves.
Now that that is out of the way, the earliest possible establishment of an independent franchisee association is the best and easiest time, if it is handled in a professional manner. New franchisees should be recruited at the first possible moment with a focused “invitation”. The invitation should have carrot and stick elements to it.
I want to start with what I believe is the wrong way to go about doing this, because that is the way almost all associations get started and that way is the most dangerous. Usually a few leader level franchisees with vision see the need, communicate among themselves about it, and take a “survey”, asking the other franchisees in the system whether they also see the need for an independent franchisee association.
What is wrong with that is that the leadership paints targets for retaliation on themselves that a resentful franchisor can snipe at. The sniping is usually various forms of retaliation – use your imagination and you will come up with just about all the aggressive threats than angry franchisors have used against association leaders in the past.
There is no reason for the leadership to be put to that risk in order to establish an independent franchisee association.
Consider that going to a lawyer for legal guidance in the management of business relationships and in dealing with franchise difficulties makes the communications with the lawyer and amongst each other while dealing with the lawyer as joint clients in a single project privileged communications. Now do lights start to go off in your head?
It is important for the smallest number of leadership franchisees to do this at first. One of the biggest risks is the Judas franchisee who thinks he can feather his nest by reporting on the others to the franchisor. It almost never fails. One franchisor in Ireland just this last week called franchisees who attended an organizational meeting and told him he knew everything he had said about the franchisor in the meeting and threatened his business if he went to another meeting. The meeting had not been properly limited to trustworthy persons, and an informer was in attendance. Stifling association organization in its infancy is a resentful franchisor’s first goal. Depriving the franchisor of the identity of people to threaten is an important advantage to the organizer franchisees.
Three or four organizing franchisees working through an experienced franchise lawyer save themselves a lot of grief if they do this my way from the very beginning, before circulating “survey” type questions to the franchisee population at large and before making a public utterance about getting the franchisees together for their mutual benefit. Do it through legal counsel from the very first moment, before you do anything else.
This is a novel approach to establishing a franchisee association. Usually it is done the wrong way. Therefore, usually the project falls on its face in failure. Judas franchisees rat out the organizers. The organizers are threatened. They make the only choice they see. They give up to save their businesses. Sometimes the association is tolerated so long as it doesn’t rock the boat. If the association is just going to sit around and accomplish nothing, then why have an association?
Part of the problem is that the association isn’t established early. It is only an after thought, when big trouble starts showing up. The association is way behind the curve and usually never catches up. It can join with other impotent associations that are nothing more than chatting societies masquerading as reality, but their franchisors do whatever they like with no effective resistance. The advisors to those useless organizations use the franchise contract language as their excuse for failure. I refuse to do it that way. If you do it my way, your association has a good shot at becoming of a scale that can face down trouble when it arises. New franchise rules required that franchisors identify independent franchisee associations in their FDD disclosures. That generates your lead flow from new franchisees. When the new franchisees can truthfully be told how a professionally managed, well financed and widely supported association can stand for them, they join. Soon it becomes a greater liability for a Judas franchisee to double cross the association than he can stand. Substantiality breeds significance. Something is different from nothing.
There are other clandestine approaches to doing this, fraught with hiding and secret communications (they think they are secret), hoping not to be found out. That is not my way and it should not be your way. You don’t want an association web site and blog to be used to feed the franchisor with adverse evidentiary exhibits to use against the membership. When the association is substantial enough to have a web site, its use will be limited to identified franchisees – no anonymous postings. What can be posted on it is restricted to material that does not “incriminate” members.
It is not allowed to be used as a whiners club. Real problems are discussed with counsel under conditions of privilege, not on the web site. The web site is used in a professional business manner, such that if the franchisor does have access to it, there is nothing there that the franchisor can use against anyone. Material that might be helpful for a franchisor to use against a franchisee is communicated though counsel under privilege, in the effort to sort out how properly to make problems go away in a proper manner.
It is a good idea to send a “survey” type question to the franchisee population, but the letter/email should go from the attorney, acting on behalf of his leadership franchisee clients who are not named in the letter. The franchisor can’t do anything to the lawyer and can’t make the lawyer identify the franchisee clients. The other franchisees will instantly recognize the authenticity of the “survey” and they will be somewhat reassured by its tone and by what it says that the project is being handled with a high degree of professionalism. This is a confidence building way to get this done.
It is also important to recognize that the first “survey” letter response doesn’t tell you what the franchisees will really do when put to it. Anyone will positively respond to anything that doesn’t cost them anything. You will only know the support that is achievable when the project gets to the “write a check and join” stage of forming the association.
That is another reason why it is important to be able to work anonymously through an attorney. In this manner, if it turns out that there is not sufficient real support for an association, the leadership group is not left out there with their identities exposed. Even if a very stupid franchisor were to sue the lawyer, that is a very easy to defeat lawsuit. The franchisor is wasting his money and will probably end up having to pay the defendant attorney a lot of money for bringing a meritless, vexatious lawsuit. That first victory in that kind of lawsuit – if the franchisor is that stupid - will expose the franchisor as weak and stupid, and it will embolden the franchisees to move in the right direction.
If you establish your franchisee association in this manner, the association is the only name in which things are done – at least until it has a very large percentage of the franchisee population already in the membership and it also has a treasury sufficient to cause the franchisor to appreciate that the association is a serious force that can do what it needs to do to accomplish its mission. Even then, there would have to be a very special and exceptional need to justify abandoning the use of the association instead of individual franchisees in any franchisor interface situation.
This is facilitated by professional management limiting the association to focused high priority projects, rather than scattered approaches that squander resources without positive results.
There are many very important goals for a franchisee association. They must be prioritized and honed to sharp focus, and undertaken with an eye upon the availability of sufficient resources to accomplish the project. This requires that he franchisees see that the association is professionally organized and managed and not just some kind of rump group with franchisee officers taking nice trips for meetings and charging it to the association. There will be no officers in such a group. Being an officer, especially in the beginning when the association has not yet proved its effectiveness, places the officers at risk of franchisor retaliation. The goal is not to do that. It is not a club. Membership identities are not published during its early stages of development. Information that is published is published in the name of the association, and it comes from the manager/attorney. In the beginning, the members become clients of that attorney so that what they say to the attorney in furtherance of the projects remains privileged and confidential. What is published based upon those communications does not have the franchisees names on it in the beginning. When the franchisees decide to go public with their names because the association is well established and properly funded, it will be simply too late for the franchisor to start trying to retaliate. Strength in numbers and in resources will always carry the day in this context.
To be sure, doing it the right way is not free of cost. Nothing is. Doing it the wrong way has other, more dangerous costs. The attorney working with the organizers has to be willing to be somewhat entrepreneurial about it. Every lawyer performs managerial matters on every project he does for every client. Law practice is not all just legal theorizing. We know that if we do it right, we will probably be kept around (although there is never an obligation to do so), and that representing and managing the association as it develops will be a revenue generator. So in the beginning we flex down the expenses at our end. Even down the road the group will not incur more expense working with a good franchisee lawyer than they would working with their own “social mode” officer and board structure. A professionally managed independent franchisee association, especially when one considers the advantages, is qualitative bargain.
Avoid Thinking Of Your Franchisee Association As A Social Organization
All organizations have social characteristics as part of their makeup, no matter how professional or focused they may be. That is just part of the territory. In consideration of just how rough the franchising landscape has become today, however, the social aspects of your association should be kept to a minimum. If you want to belong to a club, join a club. This should not be allowed to become a club.
Participation in the independent franchisee association should be sold throughout the system as an essential survival resource for franchisees. There is a tendency to want to free ride on the efforts and resources of the activists, and if this tendency is not countered there will not be adequate support for what the association is being established to achieve.
The particulars of how this association “attitude” is established and “sold” to the franchisee population will depend in part on the character of the potential membership and that of the organizers.
One of the big, fundamental mistakes made in conceptualizing a franchisee association is that it is being formed to “reason” with a reasonable franchisor. If there is a reasonable franchisor at the moment, the association will conduct its relations with the franchisor in an appropriate manner. If the franchisor is not being reasonable, or if the system is being acquired by a potential opportunist, the association must conduct its relations with that kind of franchisor in that appropriate manner. You can’t take “touchy feely” “lets chat” approaches to a hungry dog. There are already associations and groups of associations that live on wishful thinking and claim falsely that they accomplish positive gains for their memberships. That is sometimes true, but much less true when things get tough. The tough franchisors pay no heed, or maybe lip service only, to the lets talk it over ad nauseam associations. The tough franchisors must be confronted with franchisee associations equipped in membership strength and in resources to deal with tough franchisors. Opportunistic franchisors have contracts engineered to give them all the options. They do not give up on their scope of use of those options just because someone with an education, in a suit, asks them nicely to be more considerate.
For this axiomatically truthful situation, an association needs to be able to confront its franchisor over tied in vendors who are ripping off the franchisees and paying commissions to the franchisor for that privilege, and be able to wrest shared control over the vendor program away from the sole discretion of a greedy franchisor. Without that, no franchisees will ever see the benefits of group buying power. The flow of those benefits will stop at the franchisor’s bank account.
An association needs to be able to confront an aggressive franchisor over frequent remodel and territorial encroachment issues that cost franchisees enormous resources without always conferring responsible benefits to the system as a whole.
An association needs to be able to confront an opportunistic franchisor over new and seriously disadvantageous terms in renewal agreements, and get them moderated.
An association needs to be able to confront a potentially adverse acquirer of the franchisor even to the point of killing the deal if need be.
An association needs to be able to wrest control of the system from the franchisor if the franchisor loses touch or interest in a way that is brand destructive, including turning control over to the franchisor’s idiot children in many cases. If you have ever seen or heard of a situation like this, you will know it needs no further explanation.
These are but a few of the really difficult issues that a franchisee association must be able to deal with effectively if it is to have the ability to protect the investments of its membership. These difficult issues absolutely cannot be dealt with effectively through “discussions” in almost every instance.
I do not intend to diminish the positive and constructive goals of an independent franchisee association. Improvements to any franchise system frequently come up from the ranks rather than down from on high. The implementation of improvements frequently represents incremental sales on which royalties are to be paid. This is a balanced equation in which bilaterality of obligations is always the rule. Inasmuch as you will be paying for everything you get or do in a franchise relationship, it is also important that there be a resource that can optimize the chances for considerations to flow in both directions. Being a franchisee does not automatically mean you have no opportunity to receive consideration for your positive contributions. Being a franchisee with an effective franchisee association that you support and that supports you makes that possible.
For these and other reasons, the social aspects of a franchisee association should be minimized and its professional management and strategic effectiveness be made the focus of why franchisees are supporting it. It isn’t a club.
There are many other discussions about the why and how of independent franchisee associations to be found on FranchiseeAssociationManagement.com. There are many “issues” articles for franchisees on FranchiseRemedies.com. I’m not going to just repeat all that material here. It is subject organized for anyone who wants to review it. After over 45 years in this business, I believe I have a higher level of understanding of the “street” issues of franchisee associations than people who have degrees but less actual experience. These are my streets.