Dealing with the Rogue Franchisor
Today the world seems chock full of disgruntled franchisees. Historically, the world always had sufficient unhappy franchisees.
These included franchisees that really had no right to be unhappy because they were making money on their investments, but resistant to the controls inherent in all franchise relationships. This article is not about well performing franchises whose franchisees resist the controls permitted by the terms of their franchise agreements.
This article is really about disgruntled franchisees who have good reason to be upset with their franchise relationship. They are living in a franchise system that is not performing well, and with an abusive franchisor.
The system is not performing well because it is a bozo business model significantly unlike what was sold to them in the sales materials and the FDD, or because it might once have performed well but is now over the hill and in a state of decay. All franchise systems – with the extremely rare exception – eventually come to the end of their life cycle and in those closing years perform just like newer franchises that are simply not competent business models. They are both bad investments, but many people invest in bad franchises.
Over the hill franchise systems have often been sold by their founding owners to bean counter mentalities who are hell bent on maximizing the short term profit on their investment for any of a number of reasons. They want better performance out of the system than the system is capable of providing in the normal course, and a decision is made to extract as much franchisor revenue as can be accomplished regardless of the impact on the franchisees. Franchisee financial performance gets poorer every year, but the burdens keep increasing despite the impact of steepening the rate of decline. As much as the franchisees complain, there is no relief.
Newer, bad business model franchises perform terribly early on. After two or three years there is a growing attrition. Franchises close at alarming rates. Franchisees are working more to service debt than to make a living. While they see the end as being a financial disaster, they have no way to deal with the situation.
You can see them in online forums complaining loudly and calling their franchisor awful names; all to no avail whatsoever. If they form a franchisee association, it is usually done on the cheap with a franchisee or two in the lead who have no idea how to deal with the problems. They are businessmen, not revolt leaders. They have never led a revolt and they have no way to deal with the fact that the rogue franchisor – if it ever appears that they are making headway – can simply find a pretext to terminate them and take their businesses away. Their vulnerability, coupled with their inexperience leading this kind of group in desperate circumstances, make the whole exercise futile. This goes on for quite a few years, never accomplishing anything but noise.
There may be a few crumbs tossed for the sake of appearances, but no substantive improvement in the franchise relationship. If the group has a lawyer, it is usually a lawyer who thinks he can simply point out the right and wrong of the situation and things will start to improve. This kind of lawyer is what the rogue franchisor hopes the group will use, because the rogue can simply tell the lawyer to go to hell – though not in those words. There may be some pretense at cooperation to keep the fool believing something may yet be accomplished, but it is just a game, and the rogue plays that game much better than your usual rules following business lawyer.
What does it really take to deal effectively with a rogue franchisor, one who really doesn’t give a damn and who is hell bent on extracting as much from the system as is humanly extractable no matter the consequences? These people have no long term interest in anything. Their business plan is to get as much out as they can and then leave. This isn’t McDonalds or Burger King. This is your bozo franchisor with a bad system and no moral compunction about putting everyone into bankruptcy.
His franchise agreement says roughly the same thing as the franchise agreements of well managed and well performing franchises. This means that the rogue has all the prerogatives as a matter of terms of agreement that a franchisor in a profitable franchise exercising good business judgment would have. What is lacking is satisfactory financial performance at the franchisee end of the stick, or, at best, worsening financial performance. Soon, if not already, the total cost of being a franchisee in a rogue system approaches 20 % of gross sales. The cost of the affiliation is far more than the value of the name, and nothing is coming out of the franchisor that has the prospect to improve financial performance for the franchisees.
How can you take control of your life and make this kind of franchisor respect the investment protection interests of the franchisees?
You cannot do it with any customary approach. The frat boy, church manners lawyer is completely useless here.
If the franchisees have a good claim against the franchisor and go to litigation or arbitration, recovery is possible. Despite what you may think, this rarely happens. It doesn’t happen because the franchisees won’t pay for the required legal services and the claims are not of a kind that some contingent fee law firm would take them on as clients. Often the claims that may once have been valid are lost due to delay. Often there are other defenses to the claims. Good contingent fee litigators take only the most platinum cases where, when they win, the franchisor is so financially sound that collecting the judgment is not an issue. Most rogue franchisors are low capital organizations with high risk of not being collectible when a victory is won. Potential judgments will probably be worth toilet paper, and contingent fee law firms shun those cases. In many instances the franchisor is itself possessed of little money or other assets. Some related parent company is taking most of the revenue upstream. The franchising company – the only one with its name on the franchise agreement – doesn’t show a profit of any significance. They believe that the parent is immune and that they can defeat any claim simply by keeping the franchising company lean and potentially uncollectible.
It is also likely that, since there are problems with the probable outcome of litigation, that is not the right avenue anyway. What is the alternative?
In finding the right alternative, the first order of business for an experienced leader is to determine the realities of the situation – is this franchisor really a rogue franchisor or is this a situation where the franchisees are not in command of a competent understanding of their rights and obligations. This is more than just a contract reading exercise because all franchise contracts say essentially the same things. Many times the franchisees are upset about matters that are common to most franchise system operations, and adjustment in their thinking about how life really works is the first order of business.
It is more about rational balancing of interests and orderly administration of the franchise system. With the rogue franchisor much is arbitrary and without traceable reason. It is difficult to link what is demanded with any perceivable benefit. One might generalize that things can be vaguely supportive of enhancing gross sales, but vague generalities do not rationally support expensive programs. Reasonable franchisors tend to have documented support for their programs. Rogues usually do not, and with rogues the story often changes frequently so that reliable consistency is missing. Simple dishonesty is a universal problem with the rogue franchisor.
A competent leader does not start throwing bombs if there is a possibility of establishing a professional working relationship with the franchisor. Where the franchisor is wall to wall hostile and unwilling to communicate in any meaningful fashion, good manners and board room professionalism is a waste of time. Hostility must be dealt with for what it is. Sometimes attitudes tend to change for the better once the franchisee association is established, but with a real rogue one may expect continued implacability. Leadership needs to be able to adjust to the ambient conditions and not try to pretend that something is what it isn’t.
The alternative that works against even an absolutely terrible franchisor works like this.
A small group of organizers who trust each other – not more than four or five people – hire an expert on franchisee association formation and management who can protect them from being identified by the franchisor as the organizers. This leader has to be an attorney so that the communications with him/her are privileged and confidential. The organizers retain the attorney to advise and assist them lawfully to establish an independent franchisee association and they are his clients. He prepares and sends out the recruitment materials to the entire franchisee population, inviting them on behalf of his clients to join and explaining the purposes and the benefits to be expected from membership. All membership applications go to the attorney and the dues sent in go into his trust account, held for the benefit of the association. But the checks for dues do not get deposited unless and until there is an adequate membership population for the new association to be viable. If the attorney and the organizers decide there is not sufficient support, the checks are put into the shredder and no one ever knows who was involved. The organizers, in that unfortunate event, then know that there is no sense bothering further and they can go on with their lives acting only in their own interests. Franchisees without sufficient strength of commitment to save themselves just end up getting what people like that get.
If there is sufficient membership support, the association is established, but in the early period – maybe a year or so – the members are taught to communicate mainly to the attorney to protect confidentialities until the rogue franchisor has come down off his horse and accepted the fait accompli of the existence of a franchisee association that is not under his thumb.
By this time the issues have been sorted out in order of seriousness, and a plan has been formulated to deal with them as they deserve. The attorney association Managing Director must be adept at the tactics needed to make the association’s positions reasonable and well supported. In that way if there is no cooperation from the franchisor, the association has accumulated the facts and evidence necessary to take more drastic measures as necessary. The priority is always to try to work things out in a reasonable business manner with the franchisor, but sometimes it takes a while for that to start to happen. Things must be done to win hearts and minds, if you know what that means.
This is a sequel article to a main publication on this subject that has appeared on two of my professional websites. The main article can be reviewed at FranchiseRemedies.com. I am trying not to repeat the important information contained in that article, so I strongly recommend that the two be read together.
There is usually a reluctance to participate. Many will join up immediately if the assessment of the seriousness of the situation has been accurate. Others will join up once the association has been formed and announced. There will always be a segment of the franchisee population for whom the association is simply too late to be helpful. They are too close to financial collapse and probably won’t be around within a year anyway. Some will cynically believe they can get the same benefits without having to join. That is a ridiculous fallacy, no matter how attractive it can be made to sound. There are no free rides in a well organized and managed independent franchisee association. There are simply too many instances where individual members need immediate expert help from a professional who has made it his business to learn about this franchise and how to deal with the issues. Members will have “no fee” access to this level of expert assistance. Non members will be out there on their own, having to find their own lawyer and pay for him to learn what the Managing Director of the association already knows.
Some will say they can't afford to join. That is nonsense. It will cost more each year not to be a member than it will to pay the dues and get the benefits. That response to membership needs to be answered just this way. You can’t afford not to join. Dues will amount to about the price of a pack of cigarettes a day, paid annually in advance. People spend that much each year at Starbucks. They can certainly afford to pay association dues to help themselves to effective franchise relationship management.
When you get tired of so called gentleman lawyers failing to get you to yes in your relationship with your rogue franchisor, try doing it this way. The consequences of the rogue franchisor refusing to cooperate are much more drastic than he wants to deal with. You can show him that he is not able to treat franchisees like dogs, no matter what the contract says.