Resisting the Formation of an Independent Franchisee Association
Independent franchisee associations vary in quality from system to system. Where they are successful and their establishment does not result in all out warfare that tends to make reconciliation unlikely, the system usually performs better for the franchisees. In most of those systems the performance of the franchisor is also healthy in the sense of long term health. The franchisor’s short term profit maximization ambitions, however, are aborted when an independent franchisee association gets going and is effectively supported and competently led/administered.
The most obvious immediate point of impact is the supply chain. The franchisor’s revenue stream from designated vendors from whom the franchisees must purchase tends to diminish, as the franchisees move to obtain competitive multi source purchasing arrangements.
To the franchisor that has been enjoying the extra cash, that is a big issue. It seems like giving money away. Giving money away today in the hope of some future undefined benefit is often difficult, to put it mildly. There are obvious other issues as well, but this is just about always number one on the hit parade. If the franchisor is considering an IPO or is controlled by a large investment banking company that is looking to flip the control through an IPO, resisting the establishment of an organization hell bent on short term revenue diminution is not a hard decision to make. In fact it is just about a slam dunk what the decision will be. Even without the prospect of a near term IPO the decision is usually very predictable.
Among the long term healthy systems with effective franchisee associations you will find Popeye’s Chicken, Burger King, KFC. Among the marginal franchise systems where the establishment of an effective franchisee association has been thwarted you will find Quiznos, ColdStone Creamery and others whose reputations have become rather notorious on Blue MauMau.
Other than the extraordinary franchisee associations like the successful ones I mentioned, the normal impetus for the establishment of an independent franchisee association is to enable mass litigation/arbitration against the franchisor. It is never said in that way. It is always stated as an effort to “improve things”, to make the franchise relationship a “win win” situation. That is largely franchisee association theater. Subliminally the hope is that a sufficiently angry large group of people can experience so much frustration that they will finance large litigation/arbitration or enable some form of class action case. In the mind of the lawyer representing the franchisees, this situation will probably not reconcile amicably, and the franchisees need to become conditioned to accept ultimate confrontation as the way to success. All too often franchisor management ego plays right into the hands of that scenario. Often that is how it eventuates if the association does survive its infancy.
There are some sissy lawyers who really believe they can talk a franchisor out of revenue streams. They are few, far between and delusional. A ridiculous organization that called itself the AAFD pushed something called fair franchising standards, a California touchy feely notion of Pollyanna nonsense that no one ever took seriously. After giving Franchisor of the Year awards to a couple of scoundrels in exchange for some cash, it seems to have collapsed.
As you can see, this is not going to be a politically correct article. This is a discussion of probable realities depending upon how the events are dealt with.
Independent franchisee associations are somewhat of a specialty of mine. More often than not I am called by groups of franchisees who would like to start a franchisee association to deal with perceived abuses they claim their franchisor is imposing on them. On the other side, I am called by a franchisor that feels upset that their franchisees seem to want to change the system of brand governance – they don’t like how things are being done and they want to run the asylum. The two different sides are really different perspectives on the same questions and issues, but somehow things have gotten “out of hand” and there is now contention.
I have published numerous articles on my web sites about tough franchisors, predatory franchisors and how to deal with them by establishing militant independent franchisee associations. This is my first article on how to deal with the same phenomenon on behalf of a beleaguered franchisor.
There are three kinds of franchisors in this context. There is the franchisor that is openly predatory and is not in the slightest interested in anyone else’s views on what is being done or how it is being done. What the franchisees consider to be abusive and predatory, this kind of franchisor characterizes as being an example of short term profit maximization. On the other extreme is the franchisor that believes its franchisees are given every advantage that they are entitled to and that there is no predation or abuse whatsoever. What is done is permitted by the franchise agreement; is accurately disclosed in the FDD materials; and is carefully watched by the franchisor to assure that the practices are not preventing franchisee profitability. In the middle is the franchisor that is aggressive and can be seen to be insensitive and uncaring, but believes itself not to be abusive or predatory and really is not interested in being told how to run its company by a group of its licensees.
To be sure, one may come up with other categories, but this is just for the purpose of illustrating the point of this article. The point is that in each and every variable the common thread is opposition to the formation of independent franchisee associations. Frustrating them is a specialty in itself, and is not work for sissies.
How these franchisors should be represented is the theme of this article. It is not the lawyer’s job to preach or scold. It is the lawyer’s job to assure compliance with applicable laws, and, having satisfied that requirement, to seek out and raise options for consideration by franchisor management. When the options are sorted out and prioritized, it is then the advocate’s assignment to develop tactics and strategy to deal with the dissent.
Things are not always as they seem. Within franchisee groups there are agendas that not only differ, but also conflict. The implications of franchisee variant circumstances provide insights and opportunities for effective tactical action by franchisors that are not interested in having to tolerate group resistance to the franchisor’s rights carefully set forth in a written agreement signed by grownups. This is not a parlor game. It is business, and contracts are meant to be enforced according to their terms. Our entire economic system depends for its success upon respect for written agreements. They are capital. The franchisor’s portfolio of enforceable franchise agreements is the most valuable intangible asset that the franchisor has.
Most errors are made in picking the first option that comes to mind and adopting that as the only line of attack. One should always think in plural terms and try to sort out as many options as possible; prioritize them and use them where they fit best. Make the franchisees fight a multi front war, so to speak. Yes, I know that war is not a politically correct word in franchising, but you can be politically correct when the work is done. When your point has prevailed you can go back to being charming and forget you ever met me. I’m not campaigning to become your regular business counsel. I deal with “special projects”. In Texas the expression has been “One riot, one Ranger”.
One thing of which I am certain is that counterinsurgency is a myth. Counterinsurgency is that ridiculous doctrine that we used in Nicaragua, Viet Nam, Iraq and now in Afghanistan – making the indigenous population appreciate that we are really there to help them so that they adopt us as their own and hate the opposing forces. As we have seen in these other countries, the locals do not like us and would much prefer their own brand of oppressors than some foreign group known historically to have been working against their interests. The villagers will shoot at you as soon as they can get their hands on weapons, including any weapons you are stupid enough to provide for them or that they can steal because your security isn’t what you thought it was. Franchising is no different. So we don’t waste our time and resources on trying to become likable. This is business, and when the conflict has been resolved in your favor you can then start campaigning for adulation if you like. If you weren’t all touchy feely before the fight don’t expect to be believed about how much you care about them once the fight has been started. It only makes you look like a fool. Their hearts and minds will follow when you have reconfirmed your grip upon the governance of your system. Then you can waste money on popularity contests if you are still in the mood.
Fortunately for lawyers, there is no such thing as a happy franchisee. Within no more than 24 months every franchisee has decided that he is paying for nothing; that support is a joke; that if he had just given it some thought he could have figured out how to do this without having to sign your agreement and pay you all that money; that you are stealing from him; that you are at least taking very unfair advantage of some arcane and obscure provisions of your franchise agreement (designed by the world’s most unscrupulous lawyers); and that the only way to survive without bankruptcy is to wrest control of the franchise system from you and make it profitable for the franchisees. Even franchisees who make money feel this way. Expecting encomia from your franchisees is the height of delusion. I have represented franchisees for almost 50 years. I have also represented franchisors for almost 50 years, so I know whereofI speak.
So let’s stop talking about the theories and the myths and get down to how we are going to frustrate the establishment and effective of an independent franchisee association made up of your franchisees.
I am not going to “give away the store” here and enable franchisees to telegraph false punches because I have provided some kind of roadmap. However, think of initially doing “opposition research” as politicians do when they learn who their opponents are. Think of choke points that you may have on key players. Think of “goody bag” contents that can be suggested but not provided unconditionally until the consideration for them has been received and fastened down (and maybe not even then). Think of what you want in consideration for indulgences. Think of how you counter agendas and schedules. How and by whom these things are handled is usually outcome determinative. I have been threatened by several franchisee lawyers over tactics, so I know they are working. Threatening me is totally useless and only shows me that I am ahead and you are losing control.
The techniques, manner, sequence and the people who are bringing into use these variable opposition resources are mission critical. You cannot just do this in house and expect to have a good result. It can happen but it is unlikely to happen well or soon trying to use company people to bring this off. The aim is to deflect onus onto an outside resource as much as possible.
Some years ago I published an article on what not to do when bad things happen. My point was and remains that your first inclinations and reactions should never be acted upon because they are usually wrong or at least not optimal. If you are interested in reading it you can find it at this link http://www.franchiseremedies.com/Franchisee_Mishaps.htm . The approach is the same in dealing with disgruntled people trying to get an independent franchisee association up and going. Get the best assistance you can get before you do or say absolutely anything at all. It is always tougher when you find out you did yourself a disservice and need to shove that shit back into the horse.