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.

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Comments

Thank you Richard

This is a good reminder for franchisees who operate in brands that tend to survive for a long, long time but those in the brand network come and go having lost their investment, home and possibly family only to be forced to start again from scratch carrying deep scars.

To those franchisees I’d suggest you have more time than you think to get organized into effective associations. Think of your franchise agreement as being locked into flooding vault. You don’t actually drown until after your resources have been exhausted and you’ve been sucking on the ceiling.

It is unbelievably foolish for those who tippy toe around trying to smooth a transitional relationship when all the participants have done the math and realize just how much franchisor revenue in total is involved in turning around the plight of individual franchisees.  The money is enormous.

This is how franchisees must approach with focused determination;

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.

Richard points out here that clearly the situation is war; ‘We sleep safely in our beds because rough men stand ready in the night to visit violence on those who would harm us.’  George Orwell

The foolish, the cheap and the cowardly concede to common sense when it’s just too late. Richard has been kind enough to point out some of where it can go wrong but where it can go according to plan is when franchisees embrace absolute strength in numbers.

Thanks, Ray, but this is not intended as a heads up to

franchisees.

A week or so ago there was a discussion about franchisee associations in which I indicated that I often shoot them down for franchisors and don't just set them up for franchisees. I think everything on BMM to date other than this article has been about forming franchisee associations. This is the first glimpse into the other side of that coin.

Actually, I doubt that franchisees have any appreciation of the weaknesses within franchisee groups when they are trying to do this. They just think they are all on the same side all the time.

Nothing could be farther from reality than that.

Yes Richard, but while I

Yes Richard, but while I hoped to point readers to your blog I had also hoped to get your shackles up with a twist to suggest that there was much there for franchisees pondering their troubles to consider. As soon as I mentioned ‘Richard’ and ‘kind’ in the same sentence I thought you’d realize I was being facetious.

No tactician ever achieved much with a great plan if he or she had not planned for where it can all go wrong.

Franchisor's Supply Chain and Startup IndFA

Richard writes: "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."

A startup independent franchisee association is committing suicide by trying to take away from the franchisor its rebate stream.  There simply isn't enough economic power or cohesion in the group to withstand the counter attack from the franchisor - who will threaten everyone with breach of contract.   A group of franchisees who simply tries to attack the franchisor's rebate stream is a simple group to defeat.

A modern franchisee association has to start with a different economic agenda, here is my article on the creation of modern franchisee associations.  At some point, it may make sense for the franchisee association to create, with the assistance of the franchisor, a co-op arrangement as a device which monitors cheating.  But the franchisee association has to obtain some independent economic clout first.

Dunkin' Donuts Supply Chain Rebates

To move forward with their IPO plans, Dunkin' Donuts is betting on a merger between the regional purchasing co-ops (DCP) to form a National DCP. Certain franchisee groups are in opposition of the merger because they believe the franchisees would lose more control over the supply chain.

At the National DCP level, the BOD structure allows Dunkin' Brands Inc to gain 2 board seats. This would be the 1st time the franchisor has an active BOD role in the franchisee owned supply chain structure.

Total purchases in the DD system are estimated to be roughly $1.25B. Some franchisees believe Dunkin's rebates are as high as 20% of the total purchases made annually. However, Dunkin's representation in the FDD does not come near the figures being thrown out by the franchisees representing certain regional DCP's. They believe the rebates/kickbacks are being funneled through non-franchisor entity accounts.

In order to support the National DCP merger, franchisees are seeking to participate in supplier contract negotiations. However, as Richard points out in the article - Why would Dunkin' give up control over supplier contract negotiations?

Certain franchisee group have publically stated to the franchisee community that the merger will reach impasse if the franchisees are not represented in the supplier contract negotiations. However, when asked if the merger impacts Dunkin's upcoming IPO plans, they state they can not comment on the subject due to confidentiality agreements they have signed to participate in the National DCP merger talks.

I suppose Dunkin' has already gotten what they want by limiting full disclosure and open communications with the entire franchisee community. Ultimately, the franchisees negotiating on behalf of the community will bend into Dunkin's desires by being threatened as outliers. Franchisees will lose control of their DCP system since they already gave up the National DCP BOD seats to the corporate franchisor before gaining any seats at the supplier contract negotiation table.

Dunkin' Franchisees Already Lost Control!

Not knowing much about the Dunkin system I'd say the franchisees already lost control.

Jerry says, "At the National DCP level, the BOD structure allows Dunkin' Brands Inc to gain 2 board seats. This would be the 1st time the franchisor has an active BOD role in the franchisee owned supply chain structure."

Why would the franchisees have allowed the franchisor access to the franchisee owned purchasing co-op? Do the franchisees have a board seat on the Dunkin' franchisor?

Who ever negotiated the inclusion of the franchisor onto the co-op board signed away any control the franchisees may have had over the supply chain historically. Now, they seem be whining about why they are not involved in supplier contract negotiations.

The last time Nigel was on CNBC, he said the franchisees are getting more sophisticated and many are former professionals and MBA's. Not for nothing, the franchisees sitting on the co-op board seem to be pretty uneducated and down right stupid for allowing the Dunkin' franchisor to gain a board seat.

Dunkin coop and Zor board seat

Why would the franchisees negoiate a franchisor board seat? Think about who owns the franchisor now. Private Equity is notorious for squeezing money out of the companies that they buy.

The PE owners want to offload as many of the franchisor's expenses onto the franchisees as it can. That may include the product sourcing and supplier management. Why have a department at all when the franchisees not only will do, but want to do it? The supplier income sucked out of the vendors now that would be lost is at least partly offset by the Zor shedding an entire highly paid department and related overhead. A board seat costs them nothing.

Of course, they have to give the Zees a contract that they want to get there...

Dunkin' Franchisee Board Seat

Guest says, "Private Equity is notorious for squeezing money out of the companies that they buy."

Franchisees gave up 2 board seats to Dunkin'. Now, they'll be able to see where they can pick-up greater efficiencies for the Private Equity owners. Franchisees should simply sign over their banking accounts to Dunkin' because that's what they really want to make their shareholders happy.

Why do they need to give the franchisees anything when they're already in a position to take it all? After all, the supply chain begins with a supplier contract approval.

Because Dunkin Brands doesn't own anything but the sign logo

Good luck to a putz In a $3000 suit trying to run a single Dunkin Donuts, forget 13,000 of them.

Oh, and the franchisees who own their real estate (generally all of the long time A plus locations) don't really care if they get to retire and lease their many,many units to direct competitors. The franchisor doesn't have the real means to prevent that, especially with large numbers taking that route.

When push comes to shove, and it is coming, franchisees really hold the bigger sticks.

DBI Won't Own The Trademarks Much Longer

GuestZee comments, "When push comes to shove, and it is coming, franchisees really hold the bigger sticks."

For past 20 or so years, Dunkin' has successfully divided and conquered the franchisees against each other. We, as franchisees, were spectators in the process due to our own individual self interest and greed. We all ratted out on each other, and now, Dunkin' is going to give us all the final shaft.

I own the real estate under 2 of my 11 locations. What makes you think I'm ready to lose 9 of my stores in order to rebrand 2 of the locations I own? I'll never be able to support my lifestyle, kid's college, and family. When push comes to shove, I'm doing what's best for my family's interest.

Once Travis' team takes it IPO, what do they care what happens to the brand? They're the ones making the money and riding off into the sunset. No state relationship law or franchisee PAC is going to bring back control over the supply chain.

It's too late because we waited too long.

DD Franchisee's question

DD Franchisee asks, "What makes you think I'm ready to lose 9of my stores to rebrand 2 of my locations?"

I believe that you answered your own question in the above post.

When those 11 Dunkin's become albatrosses around your neck, you will beg someone to free you from them. If you can instead derive a revenue stream instead of a revenue drain, you will be ready.

Deriving A Revenue Stream From Dunkin?

GuestZee says, "If you can instead derive a revenue stream instead of a revenue drain, you will be ready."

What revenue stream are you talking about? Do you really think Dunkin is ready to begin sharing their supplier kickbacks with the DCP? Think about it: Dunkin is going public. If the kickbacks are as high as some franchisees are speculating, wouldn't that be a nice cushion for Dunkin to dip into to hit their quarterly analyst targets?

Franchisees have speculated for years on what the total kickbacks are to Dunkin. No one has a clue except for hearsay from the supplier reps. The only additional sources of revenue they are disclosing is from the new JBOD program which they are hoping will build shops West of the Mississippi.

When Dunkin decides to sell to another PE group in the next 5 years after going public, the undisclosed kickbacks help them attract a higher resale multiple. Think: Burger King.

Have you checked in with some of the local Northeast brokers lately? There are many Dunkin stores for sale. When there is uncertainty, franchisees begin to unload. I agree with your earlier point, it's better to sit back and collect rental income from the properties I own versus worrying about the declining profitabilty of my stores.

Dunkin' Supplier Multiple

DD Franchisee comments:
"When Dunkin decides to sell to another PE group in the next 5 years after going public, the undisclosed kickbacks help them attract a higher resale multiple. Think: Burger King."

Who said Dunkin' franchisees were stupid and uneducated? DD Franchisee makes a solid observation. Dunkin' will never give away the kickbacks they are earning to cut a deal with the franchisee owned DCP. Within a few years of Dunkin's IPO, the current sponsors will look to sell off the remainder of their investment. Dunkin' will again be taken private. Whoever buys the trash heap will value the kickbacks and pay a reasonable multiple on the supplier revenues.

The private equity sponors would be stupid to let the valuable supplier revenue stream slip away. GuestZee has many high hopes for the franchisees negotiating position.

you would not have a clue

''The supplier income sucked out of the vendors now that would be lost is at least partly offset by the Zor shedding an entire highly paid department and related overhead.''
You cannot mean that the rebates etc are not much more than the cost of managing supply?

Dunkin Supply Chain

There is no cost to Dunkin today to manage the supply chain. Dunkin only has opportunity to capture greater kickback revenue with every new supplier approval. The franchisees are responsible for the day-to-day management and expenses.

Franchisees will continue to lose control and be slammed with higher COGS to operate their shops. It's the reality of Private Equity and franchisees must except it or sell out to another sucker. When the system is no longer profitable to the franchisees - who cares? Private Equity will have made their money and will have ruined a one time healthy system. Good luck franchisees.

DBI Comments: The Franchisees Are In Charge.

On Wednesday, June 29, 2011, DBI provided a statement to the Joint Committee On Community Development and Small Business. Although the statement does not address the issues with the supply chain, they basically say that franchisees have a fair deal with the franchisor Dunkin' Brands Inc.

"Thus, we believe the recently negotiated franchise agreement addresses the topics included in the legislation and alleviates the need for a legislative option to govern this contractual relationship. In addition it is worth noting that both our systems have a totally democratic system for receiving advice from our franchisees. Meetings with these representatives are held at the district level, regionally (5 per quarter in Dunkin' Donuts alone) and at the national level quarterly."

Apparently, the franchisee's own democratic system voted in a fair franchise agreement and a Board of Directors in charge of the National DCP supply chain. Dunkin' Brands also provides a brief statement on H 3513, an Act relative to clarifying franchises.

"Dunkin' Brands supports H 3513 as we believe it appropriately clarifies the nature of the franchisor-franchisee relationship. As noted above, Dunkin' Brands, as the franchisor, enters into a contractual relationship with our franchisees. Thus, employees of Dunkin' Donuts and Baskin-Robbins are the employees of the individual franchisee, not Dunkin' Brands. We support this legislation as it seeks to clarify existing law in the Commonwealth of Massachusetts."

Dunkin' Brands believes there is a fair franchise agreement, a democratic voting system, and they have no control over the employees that run Dunkin' Donuts and Baskin-Robbins. So, why are the franchisees so upset with their control over the supply chain?

According to Dunkin' Brands' statement, they are actually doing the franchisees a great service by investing into the brands they really have no control over. For example, they are investing in back-end technology support, restaurant manager training, voluntary ad fund contributions, and monthly operational webcast communications.

They make it seem as though they are running a not-for-profit organization. However, we all understand the spin doctoring that goes on behind their private equity owned corporate veil. I suggest the franchisee community should submit a counter letter to Dunkin's statements and argue the validity of their statements to the committee. Force Dunkin' onto the legislative floor and grill them on the realities of franchising. They didn't have the guts to show up, so the franchisee community should shoot down the statements delivered.

Perhaps, calling them out in front of their own government legislators will get them to agree on the core franchisee issues concerning the supply chain. It is on the legislative floor that will force Dunkin' to react in the most positive and efficient manner for the franchisees because government reputation hurts them the most. Your owner, Bain Capital, is sending their top dog, Mitt Romney, to run for the Presidential Oval Office in 2012. Now, is the time for the franchisees to enact their so-called democratic system.   

Spin Doctoring

Ed states:

' However, we all understand the spin doctoring that goes on behind their private equity owned corporate veil.'

If spin doctoring is such a bad thing, what about the franchisees that tell their story and leave out facts that might be important to the story.  I believe that Barkan spun things in his book to make himself look like more of a victim than he might have been.  I'm guessing he played the same card at the hearing. 

There was a franchisee that told their story on this website four years ago, and got sympathy from people.  Reading through the court case, that franchisee left out some pretty important information to their story. 

Dunkin' Spin Doctor

JD says, "If spin doctoring is such a bad thing, what about the franchisees that tell their story and leave out facts that might be important to the story."

There are two sides to every story. Dunkin' is notorious for going after the most minor infractions of the FA to find a reason to terminate a franchisee to swindle them out of their wealth. I know a franchisee that shared his story here on BMM about 3 years ago. The franchisor spent over $1.6M fighting the franchisee to grab their profitable stores. The franchisee spent nearly $600K defending their position. The two had fought over who's right and who's wrong over whether or not the proper amount of payroll taxes - about $15K - were paid on various business deductions. That franchisee operator, today, still receives some of highest scores on their Guest Satisfaction Surveys and Restaurant Operations Reviews. Yet, Dunkin' tells the world they are the worst franchisees any franchisor would ever want in their system. 

You would think that if the franchisee really did something to materially breach the FA, then they would have settled the litigation up front. The franchisor was able to terminate some but not all of the franchisee's multi-unit network. In the Dunkin' system, it's generally all or none due to the prior FA's cross default provision. In this particular case, the cross default provision failed. The new changes in the current FA allows the franchisor to go after franchisee owned shops one at a time.    

Re; Spin Doctor

I never said that Dunkin didn't spin their news, I'm just saying that franchisees spin their stories as well, yet, people seem to be oblivious to it, and want to believe everything the 'hurt' franchisee says. 

I've also never said that Dunkin didn't go after franchisees for minor infractions.  However, I think you would agree that not paying royalties and loans wouldn't constitute a minor infraction.

Dunkin Offering 72 Virgins

Mr. Ryan says, "The two had fought over who's right and who's wrong over whether or not the proper amount of payroll taxes -about $15K -were paid on various business deductions."

Payroll taxes? Let me guess - the franchisee paid employee fringe benefits that Dunkin claimed should have been included in the employee's gross wages? The whole problem with this is that Dunkin has done this to many franchisees. The franchisee you describe actually stood up to Dunkin and fought. Many others paid the penalties Dunkin imposed. Dunkin caught franchisees with undocumented workers and penalized them as though they were acted on behalf of ICE.

The problem I have with their tactics is that the franchisee's accounting practices neither damages the brand nor harms the franchisor. What was Dunkin's motive to go after the franchisee's stores? To profit from a resale?

Dunkin is under a gun with their IPO road show. Dunkin needs a National DCP merger before going public. Certain franchisees will negotiate the supply chain away if Dunkin promises them 72 virgins.

A Democratic System?

Yeah right! Franchisees will do whatever Dunkin tells them to do. This isn't a democracy. It's a franchising money machine.