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It always amazes me that so many franchisees do not understand the importance of having their own association and having it competently managed so that it isn't just a bunch of whiners with no credibility. Of all the problems I hear year in and year out about franchising, very few could not amicably be resolved if the franchisees had an adequately funded franchisee association counseled and managed by someone who saw the job as something more than simply agreeing with everything franchisees say.
Some franchisee groups, I am sad to say, will never have an association, and their problems will not amicably or otherwise be resolved. This is because they are simply too poor, too cheap or lack the courage to get one together. It still takes a bit of courage, because franchisors still do not want franchisees becoming empowered to act for themselves in a credible and effective manner. However, there is absolutely no reason today for any franchisee group to fear retaliation over association formation. The trick is to catalogue any franchisor threats and see that the franchisor knows that any threats are being catalogued for future use. That will put an end to the threats. Not only do various state laws protect against franchisor obstruction of franchisee associations, but there is also a recognized and protectable right under the First Amendment to the U.S. Constitution to associate freely for proper purposes. You are not a conspiracy in restraint of trade or a conspiracy for any other purpose because you are forming and attending functions of a franchisee association.
There are several very constructive and proper purposes and functions for franchisee associations. Unfortunately, they are almost never formed early enough to head off system problems. They are, in the main, formed only when franchisees are 'ready for war'. Franchisees put themselves through that unnecessary agony because they are not sufficiently informed to appreciate that the yearly dues to create an adequately funded, professionally managed association are more important to the success of their franchise relationship than their new car or boat. Association dues do not overwhelm the new car or boat anyway. If they do, then you aren't making enough money to justify staying in your franchised business anyway. If you can't afford the association, there is no economic justification for continuing in the franchise system. It is that inexpensive if it is fully supported.
This article assumes that the franchisee group considering formation of a franchisee association is not just a bunch of bottom rung starvelings who bought bozo franchises and are slaving away at them without making a decent living. People who bought those franchises can't be helped by any association. This article is addressed to franchisees that are managing a franchised business that pays a reasonable return and that requires, for the protection of future prospects, that the franchisees are not just out there to roll over and comply with any edict from the franchisor without consideration of their valuable interests. The association is not there to foment rebellion. It is there to offer the franchisor valuable cooperative assistance in system management, to save the franchisor governance expense, and to receive for the franchisees in return a level of respectful consideration that directly benefits the longer-term value of the franchise investment. And, if the construct just described does not generate the return consideration, that kind of association is in a position to enforce protection of franchisee interests. It is carrot and stick, sword and shield. It is what a healthy franchise system need never fear.
A well counseled and represented franchisee association assists the franchisor to obtain compliance by the franchisee membership with their obligations under the franchise agreements. The association does not waste its resources or its credibility championing the cause of any bad apple franchisees. Bad apple franchisees hurt other franchisees as much as they hurt their franchisors. They try to free ride. They present to the public a negative version of the franchise system's persona. The association counsels with them to get them into compliance rather than insisting that they be protected. Counsel for the association should not be accepting retainers from bad apples. They should, if they persist in their pernicious habits, be required to obtain counsel who is not impairing the good will of the association by claiming that a bad apple should get off or be tolerated. A good association counsel has the ability to decline retention by a franchisee in trouble due to the franchisee's own fault. The association counsel should be there to counsel with the franchisor and the non-compliant franchisee to try to sort things out in proper fashion. But, if there is no resulting compliance, that is as far as association counsel should go in the matter. If the bad apple has friends who prevail upon association counsel to represent him, those friends should be reminded that they would do better to have him get other counsel and not involve the association's reputation for integrity in riding a sick horse. That reputation will be needed intact for many important and worthwhile matters in the future. Bad actors' association dues are not a ticket to have the association take positions potentially harmful to the group when the proper course is to correct inappropriate conduct.
Even in cases where a franchisee member in good standing needs representation against improper franchisor conduct, the association should not join in or subsidize a fight unless the issues at stake pertain to the franchisees as a group. Those decisions are best made by the executive committee of the association after they have been apprised of the facts. A franchisee seeking association assistance in such a project needs to agree in writing to a waiver of privilege as to what counsel may disclose to the executive committee, else counsel risk a serious violation of duty to that franchisee. Clear disclosure of the limits and obligations of association counsel's role in this exercise is imperative. Anything told to the executive committee will probably not be privileged, even if counsel is present. Here the association counsel walks a tightrope on the issue of who his client really is. There must be a signed memo agreement disclosing the privilege destroying potential and granting consent by the franchisee to the sharing of the information with the executive committee.
All competently drafted franchise agreements provide that the franchisees will send a copy of their annual federal income tax returns to the franchisor. This is, unfortunately, insufficiently enforced, which makes earnings claims unreliable. Franchisors whose franchisees are making money want to be able to make formal earnings claims. That's the most important question in any potential franchisee's mind. Franchisees, especially franchisees who own several businesses, dislike sending their tax returns to a franchisor. A well managed, credible franchisee association could save everyone trouble and expense by having a program that provides tax return information in an earnings claim usable format on an anonymous basis, subject to the franchisor's right to spot check for quality control and insist upon the returns if the quality check is not satisfactory. This would be done by an outside accounting firm for credibility enhancement. Practically no association does this today, and I wonder why not. It is a very good way to balance all the interests of all the parties.
The association could be a clearinghouse for franchises available for resale, saving the franchisor from this burden. With today's computerized profiling, resale proposals could be presented in formats capable of 30 minute approval.
The association can work with the franchisor in formulating new policies and programs, so that they are not simply adopted and announced without adequate regard for franchisee interests. An example of this is 'new concept' stores that so many franchisors want the franchisees to build out and test. New concept construction testing is a franchisor function. An association can see to it that renewal, resale and other rights are not made contingent upon untested, risky new concept remodeling and construction. It is not enough for a capital expenditure decision to be made that several stores have been placed on line and have been in operation for several months or a year. What has been the result of that in bottom line terms? If there is not bottom line growth sufficient to amortize the expense within a reasonable time, no franchisee should be required to do it. But this is an example of something single franchisees cannot effectively bargain over. It takes an association.
Where franchisees are allowed to purchase supplies only from the franchisor or from designated suppliers, and avoiding non-economic expenses for supplies is critical, this is definitely an issue for group, not individual action. Where there is a secret formula issue, sole sourcing may be appropriate, but not for everything else. That is another question. Sole sourcing non-proprietary supplies has in too many instances been a way of extracting another royalty. Since in so many franchises, the royalty and advertising fund burden can equal fifty percent of profit, failure to have access to competitive supplies purchasing is a critical issue requiring an association's strength. This is one of the most frequent complaints of franchisees, and their failure to form an effective association is the only way to deal with it short of leaving the system.
The association represents the only effective way to share the cost of managing system wide issues before they become litigation level problems. And if, even then, they become litigation level problems, sharing the cost of dealing with the litigation is the only way most franchisees could ever hope to achieve a positive resolution. Individual franchisees can usually be spent into the ground. Associations do not have that weakness. Since the association is known to be well funded (if it is), the litigation usually is not necessary.
The association should have its annual meeting at the same time and place as the franchise system's annual franchisee meeting, with its counsel present. If there is franchisor reluctance to coordinate such meetings, it will be the franchisor that loses out, not the franchisees. Franchisor representatives do not have to be allowed to be present at, or to participate in association meetings.
The association's counsel should be available at any time between meetings and should attend all executive committee meetings, that ought to be held at least every quarter, with a pre-circulated agenda so that no one shows up unprepared.
A franchisee association is not the same thing as a franchisee advisory council or any other franchisor controlled group. The presence of a franchisor-controlled council should not be thought of as an adequate or inexpensive substitute for an independent association. The membership of the franchisor controlled group will be set by the franchisor for the franchisor's own purposes.
There are many more instances where an association is highly desirable and necessary. In the absence of field leveling legislation that is not likely to to be adopted, the association is the franchisees' best hope.
Copyright 1997 - 2008 || Richard A. Solomon
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