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AXIOM -- When it is recognized that a franchise system is in/about to enter crisis mode, it is rarely due to something that just happened. It is in most instances something that just happened that cumulated with 'issues' that have been stacking upon one another over several years.
Once simply and explicitly stated, that axiom seems so obvious -- but of course, that is what an axiom is, isn't it -- something that is not only true, but obviously true. And, like the safety pin, resort should be made to that axiom as the starting point of franchise crisis analysis that is effective for its being so obviously simple. Why then is it not more frequently the starting point in reality? Direct questioning of everything, though not always politically correct, tends to get one to the best answers more quickly than wandering in a politically correct wilderness of subject avoidance. In my experience, a great many franchise companies that have been around quite a while go arse over teakettle into real crisis because -- instead of starting with this analysis, they chose rather to litigate about 'last straw' issues.
For example, if you want an explanation of why obviously mature franchise companies lose covenant not to compete cases despite the 'law' seeming to be very pro-enforcement in its view of such covenants in many states, it is simply because they choose to freak out over fear of mass exodus from their system should a defecting franchisee 'get away with it' rather than deal with that fearful moment analytically. Accordingly, there is a growing, substantial body of case law that, despite what some people think is 'the pro franchisor law' on the subject, is opening a huge avenue of escape for franchisees whose counsel know how best to exploit 'staleness' as a defense to attempted enforcement of covenants not to compete. Simply reading opinions in covenant cases where the franchisor loses won't reveal courts ever using the actual term 'staleness', but, analytically speaking, it is staleness that is at the heart of the matter. And this is just one of many examples of common errors in franchise crisis counseling.
Staleness doesn't happen overnight. It is the accumulation of degenerative influences over time -- just like the axiom says. That accretion period may be short or long, depending upon the rates of changes in the markets your franchisees serve. Rates-of-changes as risk analysis factors still escapes most franchising companies. Unfortunately for most franchisors, anyone who has the temerity to suggest an inquiry into staleness issues in the system will probably get fired for assaulting a sacred cow. But, if there is no possibility of open mindedness when questioning assumptions made, there can be no effective analysis of anything. Arrogant insistence upon positions taken because the Boss can't ever have been 'wrong' (whatever that means), precludes effective representation when in crisis mode. You end up with a lawyer who is so scared of the Boss that his capability to be of real value is simply undermined. Sometimes you have to be willing to risk losing the fee to be worth while. If you do the right thing and get fired for it, you couldn't have helped that kind of client anyway. How you deal with the boss who can't be wrong is another article length subject in itself.
I think there are about a dozen -- more or less -- contributing issues to consider when you analyze how a crisis came to be present in a franchise system. It is form of metastasis, like a malignancy, that may often be in the chromosomes of the system from the moment of birth. Little things that seem the smart thing to do at the time sometimes combine over time with other little things to become 'issues', casus belli if you will. And they are so insidious that they are not recognized as symptoms. They are thought to be simply aspects of every franchise relationship that simply come with the territory. It is what most franchisors do, so how can it be wrong? And the answer to that question is that maybe it isn't wrong in itself, and maybe it wasn't wrong when it was first adopted, and maybe it isn't wrong even now, if viewed in isolation. But viewed in context with other operational factors, it may be a contributor to a major problem. And this is why focusing upon the one salient 'issue du jour' so often causes franchisors to mishandle crisis management decisions and miss opportunities to fix the problems, choosing instead to go to court and lose a major piece of litigation in the name of protecting the 'integrity' of the franchise agreement.
The truth of the matter is that the integrity of the franchise agreement is sometimes protected by standing and fighting, but many times better protected by combinations of a defensive mode and an open mind. Open mindedness is the willingness to look at the system holistically for the purpose of trying to identify as many of the root contributing causes as may be related -- though tangentially in many cases -- and that may be subject to modification that only minimally affect the franchisor's views about the integrity of the franchise agreement, and that at the same time may so improve the overall modus vivendi by amendment as actually to enhance the integrity of the relationship that is to be served by that agreement.
AXIOM -- The integrity of the franchise agreement is never the issue anyway. The real issue is the integrity of the business relationship that the franchise agreement was/is intended to serve.
If you would like just one exceptional example of how this axiom works, consider the fact that the franchise contract was originally written several/many years ago, and that it has been amended largely as the result of lawyers going to continuing legal education seminars to learn about trends in franchise agreement draftsmanship and changes in the laws affecting franchising. What the lawyers learned at the continuing legal education seminars has little to do with this discussion. That's the problem. At the seminar they teach about what the industry is trying to accomplish -- the franchising industry. They don't teach anything about how you decide what parts of the 'new material' you ought to use in your company (if any), or how to insert legal notions effectively into a proactive formalization of the legal principles upon which you will have to rely for the effective functioning of your individual business system. Now, ask yourself, 'How often has this agreement been revised to accommodate the evolution of my business from real market and real market economics perspectives?' Then, if you please, re-ask yourself how much you may wish to invest in fighting over the integrity of the franchise agreement? To me, if you end up fighting over terms of a 'dated' agreement, you may not be much different from people who save Confederate money in hope that the South will rise again.
I had to try one case in which the contract was such a disaster of cut and paste modifications over years of attending continuing legal education seminars that it fought with itself internally on many critical issues. It was so bad that the only way to win the case was to deal with the clandestine transfer of ownership issue, which was the basis of the lawsuit, under the Securities Act. Thank God the fools bought stock and not assets. In rejecting contract remedies, the court stated that, 'It is apparent that the franchisor attempted to cover every possible base in this agreement, but, like Marvelous Marvin Thornberry, they missed them all.' I know of no more graphic example of the problems that arise from amending contracts based upon attendance at these seminars. The proposed amendment must first be competently vetted. Currency for the sake of currency is ridiculous.
To this question, the unimaginative person posits that, 'Well, we can't unilaterally go back and change the terms of contracts that we already signed and that are now in force.' While that is a technically correct statement, it is also the most useless statement anyone could possibly make at this moment in your business life. I would suggest that any decision made because you believe that you are in a contract language trap that compels you to go to battle over ill perceived notions of contract integrity is a bad decision per se. While you obviously can't simply send out a letter saying, 'We hereby unilaterally amend your franchise agreement as follows...' there are other ways to skin this extremely important cat. But you have to have the capability to perform the analysis that may reveal your own escape from having to hang yourself upon your own petard/franchise agreement.
We typically think of contract revision annually. We change the language of franchise agreements and then use the new agreement for all the new franchises we sell and for any renewals and transfers. In that way, franchise agreement portfolios are kept current, as the notion of currency is commonly understood. But that does not alter the old agreements in force, and there is always lag in the system with this method. It doesn't always have to be that way. Usually that lag is not pernicious. Occasionally, in the context of the crisis mode environment we are discussing, it is pernicious. Obviously, if the provisions that are 'new' are not enhancements of the franchisee's interest in the relationship, and it is simply presented as a 'let's all do this' proposition, it will meet with rejection from the existing franchisees. Interim relationship amendment does not always depend upon interim contract amendment, and there are ways to sell packages of amendments that have an overall more appealing prospect for existing franchisees.
All of this, of course, runs us into another axiom:
AXIOM -- No company can long afford a franchise agreement written without the ability for it to be made current with changes in the markets in which you have to live.
The meaning of this axiom is that your franchise contracts have to take into account considerations that are simply not taught at continuing legal education seminars.
It is my less than humble opinion that, although it is never said in any court opinion that I can recall, what concerns judges quite often is their visceral reaction to being asked to decide current market issues in accordance with agreements that, by their language, seem to insist that the circumstances extant when they were first drafted are still 'real' circumstances, current circumstances. So often they are asked to rule that obsolete contract provisions be honored over economic realities. If the judge happens to agree with my thinking that the contract should serve the business arrangement's actual business need to accommodate the business environment in which the parties now live, there will be reluctance born of intellectual honesty to force people to a result that ignores marketplace reality. It's staleness, isn't it? It may not be called staleness, but it is staleness. If the 'wrong' issue litigation happens to focus on covenants not to compete as the 'wrong' issue du jour, for example, staleness is a terminal disease. And that you lacked the insight into your own franchise system's currency and could not avoid going to war over it is what will cause -- as much as any other factor in the litigation decision -- the feared mass defections if escape from the covenant should occur in this matter.
I use the covenant not to compete issue as the example here because it is among the most frequently arising issues in any termination confrontation. There are many others, to be sure.
It is not that I oppose litigation as an arrow in a franchisor's quiver. To the contrary, there are too many times when a miscreant franchisee simply must be put down. And this brings up the other question that is so often wrongly answered. It is not always the question of defense of integrity of anything. It is frequently the question of, even if this is an integrity defense issue in its reality, is this the best situation/the best fact pattern/the best franchisee(s) to be in litigation with on the matter. Sometimes, good and defensible positions are lost because, although theoretically sound positions are in play, the wrong case is selected as the vehicle in which to seek their vindication. Nit picking technical legal analysis often leads to bad results for worthy positions. 'Sue the bastard!' requires that you pick the right bastard to sue. The franchisee in violation today may be the wrong bastard. You have to find the right bastard to sue. You have to deal with the wrong bastard in other ways. You have to get rid of the wrong bastard without giving him a grip on your cojones by taking him to the mat when not in your 'best mode'. If he really is a bastard, there will be other ways to 'fix his wagon'.
If we accept the notion that crisis moments spring from glitches that accumulated insidiously over time, and that we could never have spotted the first instance of 'infection', then one might well be tempted to believe that preventive maintenance here is not a real prospect. I think that there are at least two approaches to diagnostics. The ultimate and absolutely indispensable requirement is that you don't go to war without having done the diagnostics. If you are almost the moment of war, the need is immediate.
If we can afford to do it, at least an annual diagnostic exercise is not a luxury, but a major aid in progress toward crisis avoidance. At my age, I can't help thinking of it as equivalent in value to my going to have a colonoscopy examination to be sure I don't have some awful situation in my guts. The cost of regular checks involves the least expense. Even when you add it up over the years, it's still cheaper by far than warfare. It is cheaper in terms of absolute dollars of lawyer costs, and it is certainly cheaper in the sense that it enhances the value of your relationships that produce the revenue stream on which you live, and the value of any franchise company's single most important asset -- its portfolio of enforceable franchise agreements.
We bring these insights and capabilities to any franchise company that may wish to introduce this kind of analysis into its management environment. Forty two years of franchising experience has taught us where to look and how to provide serial options to address every issue and all the issues.
POST SCRIPT
There is an excellent companion piece to go with this article entitled 'What Not To Do When Bad Things Happen.' It may be found among the Specialized Tutorials on www.FranchiseRemedies.com.
Copyright 1997 - 2010 || Richard A. Solomon
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