| Licensing, Technology Transfers, |
Twenty five years ago,
before automatic POS systems tracked and forwarded business information of all
sorts from franchisee to franchisor; back when it was still a new thing that you
could remotely poll someone’s cash register; and field auditors wandered the
earth dropping in on franchisees to look at their books to assure that there was
no under reporting of sales and under payment of royalties; and some franchisees
kept two sets of books and you couldn’t tell which was which without looking at
bank statements and cancelled checks; and so on and so forth, the world was a
happier place – and if not happier, at least different.
In the interim, franchise
agreements became much stricter in providing for franchisor options. Business
information management technology exponentialized in its ability to “report”.
What was always thought of as an inherent abrasive interface between a
franchisor and its franchisees became a hostile divide. Franchisees who
previously believed they had been provided everything worth paying for in the
first twelve months and spent the rest of their term looking for a way out, now
frequently don’t last for much more than twelve months as franchise offerings
have become more and more just make believe, hype driven guaranteed failure. The
fraud issues in franchising became the front page, and the relationship
opportunism issues, with few exceptions, took a back seat. The antitrust law
view of sole source requirements, formerly known as illegal tying, became lawful
with the Chicago school analysis of the Jefferson Parish case. Since then, all
you have to do is disclose up front that that is how it is going to be, and
you’re home free, legally at least.
The franchisee view of
the real worth of franchise relationships is now so negative that vicious public
name calling is a daily occurrence on sites such as
www.BlueMauMau.org . If you
visit that franchise blog site, you will encounter threads about Quiznos and
Dunkin Donuts that would make Alan Ginsberg and Lenny Bruce blush.
The Quiznos issues are
not the subject of this article. The Dunkin Donuts issues present us with a
different dynamic – one in which franchisees go on the Internet, use anonymous
names, and openly discuss their beliefs that cheating is now the only effective
way to deal with franchisor abuses. That is hard to do in today’s high tech
world. It is nonetheless the same fraudulent conduct that it was in the good old
days when accountants wore green eyeshades and pocket protectors.
The Dunkin Donuts
situation represents a good opportunity as a case study in what not to do. As a
caveat, the postings on Bleu Mau Mau have not been vetted for truthfulness. From
what has been said, you can’t tell if exaggeration or worse is afoot. Some of
the lawyers who regularly post on Blue Mau Mau have asked for corroboration of
the accusations, but none has been forthcoming.
There are also some
inconsistencies in the franchisee stories. Illustratively, while complaining
that their franchisor is conducting goon squad raids in attempts to rid the
system of selected franchisees – supposedly only the “Mom & Pop” operators – one
of the posting franchisees says that his trouble is unfair because is came in
the midst of his trying to buy more franchises, including some locations that
were owned by a Mom& Pop that was being terminated. The question raised is, why
would anyone in that environment want to get in even more deeply? From this
alone, questions about the reliability of the franchisee side of the story have
been raised.
Notwithstanding that
issue, it appears to be a factual statement that the in house lawyer for DD was
allowed by the company to go give a speech at an ABA Franchise Forum meeting in
which he bragged about how he busts franchisees. If that is true, as it now
seems truthful, serious questions are raised about the acuity of the folks in
charge at franchisor headquarters. That man should, in my opinion, be summarily
discharged for unbelievably bad professional judgment regarding the company’s
business.
It has always been the
case in franchising that franchisor field reps/field auditors were a thuggish
lot, capable of every manner of oppressive and even depraved conduct, seeking
frequently to intimidate franchisees into doing what they would never do in
normal circumstances to avoid stated threats to deprive them of their business
by termination. That the “loss prevention” people of DD would be the same as the
thugs of most franchisors over a history of many years comes as no surprise.
Still, however. We must await the trial of pending cases to see whether the
accusations are true.
None of this high and
sordid drama detracts from the need to police the quality of reportage of
business information requisite to the best mode for collecting what is due the
franchisor under the franchise contract. My point is that a professional grade
franchisor today will have in place competent technology to enable determination
of some “probable cause” evidence before sending in a goon squad to scour every
scrap of paper pertaining to a franchisee’s business. Aggressive confrontations
will not occur in the franchisee’s business premises in the presence of
customers. Those will be held in private, if for no other reason, because they
might be based upon inadequate evidence or improper evaluation of the evidence.
The practice of
conducting a review of a franchisee’s compliance prior to consenting to the
purchase of additional franchises; prior to consenting to renewal of the
franchise; and prior to consenting to a sale of the business is a proper
procedure. Non compliant franchisees are not entitled to the privileges of
agreements they have broken. The caveat here is that contract violations should
have to be really material, not trivial, in order to justify consent being
withheld. According to the accusation of the DD franchisees on Blue Mau Mau,
that has not been the case. From what they say, it might be that DD has some
agenda to reconfigure their franchisee system to eliminate small operators for
reasons of assumed better management opportunities – small franchisees are a
pain in the neck not justified by the amount of revenue generated by them. I
personally doubt that theory, especially since DD was perfectly willing in the
first instance to accept small franchisee money for many years, as a consequence
of which the company and the small franchisees thrived. But now there is a new
owner of DD, and new owners have near term exit strategies that they often try
to enhance by ridiculous means.
One question that remains
unsubstantiated in the DD case study is whether the “audited” and terminated Mom
& Pop franchisees were in fact in material breach of their franchise agreements.
In some instances, it appears that is true and the termination was justified.
What remains, therefore,
is a cleansing of the process, unless the truth is that there really is a DD
agenda to so reconfigure the franchisee population for other purposes.
Where does that leave us?
It leaves us at the conclusion that DD is now a FranWhack – a franchise
investment opportunity that should now be avoided. No one should risk large
investments in joining troubled systems, no matter what their past performance
might have been. Anyone buying a DD franchise today is simply not conducting
adequate pre investment due diligence. In my opinion as a franchise counselor,
this is a troubled company and a troubled system. This is not where intelligent
people put their investment money.
Moreover, since it is
true these days that franchisor ownership frequently changes, that change in
itself raises questions about the reliability of past performance as an
indicator of present tense investment worthiness. Much more astute and focused
due diligence must be done before investing in the franchises of systems in
which the ownership has recently changed or is about to change.
Copyright 1997 - 2010 || Richard A. Solomon
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 | Licensing, Technology Transfers, |