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Why Revolts happen | Begging - Franchisee Foreplay | Running The Meeting | Obtaining Relief Through Enforcement of Rights
For four decades I have advised and represented disgruntled franchisees who wanted to disaffiliate from their franchisors even though there remained many years until their franchise contracts expired, To be sure, not long after I successfully represented a few such groups, in some instances in protracted, but successful, trials, I began being sought by franchisors whose franchisees were banding together to leave in large numbers. And so, I know very well both sides of all these issues. Franchisors who say I'm a traitor because I also represent franchisees miss out on the fact that I understand the motivations and intentions and tactics their franchisees are going to use on them if competently advised, but that's their problem, not mine.
This article is for the franchisees everywhere who are so angry and feel so abused that they want out. Here is how it is done, how long it takes and how to organize in groups large enough that you have great credibility and an enhanced probability of success over a shorter period of confrontation. This is not intended to be a guide for lawyers who have little or no experience in this context. There is so much tactical savvy involved in the management of a successful franchise revolt that can only come from having done it. No article can make you capable of making the instantaneous decisions, devising the critical tactical plans and controlling the more aggressive members of the franchisee group so that they don't go out and mess things up by doing stupid things.
Franchise revolts happen because business circumstances change and the franchise relationship changes in ways inimical to the perceived interests of the franchisees. Anyone who expects markets to remain static and business simply to thrive and grow without difficulty is simply an idiot. Franchisors always tell prospective franchisees that they are the experts and have a system that is unique and unbeatable. That statement cannot possibly be true over a period of years. While a system may be special in the beginning, to the extent that it succeeds, it attracts imitators -- those people you know as competitors. As success breeds more success and more competitors enter the field, saturation eventually rears its ugly head. With saturation comes price competition at ferocious levels of intensity, and with that comes erosion of margins, profits, return on investment and great disincentive to keep investing more capital into a business that is degrading, not improving. These tendencies are universal to all business, and no franchisor has ever been able to devise a system so effective as to overcome it.
What this all means is that the expectations of franchisees and franchisors that nothing can make their relationship unravel because they have the best system and a contract to boot, are extremely unrealistic.
Unfortunately, the manner in which most franchisors react to fundamental environmental market changes causes greater disruption to the franchisees. What franchisors do most frequently are the following: (1) They start selling the franchised product or service through channels of trade outside the franchisee system, creating a non-franchised corps of competitors for the franchisees. Illustratively, a franchisor of premium products through an exclusive franchise chain of dealers will start selling those products through chain stores or on the internet, and thereby compete with their own franchisees. These mass market channels can use the product promotionally in ways the franchisees cannot, and so the seeds of revolution occur; (2) The franchisor starts acquiring competing franchise chains that are/were competitors. Now your franchisor is the owner of competing stores in its old franchisees' territories and is using its resources gained through its relationship with its franchisees to support the competitive, acquired network. This makes blood boil; (3) The franchisor decides that there are many more good locations to be had in areas already populated with its franchisees, and embarks upon a territory flooding program that, to the franchisees represents encroachment and destruction of whatever is left of their profit potential; (4) The original management team of the franchisor is replaced, due to retirement, death or sale of the company, and the new guys are, in the estimation of the franchisees, a bunch of bastards who can't be trusted and do not provide 'support'. They just want to pump the financials, do a public stock offering and lie around the beach for the rest of their lives, and they don't care how they do it. To be sure, these aren't the only ways in which franchise relationships come apart, but, in my experience, they are the most typical.
Franchisees are always complaining, no matter what. It's part of franchising theater. That's OK. All groups complain, no matter whether it's troops in the military, citizens feeling overtaxed and overburdened by stupid and arrogant government, or franchisees. Complaining is the normal, healthy escape hatch for frustration that, in a constructive and mutually supportive relationship leads to solving problems. Franchisors form franchise advisory committees, select the most compliant franchisees to populate the committees and, if they are smart, use the committees to sell constructive proposals to the franchisees in general. Some franchisors use these committees unethically, using them as window dressing to suggest democratic attitudes in the system, when in fact no such democracy exists or will be permitted. What happens when franchisees perceive these committees to be shams is that franchisees want to form their own franchisee association, one not controlled by the franchisor.
Unfortunately for everyone, franchisors usually come unglued when franchisees want their own association. Franchisors know that, one at a time, franchisees have no empowerment, and that in an organized group, franchisees can be independent and very powerful. And so franchisor opposition to formation of a franchisee association becomes very aggressive. Unfortunately, most franchisees are cowards and won't oppose a strong franchisor and organize a franchisee association despite the threats. Such groups remain ineffective, and their problems never get solved. If they have an abusive franchisor that is ripping them off in ways not contemplated when agreements were first signed, they will continue to get ripped off. No one will surrender power voluntarily. It must be taken by strength, and strength does not come about through failure to get organized. This is axiomatic, and no amount of wishful thinking is going to change it.
So long as problems in a franchise network remain relatively at nuisance level, a few disgruntled franchisees cannot find solid support within their network for aggressive confrontation. One of the ways I vet franchisee clients is to try to measure immediately whether their complaints are fundamentally critical and epidemic in their proportions, is to find out whether they can organize a meeting to deal with the problems. Since other franchisees are going to have to leave their businesses for at least a day, buy a plane ticket and rent a hotel room, at the very least, and be reported to the franchisor as attendees at the meeting, there won't be support or substantial attendance at the meeting if the problems are not perceived throughout the network as being as desperate as the angry franchisee sitting in my office says they are. Anyone who listens to just a few angry franchisees and decides from that that the problems described are fundamental and widely injurious, simply doesn't know what he's looking at. You have to measure severity quickly, as a very first step, and that's how you do it. If the client in my office has no widespread, check writing support in the network, then he has misperceived the situation. You don't take a single franchisee on a save the world campaign. If his fellow franchisees aren't going to get on the train, don't put him out there by himself to get his head chopped off. If he's the only one, or one of only a few, angry enough to take action, the action should be to sell out and go do something else. No franchisor is going to change the way it does business because only a few franchsees are really upset. But, of course, there is always a begging period, even when the problem really is system wide and critically destructive.
People need to recognize that no franchisor is going to give up control or change any practice which is seen as profitable to the franchisor just because groups of franchisees come begging. But franchisees, as an emotional issue, need to go through the begging foreplay and be told NO in order to satisfy themselves that they tried the peaceable approach before going to war. Usually this has been done before they end up in my office. Usually they want me to go talk to the franchisor before going to war, thinking that I have some powers that they don't have. Indeed, there are a group of lawyers, mostly California peaceniks, who do that. They become bogged down for months and years in meaningless, hairsplitting discussions about things like fairness and contract rights, and the franchisees are hanging out there without relief, while the lawyers are running their clocks and using up money that should have been used to achieve self help remedies, including lawsuits, that have the promise of substantial relief. To me, such lawyers are worse than nothing. They don't understand that begging has already been tried unsuccessfully before the franchisees came to seem them.
If the problems are as serious and as widespread as my new clients believe them to be, then many franchisees will attend that first meeting. I give that meeting an entire day, and I am there all day to talk about anything they want to ask about, to tell them how I believe the matters should be addressed and why. For that meeting I insist upon my expenses being paid in front, but my time is not charged. That is, to my mind, an essential first step in qualifying my client. If at least out of pocket expense money isn't available, then the problem simply can't be that crucial.
Obviously, it's less expensive if the meeting is in Houston. Then I have no expenses at all and the franchisees simply come here and have one overnight stay and the expense of renting a conference room - nominal.
The meeting starts promptly at 8 am. It is important that you don't delay the start of the meeting to run around looking for people who aren't concerned enough to show up on time. Some sense of discipline has to be observed or nothing will be accomplished.
The first order of business is for the people or person who called the meeting to get up and state simply that they all know why they are here, and that I have been brought in to talk to them about it - that I have done this many times before - that I have represented franchisors and franchisees and understand this situation from both perspectives. At this point I am introduced and I present my views of the situation as well as a statement of my background, some warnings, many explanations of how things work and what I suggest doing in each situation. Then I open the floor for questions and statements by franchisees in the audience. This gets us to lunch break. Then I have the franchisees meet together for an hour or two without my being present. Finally, I come back into the meeting for more questions, more comments and to obtain for myself an assessment of where they are at that moment. Sometimes the problems are seen to be so severe and so immediate that everyone brought his checkbook along and most of them sign on as clients. Those people will stay over another day, if necessary, for further consultation. Usually there is a leadership group formed so that I only have to deal with a small number of liaison people in managing my function. There are handouts at the meeting. They include, at first, my own resume and a statement of what my practice is about, and, later, a set of questions that have to be answered and a list of documents that they have to retrieve from their files, copy and send me the copies of, keeping the originals segregated in a box or drawer where they can quickly get at them if needed. I also bring along retainer agreements, because people want to know what the terms of my engagement are going to be, and they are entitled to have that up front and in writing. Many times the franchisees want to think about what has happened at the meeting, talk it over with spouses or partners, discuss it with their own lawyers at home, and then make their decisions. I always suggest a drop dead date for another meeting in about two weeks. If anything is going to happen, there will be very good attendance at that second meeting. People will chew on decisions for months and get nowhere while their franchisor, having been told by some sonofabitch who was at the meeting and what was said, makes out his enemies list. So it is important either to get on with the action plan immediately or abandon it. Attendees at the first meeting don't have anything to worry about by way of retaliation from the franchisor if the plan is abandoned. They can always say they only went there to listen to what people had to say, and that will be that.
Before going to the first mass meeting, I always do some updating of my legal research on the problems that are being addressed. I read the contracts and the disclosure documents as well as other categories of documents that I have asked the first clients to bring along to their first meeting in my office. By the time I am hired, if I am hired, I pretty much know where we are going and how to get there. There are, to be sure, variables. Do we sue or do we arbitrate? Where? What self help actions do we take in addition to suing or arbitrating? If we are suing, the judge we draw will have more or less experience with these kinds of disputes and may need more or less assistance in getting a full understand of the issues and the ranges of possible relief. Will there or won't there be a jury. In almost every instance I file a jury demand. Should I find that I have drawn a judge with a great deal of business savvy and who does not have a pro-franchisor bias, I may be willing to waive the jury just before trial. Waiving a jury early and then having your case reassigned to another judge is a bummer. Usually, the franchisor, knowing that judicial scrutiny is focused upon his every move, starts behaving in a more civilized manner almost at once. Sometimes, though, they are off the wall, and I have even had death threats. I never knuckle under to threats and am quite prepared to defend myself in any context, something most franchisors already know.
Bragging aside, the results are usually positive, because I pick my fights. I don't run franchisees into confrontations where their chances are long. If you go only on the good cases and reject the weak ones, you usually get the best results.
Finally, it is important that I am not perceived as a cheer leader for the franchisees I represent. I abuse them mercilessly with offensive and intrusive questions about everything. I challenge their opinions and beliefs to see what the most basic and reliable version of the truth looks like. Only in that way can I purge the crap out of their position and go forward with an essential and fundamentally truthful and correct position. Besides, if they can't handle me, they probably wouldn't be able to handle the franchisor's lawyers either. In the end, they figure out that I'm on their side and doing them a good service by probing their determination and finding any holes in their positions before it becomes a public matter.
Franchise agreements were always too long - twenty years - in the early days of franchising. But you couldn't get a bank to loan mortgage money for a store build out on a twenty year note if you didn't have a twenty year franchise agreement. You didn't know that? That's why the agreements were for such long terms. And, to make matters worse, in those days they usually provided for renewal of 'this agreement', rather than for renewal on the terms of whatever contract was then being used for new franchisees. So the contract engineering failed to provide for system wide currency and essentially harmonized and rationalized terms of dealing across the scope of the system. Now franchise agreements tend to be for ten years, with renewal on the contract then being used for new franchisees.
But the rates of change and evolutionary development in practically every business and market have escalated greatly. E-Commerce has further accelerated the ease and the speed of new competitive entry into any business when demand boosts appear. Think of franchises that have typically sold products from expensive mall store locations, only to find that those formerly 'special' or 'exclusive' products started showing up in supermarkets and discount stores, and now on the Internet, making them more easily and less expensively accessible from sources other than those mall locations. Food gift baskets, spiral sliced hams, vitamins and health foods are examples. Sam's club now carries Starbucks Coffee. Toys-R-Us is having a tough time due to toys being merely a group of hundreds of product groups available in enormous multi-category retail operations.
When a specialty product ends up in a supermarket or discount store where it is one of thousands of products available at a single location, the store can 'football' discount the specialty as a traffic builder and make its margins on its other products. The mall site franchisee selling that single product line does not have that opportunity. How does he sell at mall retail prices what the supermarket is using as a leader at much lower prices, where shoppers can simply throw the product in the cart and not have to carry it all over the mall.
With similar economic effect, saturation in the fast food business has destroyed margins and return on investment. Franchisees are less willing to invest in updating stores with lessened prospects for returns on that expenditure, and less willing to renew agreements on less favorable terms in order to remain in a business that is in the mature or decay stage of its life cycle.
The point of all this is that market changes are rapidly making franchise agreements less reliable as the set of rules by which a franchise system is operated.
More and more, your most successful franchisees are not interested in renewing their franchise agreements, not interested in continuing in the franchise relationship. They perceive little incremental value in associating with you for another term, because your techniques, like the techniques of everyone else, are not capable of turning back the clock to the easier money days when your concept was new and fresh and almost no one else was doing the same thing.
Along with their view of their own suffering, their franchisors are seeing lower initial fee income as fewer new franchises can be sold, more expensive operating costs at company owned stores with competition inhibiting price increases to keep up with expenses. Franchisors typically increase the number of stores as best they can, flooding markets and increasing the animosity that comes when one's franchisor is competing with him. Franchisors are going on the Internet also, and these sales rarely are directed to the franchisees, but are taken more and more by the franchisor through direct on line sales. Animosity keeps growing, and revolts happen.
Unfortunately, most franchisors are looking to their franchise agreements more than to what is happening in the market place, trying to force a relationship to work according to the agreed model rather than the reality model. Attitudes about franchisees having to stick it out and play your tune because the contract says they must, and that you have a covenant not to compete to enforce if they leave, or a provision that allows you to take over their store if they leave, cause franchisors to mislead themselves into believing that they are more powerful than they really are sometimes.
But these scenarios are really more correctly evaluated from the perspective of chaos theory, because there are so many dependent variables at work that predictability of outcome is not just the product of contract drafting and market fluctuation. Franchisees do not run to join in a fight as much as people would like to think. There are techniques that tend to (but not always) isolate the leader(s) from the rest of the franchisee pack. Although few people think of it this way, the Protestant Reformation and the American Revolution worked in the exact same dynamic as a franchisee revolt. Very few colonists fought King George. Most lay in the weeds, unwilling to take the risk of confrontation.. They rightly believed, in the case of the American Revolution, that whatever the fighting colonists won would be winnings for all the colonies. It isn't like that in franchise revolts, however. The folks who stand up and fight do not obtain anything for those who lacked the commitment to the struggle. All too many times I have represented such franchisee groups, had many drop out or not join in the first place on the idea that they will get whatever the fighters win. In every instance, I have later heard from the less brave, wanting to get in on something that is already over, to board a train that left without them. Usually they simply get ground out or bought out very cheaply.
The management of franchisee dissidence is facilitated by tuning into what is happening in the system, not by seeing dissent and cowering in denial until you are in court as the franchisor defendant, in a fight not of your choosing, where you didn't get to pick or to frame the issues, where you go last and not first. When you are sufficiently alert to see it coming and to start planning for it, you have many, many more options. Unfortunately, however, most franchisors wait until they are in court as defendants or until the franchisees start leaving and litigation to enforce post termination 'rights' becomes inevitable, on the belief that if you let one get away with it, the rest will follow.
When I evaluate a potential or actual revolt situation, I analyze it in multivariate contexts. There is no 'do this first' kind of approach. It is all done simultaneously in every mode. The order in which they are presented here is for convenience of expression only, and is not intended to be directional.
First there is a need to understand what the market environment is doing to the system. Then there is the issue of what that environment is doing to the franchisor and what the franchisor is doing to react to it. Then there is the issue of what the franchisor's reaction is doing to the franchisees. Structural considerations come into play-does the franchisor have company operated stores, and, if so, what are they contributing, if anything, to the perceived problems. The same questions are addressed to e-commerce, if that is a factor, and to how it is structured and how it is being operated. At the same time, advertising fund management is very frequently a focus of contention.
Then you look at the range of franchise agreement terms under which the system operates, and you ask questions to determine whether whatever it is the franchisor is doing conforms to those agreements, or at least, may be permitted by those agreements. Along with this inquiry is the issue of whether, even though in conformity with terms of agreements, is what the franchisor is doing quite different from what was represented to the franchisees when they bought their franchises. This is more than technical, for even though statutes of limitation may have run out on misrepresentation claims in court, that plays a large role in how you manage the contention.
Ultimately, if the franchisor is doing everything right, in the sense that his agreements permit what he is doing, the franchisor has to make economic decisions. There are costs in ignoring the problems, and there are certainly costs in trying to solve the problems. Trying to decide which costs to accept, and how much of them to accept, and to manage the enforcement of 'rights' issues, and to manage the 'propaganda' and 'political' issues are all absolutely obligatory aspects of franchisee revolt management.
There are no hard and fast rules, for the reason that each franchise system has its own 'baggage'. That baggage may be heavier or lighter depending upon whether there is more or less professional management in place, how difficult it is to deal with corporate ego issues that grew out of certain people having become addicted to always being told they are right. Many revolts are mishandled to great detriment on the ego issues alone. Lawyers who aren't willing to confront these ego issues because they don't have the guts to risk being thrown out of the building are worthless. A lawyer who is afraid to challenge 'attitudes' is a lawyer who is going to lose for you. He can't be a tiger in court and a wimp in the boardroom. It is a great disservice to let your client find out about reality only when he gets to sit in the witness chair while a very good trial lawyer rips his guts out. He has to be prepared for that, and such preparation means he has to be worked over harder by his own lawyer than he will ever be by the opposing lawyers.
Now that you are at the end of this article, do you feel like you have not been given a road map for franchisee revolt management? Good! There ain't no road map. It's a matter of complexity and sophistication that must be dealt with one situation at a time. Too many variables prevent a simple directional tutorial on how to do it for your company. What works for one company in this situation may be totally wrong for most other companies. It's exactly like a recipe for making chili. Every ten miles down any road in Texas, the recipe for chili is different. Handling franchisee revolts for franchisors is just like that.
Copyright 1997 - 2009 || Richard A. Solomon
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