| Licensing, Technology Transfers, |
Sir. Don't you think you might oughta slow down? That's your fourth drink in an hour. What's upsetting you so much?
Shaddap and gimme another drink.
Ok. But it might help to get it off your chest. It can't be that bad.
The hell it can't. We made a mistake that's gonna cost us a fortune. Our damn lawyers are gonna make a few million outa this.
What's happening here? Is this right? Do mistakes have to take otherwise decent, well intentioned people into depths of depression? Could someone be getting bad guidance here? Why do companies that are not hard-core, intentional wrongdoers follow the same protocols as groups that really are hard-core, intentional wrongdoers? Have we been socialized by our commander in chief (until January 2001) to lie, insist upon untruth, pay lawyers to defend falsehoods? And why do so many lawyers sign on to promote spin instead of substance, when a bit of forthright truthfulness would mitigate the injuries and get the company back on the track doing what it does best? 'Listen here! I did not have defective transactions with that franchisee, Ms. Lubinsky!' How do you change the experience from disaster to damage control based upon reality instead of myth? Consider the Muldoon Prescription.
This won't work for the bad guys. This only works for good guys who, like everyone else in the world, sometimes make mistakes.
Let's assume a scenario in which you have an extant franchise network to whom you wish to sell an add-on or variant franchise deal, related to, but not really the same as, the system they presently operate. We could assume any number of scenarios. This is chosen only for convenience.
Someone in the company does not want to spend $ 75,000 on new disclosure protocols and takes it up with franchise counsel. That counsel, not wanting to jeopardize the account relationship, does some creative thinking. He/she tells the company that this isn't a new franchise, but another franchise of the same general nature sold to existing franchisees. As such, he fantasizes, we don't need any registrations or disclosures as long as we are selling it only to our existing franchisees. Feeling that they have just pulled off a coup, the new proposal is presented at the annual franchisee meeting in a big party with liquor flowing and pretty girls telling folks how much they are turned on by men who know how to make executive decisions. They sign on over 200 new franchises that very weekend. Now we are two years down the road, and many of these deals are greatly delinquent in royalties, advertising fund payments and sales reports. The receivables are now over $300,000, and the bank is starting to quote certain provisions of your revolving credit agreement that relate to the aging of receivables and 'any other issues that tend to make the lender feel insecure.' There is a meeting in which the decision is made to threaten termination and enforcement of covenants not to compete and telephone number takeovers if immediate compliance is not accomplished. Be tough! They can't treat us like this! Back to the lawyers who counsel (as they can't very well say we blew it and keep the account) that a firm approach is the right approach.
As things tend to go today, that bad advice will probably be followed. Here is what will happen as a result. And then I'll show you what could happen if you use the Muldoon Prescription.
Your initial contacts are met with complaints, among which are that the delinquent franchisee believes he may have a defense to any claim; that he is unsatisfied with the level of support anyway; that he no longer wants to be your franchisee anyway; that you can't have the phone numbers; and that he won't honor any covenant not to compete. He says his brother in law, the family lawyer, thinks the deal wasn't right in the first place. This conversation is reported up the channels, and a decision -- the wrong decision -- is made. It is decided to deny any mistakes or wrongdoings took place; insist upon strict enforcement of every contract according to its terms; and to accept the probable legal fee and expense costs of anywhere from $ 100,000 to $ 1,000,000 or more. After all, we can't be putting in our offering circular that we dropped the ball on compliance with franchise laws and sold a bunch of bozo deals. And the ego of the man upstairs won't permit such a thing to be acknowledged. (The lawyers have a big dinner party to celebrate the decision.) To make a long story short, this decision drives the franchisees to seek out a real kick-ass franchise litigator; that person does a wonderful job for the franchisees; the covenants not to compete go down the toilet (as does any right to take over anyone's phone numbers (if certain re-identification takes place in a proper manner); and, in the end, a financial settlement is reached that barely (if at all) covers what the company has spent with the lawyers (best result), or disaster happens. Why? Because spin control is not reality. Because a lawyer is not a magician who can change the facts retroactively. Because it is always a bad bet to assume that the franchisees are not going to be able to hire an effective and aggressive lawyer who can match your lawyers seven days a week.
The Muldoon Prescription .... Making mistakes always has costs. Even the best intentioned and very competent make mistakes. The Muldoon Prescription starts with the proposition that when people find out you made a mistake, if you handle it in a forthright manner and step up to the plate, you are in the end perceived as better, as more fair, as ethical, as trustworthy, as deserving of a break, as human. Every one of those attributes is as positive as one could hope for. Compare that to being perceived as running from the truth; as dodging; as so egocentric that you are overcome with fear; as too greedy to be straight; as a crook. Are you starting to see the light?
Within the company, the attitude should be one of forthright and factual analysis. Jokes about covering things up should not be tolerated, as they have the nasty habit of coming out in testimony and finding their way into memoranda. Never deny something when you aren't sure whether it is right or wrong. Lawyers who counsel denial at every turn, feeling that, oh well, if we're caught we can spin it some more, need counseling in reality. A rumor about the mistake will already be circulating throughout the franchisee network anyway. No secrets exist in franchising. Someone in the company will have said something to some franchisee who has become a friend in the course of the franchise relationship. It will be lying there, day after day, and it will cry for attention, in your mind if nowhere else.
The company's response to an inquiry about the issue should be that the company is aware that there is an issue out there, and the company is (if this is the truth) conducting its own investigation, through its counsel, to be sure of the facts before making any statement. To questions about when a factual statement will be made, the answer should be that a statement will be made when the facts have been analyzed and a position has been decided upon. And there should be no other statement of any kind until that point. Any matter that assumes the company's rectitude should be put on hold until the right of the company to insist upon its rectitude has been confirmed by straightforward analysis. This includes starting any enforcement action or terminations where the disputed is significantly involved.
Cutting to the chase, it is obvious that a mistake was made. This is not the time to scapegoat the person or people who made the mistake. Any retribution over that is for later. Scapegoat them now and you have just created adverse inside witnesses. What are needed at this point are the formulation of a responsible position, a statement of the facts and a statement of what the company proposes to do about it. Now if this is a deliberate wrongdoing, this whole article does not apply. If it is a mistake, it is curable at a much smaller cost if handled in this manner. There is a range of positive, though costly remedies that will, in the end, benefit the company more than confrontation. Some royalties or other receivables may have to be forgiven or reduced. Some agreements may have to be rescinded with no covenant not to compete enforcement. Some policies may have to be changed in ways that confer benefits upon the franchisees that were otherwise mostly to the benefit of the franchisor. You can survive this if it is available only to those who were impacted directly by the mistake. The whole system will not leave unless there is no perceived value in doing business with you anyway. In that case, nothing will help and the mistake really isn't the issue in the first place. You will have saved a fortune in legal fees, expert witness fees, and other litigation expenses. You will have saved a fortune in productivity that would have been sapped by litigation taking management people away from their real duties. You will have saved a positive reputation among the franchise community. In this day and age you are probably trying to diversify, and your franchisees are also potential customers of your newer franchise offerings. You will more likely be their franchisor of choice if you have proved your integrity by being forthright. Over the long term, The Muldoon Prescription has much to recommend it. Sure, there will always be the stories of companies 'dodging a bullet' here and there. But I strongly suspect that you really don't want to be a bullet dodger, especially if you plan to stick around a while.
Copyright 1997 - 2010 || Richard A. Solomon
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