There are many misconceptions about franchisee
associations. The purpose of this article is to dispel the myths and to
focus upon their genesis and management; their purpose; and their results
or consequences.
I wish to acknowledge that some of the analytical positions taken and
recommendations made are done in consideration of the excellent work done
on this subject by my friend and colleague Michael Webster, an outstanding
Canadian franchise attorney in Toronto, and by my other Canadian friend of
significant wisdom and great experience, Les Stewart. Their comments may
frequently be seen on the principal franchise Internet blog site
www.BlueMauMau.org .
What now passes for franchisee associations is for the most part not even
close to an effectively functioning mechanism. They are in large measure
social and engaged in supplication – asking for mercy societies. It is
easy to diagnose a franchisee association as effective or ineffective.
What is its history of success in protecting/improving the quality of the
return on its members’ franchise investments? Everything else is
irrelevant.
Unfortunately, they are almost always born out of a substantial history of
franchisor abuse. Had they been established and professionally managed
earlier on, the franchisor abuses that finally got them going in a fitful
and incompetent manner probably would never have happened. Early on
formation of a professionally organized and managed franchisee association
is the best prophylactic against future abuse. (Do I have something to
sell here? You bet I do. Competent professional association establishment
and management is what I am selling.)
Others, like the nascent Irish Franchisee Association and the Australians,
are also being born out of the reaction to franchisor abuse coupled with
the perceived inability to obtain redress of grievances through
conciliatory negotiations with ridiculously obstinate and abusive
franchisors, the absence is adequate legal remedies and a government in
the pocket of the franchisor lobby. Just one litigious franchisor in
Ireland could probably shut down the Irish association simply by settling
its lawsuits and ceasing to misrepresent the past performance of shops
that are being resold in a monstrous churning campaign. South African
franchisees are also experiencing the Swine Flu ethics of modern
franchising, and they are also trying to deal with it. But they are not
yet getting anywhere either. Even in China, franchisor abuse inquiries are
growing rapidly. China is especially disappointing to me, because in their
political system it ought to be much easier to deal with predatory
business practices. China is now one of the top four economic engines on
the planet. That means there is a lot on their plate. Maybe because of
that, franchise abuses have simply not yet blipped on China’s radar.
Furthermore, maybe because of China’s political system it is not as easy
to establish private groups to contend against business abuses.
The central issue in franchisee association formation and management is
militancy. Since the purpose of forming and managing a franchisee
association is to protect the franchisees’ investment value against
invasion by an over reaching and opportunistic franchisor, this is all
about money. There are only two possible consequences. Either the
association effectively protects the value of the franchisees’ investment
- sometimes despite very limiting and restrictive franchise contract
language - or it doesn’t. Politics within the association itself has
little to do with it. Because the politics within the association can
quickly emasculate its effectiveness, professional management is the best
bargain on the planet. More and more, the really effective franchise
associations are found to be under professional guidance.
Today many franchise opportunities are sold under false pretenses and are
not of investment quality. Since so few franchise investors spend the
money for competent due diligence on the deal and on the legal issues,
they find themselves trapped into five or ten year terms on extremely high
risk business models that are not the proven systems they were said to be.
There are clauses in those contracts that make formal dispute resolution
impracticable – mediation followed by mandatory arbitration that is not
subject to appeal, and post termination penalty clauses that give their
franchisors claims against them they never believed were possible. These
deals are easy to see as needing the most militant possible independent
franchisee associations. Some have been so bad that no franchisee
association could make the critical difference under any circumstances.
That is why pre investment deal due diligence is indispensible. Legal due
diligence alone is almost worthless, as there can be no such thing as a
“fair” contract on a bad business deal. Contracts cannot save bad
investments. Organizations that confer fair franchising awards and
certificates upon franchisors that offer bad investments are even more
destructive than the bad franchisors. Their imprimatur is then used by the
scammers to sell more of their bozo deals.
Where the franchise opportunity purchased is in fact a viable business
model, franchisor options in the franchise contracts allow for the
imposition of extraneous additional royalties and fees by giving the
franchisor the right to require purchases only from designated vendors who
pay the franchisor for that right and then charge exorbitantly high prices
for what the franchisees are required to buy from them. The franchisor can
also require the franchisees to add on systems and features purchased from
the franchisor or from others who pay the franchisor a commission. The
franchisor can – and frequently does – require advert fund payments that
become a slush fund for franchisor use because the franchise agreements
recite that the funds do not have to be spent on adverts in the
franchisees’ areas in any proportion to payments made, and that the funds
can also be used to advert and promote the franchise opportunity sales
program itself. The fact of the matter is that the money is not used in
the manner the franchisees thought they were required to be used.
Encroachment that eats into sales of existing units is always a temptation
when new unit sales start to slow down. Since most franchise contracts
don’t provide for real territory exclusivity, and franchisor Internet
sales are usually an exception to any territorial protection language
anyway, the militant franchisee association is the only recourse for the
franchisees.
Even if there is a benevolent franchisor in the beginning, changes in
market conditions cause benevolence to change to forcible extraction of
fees out of perceived necessity on the part of the franchisor. Good people
sell to bad people. Bad people take all the advantages that the contracts
allow bad people to take. One of an acquiring company’s motives for buying
a franchisor is that they see ways to extract higher charges from
franchisees than the current franchisor management is achieving.
Franchisees seeing the coming sale of their franchisor to people with
abusive relationship histories in other franchises they control have only
their militant franchisee association to help thwart the sale.
No matter how good the franchise relationship may seem at first, there is
always – yes always – a profound need for franchisees to protect their
interests against these and other adverse vicissitudes.
Where there is an opportunity to take greater revenue out of franchisee
pockets and transfer that to the franchisor, one may not count on loyalty
and salesmanship to talk a needy/greedy franchisor out of going forward
with the program. Only militant confrontation will work. Many
organizations that thought aggressive franchisors could be “reasoned with”
have perished or lie useless at the end of their assumed mission’s
failure. Some end up paying the rent by selling awards to abusive
franchisors who then use the awards to sell more franchises to new
suckers.
How and When Do You Establish a Real and Effective Franchisee Association?
An independent franchisee association is not the same as a franchise
council or other group formed and controlled by the franchisor. An
independent franchisee association is established and totally controlled
by the franchisees of a franchise system. The former model is not going to
be of any help when there is an issue requiring limitations of franchisor
plans, agendas and actions seen by the franchisees as harmful to
themselves.
Now that that is out of the way, the earliest possible establishment of an
independent franchisee association is the best and easiest time, if it is
handled in a professional manner. New franchisees should be recruited at
the first possible moment with a focused “invitation”. The invitation
should have carrot and stick elements to it.
I want to start with what I believe is the wrong way to go about doing
this, because that is the way almost all associations get started and that
way is the most dangerous. Usually a few leader level franchisees with
vision see the need, communicate among themselves about it, and take a
“survey”, asking the other franchisees in the system whether they also see
the need for an independent franchisee association.
What is wrong with that is that the leadership paints targets for
retaliation on themselves that a resentful franchisor can snipe at. The
sniping is usually various forms of retaliation – use your imagination and
you will come up with just about all the aggressive threats than angry
franchisors have used against association leaders in the past.
There is no reason for the leadership to be put to that risk in order to
establish an independent franchisee association.
Consider that going to a lawyer for legal guidance in the management of
business relationships and in dealing with franchise difficulties makes
the communications with the lawyer and amongst each other while dealing
with the lawyer as joint clients in a single project privileged
communications. Now do lights start to go off in your head?
It is important for the smallest number of leadership franchisees to do
this at first. One of the biggest risks is the Judas franchisee who thinks
he can feather his nest by reporting on the others to the franchisor. It
almost never fails. One franchisor in Ireland just this last week called
franchisees who attended an organizational meeting and told him he knew
everything he had said about the franchisor in the meeting and threatened
his business if he went to another meeting. The meeting had not been
properly limited to trustworthy persons, and an informer was in
attendance. Stifling association organization in its infancy is a
resentful franchisor’s first goal. Depriving the franchisor of the
identity of people to threaten is an important advantage to the organizer
franchisees.
Three or four organizing franchisees working through an experienced
franchise lawyer save themselves a lot of grief if they do this my way
from the very beginning, before circulating “survey” type questions to the
franchisee population at large and before making a public utterance about
getting the franchisees together for their mutual benefit. Do it through
legal counsel from the very first moment, before you do anything else.
This is a novel approach to establishing a franchisee association. Usually
it is done the wrong way. Therefore, usually the project falls on its face
in failure. Judas franchisees rat out the organizers. The organizers are
threatened. They make the only choice they see. They give up to save their
businesses. Sometimes the association is tolerated so long as it doesn’t
rock the boat. If the association is just going to sit around and
accomplish nothing, then why have an association?
Part of the problem is that the association isn’t established early. It is
only an after thought, when big trouble starts showing up. The association
is way behind the curve and usually never catches up. It can join with
other impotent associations that are nothing more than chatting societies
masquerading as reality, but their franchisors do whatever they like with
no effective resistance. The advisors to those useless organizations use
the franchise contract language as their excuse for failure. I refuse to
do it that way. If you do it my way, your association has a good shot at
becoming of a scale that can face down trouble when it arises. New
franchise rules required that franchisors identify independent franchisee
associations in their FDD disclosures. That generates your lead flow from
new franchisees. When the new franchisees can truthfully be told how a
professionally managed, well financed and widely supported association can
stand for them, they join. Soon it becomes a greater liability for a Judas
franchisee to double cross the association than he can stand.
Substantiality breeds significance. Something is different from nothing.
There are other clandestine approaches to doing this, fraught with hiding
and secret communications (they think they are secret), hoping not to be
found out. That is not my way and it should not be your way. You don’t
want an association web site and blog to be used to feed the franchisor
with adverse evidentiary exhibits to use against the membership. When the
association is substantial enough to have a web site, its use will be
limited to identified franchisees – no anonymous postings. What can be
posted on it is restricted to material that does not “incriminate”
members.
It is not allowed to be used as a whiners club. Real problems are
discussed with counsel under conditions of privilege, not on the web site.
The web site is used in a professional business manner, such that if the
franchisor does have access to it, there is nothing there that the
franchisor can use against anyone. Material that might be helpful for a
franchisor to use against a franchisee is communicated though counsel
under privilege, in the effort to sort out how properly to make problems
go away in a proper manner.
It is a good idea to send a “survey” type question to the franchisee
population, but the letter/email should go from the attorney, acting on
behalf of his leadership franchisee clients who are not named in the
letter. The franchisor can’t do anything to the lawyer and can’t make the
lawyer identify the franchisee clients. The other franchisees will
instantly recognize the authenticity of the “survey” and they will be
somewhat reassured by its tone and by what it says that the project is
being handled with a high degree of professionalism. This is a confidence
building way to get this done.
It is also important to recognize that the first “survey” letter response
doesn’t tell you what the franchisees will really do when put to it.
Anyone will positively respond to anything that doesn’t cost them
anything. You will only know the support that is achievable when the
project gets to the “write a check and join” stage of forming the
association.
That is another reason why it is important to be able to work anonymously
through an attorney. In this manner, if it turns out that there is not
sufficient real support for an association, the leadership group is not
left out there with their identities exposed. Even if a very stupid
franchisor were to sue the lawyer, that is a very easy to defeat lawsuit.
The franchisor is wasting his money and will probably end up having to pay
the defendant attorney a lot of money for bringing a meritless, vexatious
lawsuit. That first victory in that kind of lawsuit – if the franchisor is
that stupid - will expose the franchisor as weak and stupid, and it will
embolden the franchisees to move in the right direction.
If you establish your franchisee association in this manner, the
association is the only name in which things are done – at least until it
has a very large percentage of the franchisee population already in the
membership and it also has a treasury sufficient to cause the franchisor
to appreciate that the association is a serious force that can do what it
needs to do to accomplish its mission. Even then, there would have to be a
very special and exceptional need to justify abandoning the use of the
association instead of individual franchisees in any franchisor interface
situation.
This is facilitated by professional management limiting the association to
focused high priority projects, rather than scattered approaches that
squander resources without positive results.
There are many very important goals for a franchisee association. They
must be prioritized and honed to sharp focus, and undertaken with an eye
upon the availability of sufficient resources to accomplish the project.
This requires that he franchisees see that the association is
professionally organized and managed and not just some kind of rump group
with franchisee officers taking nice trips for meetings and charging it to
the association. There will be no officers in such a group. Being an
officer, especially in the beginning when the association has not yet
proved its effectiveness, places the officers at risk of franchisor
retaliation. The goal is not to do that. It is not a club. Membership
identities are not published during its early stages of development.
Information that is published is published in the name of the association,
and it comes from the manager/attorney. In the beginning, the members
become clients of that attorney so that what they say to the attorney in
furtherance of the projects remains privileged and confidential. What is
published based upon those communications does not have the franchisees
names on it in the beginning. When the franchisees decide to go public
with their names because the association is well established and properly
funded, it will be simply too late for the franchisor to start trying to
retaliate. Strength in numbers and in resources will always carry the day
in this context.
To be sure, doing it the right way is not free of cost. Nothing is. Doing
it the wrong way has other, more dangerous costs. The attorney working
with the organizers has to be willing to be somewhat entrepreneurial about
it. Every lawyer performs managerial matters on every project he does for
every client. Law practice is not all just legal theorizing. We know that
if we do it right, we will probably be kept around (although there is
never an obligation to do so), and that representing and managing the
association as it develops will be a revenue generator. So in the
beginning we flex down the expenses at our end. Even down the road the
group will not incur more expense working with a good franchisee lawyer
than they would working with their own “social mode” officer and board
structure. A professionally managed independent franchisee association,
especially when one considers the advantages, is qualitative bargain.
Avoid Thinking Of Your Franchisee Association As A Social Organization
All organizations have social characteristics as part of their makeup, no
matter how professional or focused they may be. That is just part of the
territory. In consideration of just how rough the franchising landscape
has become today, however, the social aspects of your association should
be kept to a minimum. If you want to belong to a club, join a club. This
should not be allowed to become a club.
Participation in the independent franchisee association should be sold
throughout the system as an essential survival resource for franchisees.
There is a tendency to want to free ride on the efforts and resources of
the activists, and if this tendency is not countered there will not be
adequate support for what the association is being established to achieve.
The particulars of how this association “attitude” is established and
“sold” to the franchisee population will depend in part on the character
of the potential membership and that of the organizers.
One of the big, fundamental mistakes made in conceptualizing a franchisee
association is that it is being formed to “reason” with a reasonable
franchisor. If there is a reasonable franchisor at the moment, the
association will conduct its relations with the franchisor in an
appropriate manner. If the franchisor is not being reasonable, or if the
system is being acquired by a potential opportunist, the association must
conduct its relations with that kind of franchisor in that appropriate
manner. You can’t take “touchy feely” “lets chat” approaches to a hungry
dog. There are already associations and groups of associations that live
on wishful thinking and claim falsely that they accomplish positive gains
for their memberships. That is sometimes true, but much less true when
things get tough. The tough franchisors pay no heed, or maybe lip service
only, to the lets talk it over ad nauseam associations. The tough
franchisors must be confronted with franchisee associations equipped in
membership strength and in resources to deal with tough franchisors.
Opportunistic franchisors have contracts engineered to give them all the
options. They do not give up on their scope of use of those options just
because someone with an education, in a suit, asks them nicely to be more
considerate.
For this axiomatically truthful situation, an association needs to be able
to confront its franchisor over tied in vendors who are ripping off the
franchisees and paying commissions to the franchisor for that privilege,
and be able to wrest shared control over the vendor program away from the
sole discretion of a greedy franchisor. Without that, no franchisees will
ever see the benefits of group buying power. The flow of those benefits
will stop at the franchisor’s bank account.
An association needs to be able to confront an aggressive franchisor over
frequent remodel and territorial encroachment issues that cost franchisees
enormous resources without always conferring responsible benefits to the
system as a whole.
An association needs to be able to confront an opportunistic franchisor
over new and seriously disadvantageous terms in renewal agreements, and
get them moderated.
An association needs to be able to confront a potentially adverse acquirer
of the franchisor even to the point of killing the deal if need be.
An association needs to be able to wrest control of the system from the
franchisor if the franchisor loses touch or interest in a way that is
brand destructive, including turning control over to the franchisor’s
idiot children in many cases. If you have ever seen or heard of a
situation like this, you will know it needs no further explanation.
These are but a few of the really difficult issues that a franchisee
association must be able to deal with effectively if it is to have the
ability to protect the investments of its membership. These difficult
issues absolutely cannot be dealt with effectively through “discussions”
in almost every instance.
I do not intend to diminish the positive and constructive goals of an
independent franchisee association. Improvements to any franchise system
frequently come up from the ranks rather than down from on high. The
implementation of improvements frequently represents incremental sales on
which royalties are to be paid. This is a balanced equation in which
bilaterality of obligations is always the rule. Inasmuch as you will be
paying for everything you get or do in a franchise relationship, it is
also important that there be a resource that can optimize the chances for
considerations to flow in both directions. Being a franchisee does not
automatically mean you have no opportunity to receive consideration for
your positive contributions. Being a franchisee with an effective
franchisee association that you support and that supports you makes that
possible.
For these and other reasons, the social aspects of a franchisee
association should be minimized and its professional management and
strategic effectiveness be made the focus of why franchisees are
supporting it. It isn’t a club.
There are many other discussions about the why and how of independent
franchisee associations to be found on
www.FranchiseeAssociationManagement.com . There are many
“issues” articles for franchisees on
www.FranchiseRemedies.com .
I’m not going to just repeat all that material here. It is subject
organized for anyone who wants to review it. After over 45 years in this
business, I believe I have a higher level of understanding of the “street”
issues of franchisee associations than people who have degrees but less
actual experience. These are my streets.
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