Franchise Relationship Management

• Author: Andrew C. Selden and Victoria Blackwell
• Pages: 313-349

313

CHAPTER 4

Franchise Relationship Management

Andrew C. Selden and Victoria Blackwell

Contents

4-1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314

4-2. Why Good In-System Relationships Matter . . . . . . . . . . . . . . . . . . . . . . . . 314

(a) Interests of System Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314

(b) Public and Regulatory Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317

4-3. Role and Responsibilities of Franchise Lawyers . . . . . . . . . . . . . . . . . . . . 317

4-4. How to Go About Achieving Good Relationships . . . . . . . . . . . . . . . . . . .318

(a) Methods of Identifying Common Ground . . . . . . . . . . . . . . . . . . . . . . 318

(b) Methods of Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319

(i) Methods of Communication between Franchisor

and Franchisees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319

(ii) Communication among Franchisees . . . . . . . . . . . . . . . . . . . . . . 321

(iii) Methods of Communication with External Audiences . . . . . . . . 322

(c) Means of Interaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

(i) Councils and Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

(ii) Special Function Bodies: Co-ops . . . . . . . . . . . . . . . . . . . . . . . . . 324

(iii) External Trade Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326

(iv) Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326

4-5. ADR/Conflict Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329

4-6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .333

Exhibit 4-1: IFA Code of Principles and Standards of Conduct . . . . . . . . . . . . 334

IFA’s Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334

Form 4-1: Franchise Termination Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337

Exhibit 4-2: CPR Procedure for Resolution of Franchise Disputes . . . . . . . . . . 342

“We must indeed all hang together, or, most assuredly, we shall

all hang separately.”

Benjamin Franklin: remark to John Hancock, at signing

of the Declaration of Independence, 4 July 1776

bri81013_04_c04_p313-350.indd 313bri81013_04_c04_p313-350.indd 313 9/28/11 9:40 AM9/28/11 9:40 AM

314 Franchise Law Compliance Manual

4-1. Introduction

No one builds a franchise system, or invests in a franchise, for the purpose of

“having a good franchise relationship.” Rather, the purpose is to achieve a desired

business outcome. Business success, however, often depends in large measure on

the nature and quality of the business relationships that exist within the franchise

organization, both bilaterally between the franchisor and individual franchisees,

and more holistically within the system generally.

Assuming a successful franchisor is one with a system that is profitable, and

growing in units, sales, and transactions, a good relationship requires more than

strict compliance with laws and contracts. It also requires acknowledging that the

franchisor/franchisee relationship is a unique long-term relationship where the

ultimate success of both parties depends upon a mutual goal, cooperation, and a

shared sense of responsibility. Accordingly, the goal of the franchisor should not

be limited to ensuring that corporate employees follow and enforce the letter of

the franchise agreement. It should also provide a framework for ensuring that

franchisees and corporate employees alike are acting in accordance with the poli-

cies and values of the brand. This chapter explores the importance of good fran-

chisor/franchisee relations and examines ways to build into the franchise system

the foundation, institutions, processes, and guidelines necessary to exploit fully

the power of an aligned, cooperative franchise brand.

4-2. Why Good In-System Relationships Matter

(a) Interests of System Participants

Good in-system relations are much more than a moral objective. Business is, after

all, business, and the objective of a franchise-based business is no different from

any other: distinguishing the brand, outrunning the competition, anticipating and

serving the customers’ needs, and, most importantly, making money doing it.

Good relations within a franchise organization are necessary, not simply desir-

able, because competing in a crowded market segment requires the strategic

vision and leadership of a franchisor combined with the practical knowledge of

franchisees applied toward a common goal. Disruption and internal strife distract

the parties from focusing on the external competition and the changing market,

resulting in a confused message to the consumer and lost opportunity.

Although franchisors and franchisees share this general economic interest,

the structure of the traditional franchise relationship often sends them in differ-

ent directions when they do not agree on the best method for achieving the goals.

Traditional franchisors and franchisees both benefit from sharing a strong, com-

petitive system, but they may also make their profit in different ways. The fran-

chisor may run its own outlets; it may also be a licensor, a vendor, a service

provider, a lender, and/or a landlord. The franchisee is usually engaged in a

retailing business and, relative to the franchisor, may be a buyer, a tenant, a bor-

rower, and/or a licensee. These differing roles create an inherent conflict of inter-

bri81013_04_c04_p313-350.indd 314bri81013_04_c04_p313-350.indd 314 9/28/11 9:40 AM9/28/11 9:40 AM

Chapter 4 Franchise Relationship Management 315

est in even the best run and most cooperative franchise organizations. For a

franchise-based business to function up to its full potential, this divergence of

interest must be regularly managed and reconciled with the parties’ common goal

of a successful system.

Franchise organizations flourish when the franchisor and franchisees recog-

nize the significant advantages to be derived from acknowledging their differ-

ences, learning from each other, and working together to create and execute a

common plan to achieve their goals. Franchise organizations that fail to reach that

understanding will never realize their full potential. In those cases, shareholders

of the franchisor will be every bit as frustrated and disappointed as will the fran-

chisee/investors in the system.

What are the investment objectives of parties to a franchise-based business?

From the perspective of the franchisee, the objectives include both capital lever-

age and information leverage: purchasing from the franchisor the know-how that

would otherwise be developed at presumably greater cost through trial and error,

combined with the (presumably favorable) goodwill associated with use of the

franchisor’s methods and trademarks. The franchisee expects to use this leveraged

capital and information base to run a successful business, to earn a positive return

on investment in the business, and to achieve a level of personal satisfaction in

doing so. In pursuing these goals, franchisees certainly expect to have to function

in a competitive and controlled environment; but few, if any, genuinely expect

their own franchisor to be a significant competitive threat in terms of sponsoring

“encroaching” locations or requiring the purchase of unnecessarily expensive

equipment, services, or supplies. These expectations exist empirically and subjec-

tively irrespective of the contents of the franchisor’s franchise disclosure docu-

ment (FDD). These are prime examples of areas in which a franchise relationship

can become strained when the two parties pursue their own individual goals

without due regard for the interests of the other, or of the system as a whole.

The franchisor’s objectives in building a franchise-based business organiza-

tion also include capital leverage, but beyond that, particular objectives of indi-

vidual franchisors vary globally. The franchisor most often undertakes a

franchise-based form of business in order to recruit into the enterprise the capital,

both financial and human, of the franchisee/investor. This leveraging allows

rapidity of expansion, facilitates penetration of distant or foreign markets, and, in

some cases, allows more rapid accretion of market share than would otherwise be

the case. The franchisor’s goals can be threatened, and the relationship strained,

however, when a franchisee deviates significantly from system requirements,

perhaps by refusing to contribute to or participate in system marketing initiatives,

cutting costs by purchasing substandard supplies, or deferring facility repairs.

The relationship roles that franchisors and franchisees undertake within the

ongoing franchise are represented by a variety of more traditional common law

relationship models. These include landlord-tenant, licensor-licensee, lender-

borrower, vendor-vendee, and others. These component relationships usually do

not include master-servant (employer-employee) or fiduciary relations, but the

franchise relationship itself—representing an accumulation of component rela-

tionships set forth in the franchise agreement and collateral contracts and filtered

bri81013_04_c04_p313-350.indd 315bri81013_04_c04_p313-350.indd 315 9/28/11 9:40 AM9/28/11 9:40 AM