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How to Create a Modern Franchisee Association

mw.jpgThis article is about how to create a modern franchisee association.

A modern franchisee association is required in all franchise systems - especially when the franchisor seeks both the benefits of controlling franchisees as if employees, but resiles from the legal and tax liabililty that attaches to such control.  

More importantly, the full benefits of a franchising cannot be delivered unless the franchisees act in a coordinated manner, and effective coordination cannot be simply mandated by the franchisor.

The Coverall case illustrates the disaster which befalls a franchisor who becomes - in the eyes of the state- an employer. It provides a good case study of what a modern franchisee association can do to benefit the franchise system.

Coverall required its franchisees to perform cleaning for the franchisee's customer, but have that customer pay Coverall directly for the job. Coverall would then remit to the franchisee payment, less deductions for royalties and other charges.

Not surprisingly, the arrangement caught the eye of the Attorney General in Massachusetts. It looked liked an employer/employee relationship with the employer making illegal deductions from the employees salary. [The case is currently under appeal, but the finding of an employer/employee relationship looks not to be overturned, and the penalties for wrongly treating employees as franchisees are increasing.]

It is not hard to imagine that there is a beneficial reason for centralized billing that is also in the franchisee's self interest. Cleaning crews are composed from an irregular work force. Reliability is not easy to maintain, so a centralized billing scheme may provide better customer service. The customer can pay in advance knowing that the payments for substandard jobs will be refunded. A simple cleaning crew could not achieve this reputation.

The reason is simple. The cleaning crew I employ today and pay at the end of the day may not be the crew I have to dock pay for a job poorly done but discovered tomorrow.

Centralized billing is a reputational device, functioning in a manner similar to a cash register. The customer makes the payment directly to Coverall, and if the work is satisfactory, the payment is sent to the local operator. Because the customer no longer cares if the local operator can refund the substandard cleaning jobs -their relationship is with Coverall- the local operator has a reputational advantage over even the same crew operating outside the franchise system.

In summary, each party, franchisor and franchisee, would like the benefit of centralized billing, but the franchisor dare not provide it. There exists a gap between services needed by the system and what can be legitimately provided by the franchisor - the services/goods gap. The services/goods gap follows directly from the fact that the franchisor is not an employer of its franchisees.

The services/goods gap is what provides the the economic imperative for the modern franchisee association - it can create the benefit as a condition of membership. More accurately, the modern franchisee association can serve as a catalyst by creating a critical mass or tipping points for providers of services/goods to the franchise community.

In the Coverall case, their franchisee advisory council, or if they had an independent franchisee association, could have taken on the role of communicating, educating, and advocating the benefits to the franchisees of having an neutral, trusted third party to do the invoicing, remittance, and customer service.

The communication, education and advocacy by the franchisee trade association for the voluntary benefit stands in contrast to Coverall's risky decision to require the delivery of the benefit by contract.

It is of course possible that the franchisee association proves not to be capable of being such a catalyst, and the effort fizzles without reaching critical mass.

But imagine the benefits to the system once even a small effort is successful - perhaps two or three vendors are selected to provide both billing and customer service. (The franchisor would retain control over the standards that these service providers would have to meet, but would not have a contract with them.)

Franchisees using this reputational device get more cleaning jobs, while others flounder. It becomes in the franchisees' self interest to join the invoicing network. As more join, the network begins to fund more communication, education, and advocacy about the benefit - which causes or drives more franchisees to join, bringing about increased funding.

(This mechanism is similar to how many QSR franchisee associations tax their members to fund the association's convention. The beverage company in the QSR may put aside, say 1/2 cent per gallon of syrup ordered, and remit the collected amount back to the association.)

Virtually, any franchisee association can be started or grown in this manner.

1. Find a mission critical service or good required by the franchisor which cannot be provided by the franchisor because of legal problems.

2. Pick one or more platforms which can deliver these services or goods to franchisees.

3. Pick the right catalyst or catalyst methods which set in motion a critical mass - communicate, educate, advocate and self fund.

4. If the project enjoys systemic acceptance, then consider collaborating with the franchisor on standards for such service providers.

Each step depends upon the actual system, and there is room for all sorts of things to go wrong. But, this is a good blue print for any new franchisee association who wishes to grow and contribute to the brand's overall success in the marketplace.

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