Confronting The Delusional Bully CEO - Contract VS Relationship

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Just back from the wars, so to speak, I found that most folks are too socially emasculated through the process of institutionalized position sensitivity to even have an inkling about what to do when a dominant position person goes off the deep end and his actions threaten to destroy businesses if not brought to a screeching halt. Such was the war just concluded, in which we represented numerous franchisees of a franchisor who's point person thought and acted like a white bread Benito Mussolini.

This was a renewal issue in which the franchisees had the right to renew on the same terms they currently enjoyed unless the franchisor was then selling new franchises, in which instance they would have to sign the then current franchise agreement in order to renew.

Obviously, new franchise agreements are historically upon worse terms for franchisees than expiring agreements. At least that is the predominant experience in the franchising business.

Money, restrictions, franchisor prerogatives and other matters that impact the relative economics of a franchise relationship tend to move in favor of the franchisor with each new iteration of the agreement.

This franchisor was a more than over the hill operation and had not sold new franchises for about twenty years. It had seen the attrition of most of its franchisee population and did not even have an operations manual.

Peter the Point Man decided that the value of being his franchisee was far above then current relative economics and that he was not going to be so foolish as to honor renewal terms, no matter how clearly they may be stated in the soon to expire current agreements of my clients. They were the best performing franchisees, historically, in the system and had been there for about forty years. Had Old Pete been possessed of any good sense, he would have paid them to show him how to operate the company owned units which lost money while theirs prospered every year more and more.

Any econometrician would tell you that in these circumstances the relative value of the relationship among the parties were indeed skewed, but in favor of the franchisees rather than the franchisor. Had Old Pete simply gifted these franchisees with the entire company, he would have come out far better off economically compared to facing years upon years of continuing losses eventuating in the bankruptcy of his company.

These franchisees had been clients of mine for over thirty five years, having once before been confronted by an earlier edition of delusional point person. I sued the franchisor on their behalf then, and the results of that litigation was the ultimate cause of their having favorable contract terms now.

My clients believed that when renewal time came around this Bozo had plans to try to rip them off, and so we had almost a year head start in setting Him up for his comeuppance.

Franchisors love discussions. Discussions leave no tracks. Writings are tracks, and thus are despised by franchisors, especially if they have an agenda to be predatory and need deniability in case there is strong push back by the franchisees. Peter the Point Man, however, failed to recognize that our insistence upon having email confirmations and exchanges to prevent negotiations from being nothing more than conversations was providing us with a plainly visible trail of the development of his entire program to rip us off.

His arrogant lack of subtlety even went so far as to acknowledge his obligation to negotiate terms with us and then insist that the negotiations be restricted to only those issues raised by the franchisor.

He even went to the trouble to have his lawyers send us a proposed contract amendment saying just that.

No one signed that, on advice of counsel.

He then told us that business requirements prevented him from being able to negotiate the renewal terms right now and offered a one year extension of the same terms to accommodate his claimed business needs. In fact, what he did during that extension period was to have his lawyers create a spurious FDD, which he registered in Virginia so that he could claim that he was in reality engaged in selling new franchises and therefore exonerated from having to negotiate new terms with us or to offer renewal upon the same terms as before. He then imperiously insisted that we sign his new franchise agreement, which was full of incredibly stupid positions that no competent franchisor would ever put into his agreement.

To be sure, he also changed the economics drastically in his own favor (as if that needed to be said). The State of Virginia took one look at his company financial reports and immediately slapped him with an initial fee impound.

My clients had been successful business operators for over forty years, and had been in only one real battle royal in their entire lives, the earlier litigation with this same franchisor under other "leadership". They found it very out of character for me to insist that they seriously do things to bring about the entrapment of the present franchisor management. I had constantly to explain to them that if they didn't handle the situation as a prelude to a main battle they were going to lose their businesses.

They, like most folks, erroneously believed that they had obvious rights and that that was all that was necessary for the correct result to ensue.

They were initially incredulous when I explained to them that there is no right on earth that is self-executing, not even those in the Constitution. If you don't stand and defend your rights, they can easily be taken from you, and this was an obvious situation in which that was exactly what would happen unless we succeeded in entrapping the franchisor into revealing his hand in an evidentiarily usable manner.

They had never heard of such a thing, and their regular lawyers had no inkling or experience with this sort of confrontation technique. They were always fearful of giving offense and messing up their negotiating posture. They refused at first to believe that there was in this instance no such thing as negotiations and accordingly no such thing as a proper negotiating posture. Fearful of burning bridges and self-destructing, it required a lot of tough love quasi-military training to get them to go along with my urgings.

Only as the unfolding of the fact pattern revealed that I had absolutely correctly assessed the risk and danger profile did they come to accept the ancient truth that the only way to deal with a bully is to whip his ass half to death - or at least until he came to terms.

Peter the Point Man had no experience in working with a company that was actively selling franchises. His overlord had once before been with a franchising company that had, under his leadership, gone into bankruptcy. Between them both, they were playing with far less than a full deck - were several bricks short of a load.

Accordingly, they compounded mistake upon mistake. They failed totally to do what every real franchisor always does to market a franchise program. They even sent us a letter half way through the litigation saying that they hoped soon to have an operations manual ready for review. The list of bozo mistakes would provide a standup comic with at least fifteen minutes of material.

They informed the court that their position was that the issuance of the spurious FDD was all they needed to prove that they were indeed engaged in selling new franchises. They could not have posited a more ridiculous strategy. This was the easiest possible position for us to defeat. Four days before we were to take their depositions in anticipation of an immediate preliminary injunction hearing, they had an epiphany, and about a week later the case was resolved upon very favorable terms for my clients.

The lesson here is that while it is nice to have polished manners and live by reasonable rules of commercial civilization, there comes the moment when those rules do not apply. If you continue to live by those rules you will simply be eaten alive. In times like that you need representation that understands and understands how to execute battle plans that level any playing field.

When someone decides that a business relationship is there to serve the terms of an agreement rather than the agreement being there to serve the quality of the business relationship, the result will be calamity if not immediately changed. Usually that change can only be brought about by aggressive confrontation.

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As always, you can call me, RIchard Solomon, at 281-584-0519.

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1 Comment

This is a wild example of a franchisor over the top behaviour.

But there are times that a party to a deal is extreme in their unreasonableness and how you respond and the advice you have will make all the difference.

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About this Entry

This page contains a single entry by Richard Solomon published on February 16, 2015 5:52 PM.

If Your Franchisor Is Incompetent, Do You Have to Continue to Pay Royalties? was the previous entry in this blog.

How the IFA intends to Win Friends & Influence Politicians is the next entry in this blog.

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