Do You Recognize the 3 Early Signs of a Mass Franchisee Breakaway & Revolt?


Franchise agreements were always too long - twenty years - in the early days of franchising. But you couldn't get a bank to loan mortgage money for a store build out on a twenty year note if you didn't have a twenty year franchise agreement. You didn't know that? That's why the agreements were for such long terms.

And, to make matters worse, in those days they usually provided for renewal of 'this agreement', rather than for renewal on the terms of whatever contract was then being used for new franchisees.

So the contract engineering failed to provide for system wide currency and essentially harmonized and rationalized terms of dealing across the scope of the system.

Now, franchise agreements tend to be for ten years, with renewal on the contract then being used for new franchisees.

The Evolution of Business Models

But the rates of change and evolutionary development in practically every business and market have escalated greatly. E-Commerce has further accelerated the ease and the speed of new competitive entry into any business when demand boosts appear.

Think of franchises that have typically sold products from expensive mall store locations, only to find that those formerly 'special' or 'exclusive' products started showing up in supermarkets and discount stores, and now on the Internet, making them more easily and less expensively accessible from sources other than those mall locations.

Food gift baskets, spiral sliced hams, vitamins and health foods are examples. Sam's club now carries Starbucks Coffee. Toys-R-Us is having a tough time due to toys being merely a group of hundreds of product groups available in enormous multi-category retail operations.

When a specialty product ends up in a supermarket or discount store where it is one of thousands of products available at a single location, the store can 'football' discount the specialty as a traffic builder and make its margins on its other products.

The mall site franchisee selling that single product line does not have that opportunity.

How does he sell at mall retail prices what the supermarket is using as a leader at much lower prices, where shoppers can simply throw the product in the cart and not have to carry it all over the mall?

With similar economic effect, saturation in the fast food business has destroyed margins and return on investment. Franchisees are less willing to invest in updating stores with lessened prospects for returns on that expenditure, and less willing to renew agreements on less favorable terms in order to remain in a business that is in the mature or decay stage of its life cycle.

The point of all this is that market changes are rapidly making franchise agreements less reliable as the set of rules by which a franchise system is operated.

Renewals - Is there Value?

More and more, your most successful franchisees are not interested in renewing their franchise agreements, not interested in continuing in the franchise relationship. They perceive little incremental value in associating with you for another term, because your techniques, like the techniques of everyone else, are not capable of turning back the clock to the easier money days when your concept was new and fresh and almost no one else was doing the same thing.

Along with their view of their own suffering, their franchisors are seeing lower initial fee income as fewer new franchises can be sold, more expensive operating costs at company owned stores with competition inhibiting price increases to keep up with expenses. Franchisors typically increase the number of stores as best they can, flooding markets and increasing the animosity that comes when one's franchisor is competing with him.

Franchisors are going on the Internet also, and these sales rarely are directed to the franchisees, but are taken more and more by the franchisor through direct on line sales.

Animosity keeps growing, and revolts happen.

Unfortunately, most franchisors are looking to their franchise agreements more than to what is happening in the market place, trying to force a relationship to work according to the agreed model rather than the reality model.

Termination Conditions - Legal and Business Reality

Attitudes about franchisees having to stick it out and play your tune because the contract says they must, and that you have a covenant not to compete to enforce if they leave, or a provision that allows you to take over their store if they leave, cause franchisors to mislead themselves into believing that they are more powerful than they really are sometimes.

But these scenarios are really more correctly evaluated from the perspective of chaos theory, because there are so many dependent variables at work that predictability of outcome is not just the product of contract drafting and market fluctuation.

Franchisees Revolt

Franchisees do not run to join in a fight as much as people would like to think.

There are techniques that tend to (but not always) isolate the leader(s) from the rest of the franchisee pack. Although few people think of it this way, the Protestant Reformation and the American Revolution worked in the exact same dynamic as a franchisee revolt.

Very few colonists fought King George. Most lay in the weeds, unwilling to take the risk of confrontation. They rightly believed, in the case of the American Revolution, that whatever the fighting colonists won would be winnings for all the colonies.

It isn't like that in franchise revolts, however. The folks who stand up and fight do not obtain anything for those who lacked the commitment to the struggle.

All too many times I have represented such franchisee groups, had many drop out or not join in the first place on the idea that they will get whatever the fighters win. In every instance, I have later heard from the less brave, wanting to get in on something that is already over, to board a train that left without them. Usually they simply get ground out or bought out very cheaply.

The management of franchisee dissidence is facilitated by tuning into what is happening in the system, not by seeing dissent and cowering in denial until you are in court as the franchisor defendant, in a fight not of your choosing, where you didn't get to pick or to frame the issues, where you go last and not first. When you are sufficiently alert to see it coming and to start planning for it, you have many, many more options.

Unfortunately, however, most franchisors wait until they are in court as defendants or until the franchisees start leaving and litigation to enforce post termination 'rights' becomes inevitable, on the belief that if you let one get away with it, the rest will follow.

When I evaluate a potential or actual revolt situation, I analyze it in multivariate contexts. There is no 'do this first' kind of approach. It is all done simultaneously in every mode. The order in which they are presented here is for convenience of expression only, and is not intended to be directional.

1. There is a need to understand what the market environment is doing to the system.

2. There is the issue of what that environment is doing to the franchisor and what the franchisor is doing to react to it.

3. There is the issue of what the franchisor's reaction is doing to the franchisees.

Structural considerations come into play-does the franchisor have company operated stores, and, if so, what are they contributing, if anything, to the perceived problems. The same questions are addressed to e-commerce, if that is a factor, and to how it is structured and how it is being operated. At the same time, advertising fund management is very frequently a focus of contention.

Then you look at the range of franchise agreement terms under which the system operates, and you ask questions to determine whether whatever it is the franchisor is doing conforms to those agreements, or at least, may be permitted by those agreements.

Along with this inquiry is the issue of whether, even though in conformity with terms of agreements, is what the franchisor is doing quite different from what was represented to the franchisees when they bought their franchises. This is more than technical, for even though statutes of limitation may have run out on misrepresentation claims in court, that plays a large role in how you manage the contention.

Ultimately, if the franchisor is doing everything right, in the sense that his agreements permit what he is doing, the franchisor has to make economic decisions. There are costs in ignoring the problems, and there are certainly costs in trying to solve the problems.

Trying to decide which costs to accept, and how much of them to accept, and to manage the enforcement of 'rights' issues, and to manage the 'propaganda' and 'political' issues are all absolutely obligatory aspects of franchisee revolt management.

There are no hard and fast rules, for the reason that each franchise system has its own 'baggage'. That baggage may be heavier or lighter depending upon whether there is more or less professional management in place, how difficult it is to deal with corporate ego issues that grew out of certain people having become addicted to always being told they are right.

Now that you are at the end of this article, do you feel like you have not been given a road map for franchisee revolt management? Good! There ain't no road map.

It''s a matter of complexity and sophistication that must be dealt with one situation at a time. Too many variables prevent a simple directional tutorial on how to do it for your company. What works for one company in this situation may be totally wrong for most other companies. It''s exactly like a recipe for making chili. Every ten miles down any road in Texas, the recipe for chili is different. Handling franchisee revolts for franchisors is just like that.

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

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Richard points out:

"Very few colonists fought King George. Most lay in the weeds, unwilling to take the risk of confrontation.

They rightly believed, in the case of the American Revolution, that whatever the fighting colonists won would be winnings for all the colonies.

It isn't like that in franchise revolts, however.

The folks who stand up and fight do not obtain anything for those who lacked the commitment to the struggle."

Yes, many attempts to change the franchise system fail to get the critical mass necessary -which is sometimes not good even for the franchisor.

Think if Carvel could have actually got franchisee buy-in for the ice-cream routes by enough franchisees -instead of going to war in Courts to solve their business issue.

When franchisors recognize the have revolt on their hands it's often too late. And options are limited

What franchisors should do is pay more attention to the little things that are happening between them and their franchisees. You need a canary in your coal mine.

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