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Societies are generally groups of like-minded people who form a voluntary association for a particular purpose. Societies can be are created for many reasons: a charitable purpose, fostering a sporting or cultural endeavour, or provide a framework for religious groups.

The Society Act creates the legal framework for the incorporation and organization of such groups. Each society has a constitution that defines its purpose and bylaws or rules that govern the conduct of its affairs.

Despite this, these voluntary associations are, more often than not, fairly casual in handling their affairs. The procedural aspects of their bylaws are often vague or incomplete.

Things get done a particular way because "that is the way it has always been done" or because no one has the time to do it properly.

Role of the Courts in Reviewing and Enforcing the By-Laws?

Resort to the proper procedural technicalities usually only comes into play when a divisive issue arises amongst the members. Everyone drags out and tries to enforce their understanding of the rules to advance the position they seek to establish. Not infrequently, the dispute ends up in court.

What role will the court play in figuring out the correct procedural requirements for the society?

Ilustration - Improper Nomination Forms

One recent case illustrates that the courts will look to the unwritten but long standing traditions of a society to help sort out the proper outcome. In this instance, there was a fight over the disqualification of a set of nomination forms shortly after the nomination deadline passed.

The incumbent executive had submitted their slate of nominations in a timely way, though some portions of the forms were incomplete. The challenging slate of candidates submitted their nominations 90 minutes before the deadline to do so.

Shortly after that, the secretary told the challenger slate that their nomination forms were invalid. They had each nominated themselves rather than have two other society members nominate and second their candidacy. As a result, the incumbent slate was elected by acclamation.

The disappointed challengers sought to overturn the election and the disqualification of their nomination forms. They pointed out that neither the society bylaws, nor the Society Act made provision for the content of nomination forms. Similarly, they contained no prohibition on self-nomination. The challengers asserted that the defect in their nomination was a technicality that ought to be remedied by the court.

Court's Jurisdiction and Remedy

The Society Act gives the court authority to oversee and rectify the affairs of a society. In order to do so, the court must first find that there has been an "omission, defect, error or irregularity in the conduct or affairs of the society". This can be a breach of the Society Act, a failure to comply with the constitution or bylaws, or misbehaviour in connection with the directors or members meetings.

The question, therefore, became whether or not the requirement to have two other members nominate candidates was an irregularity that gave the court jurisdiction to intervene.

The court decided it was not. It did so in reliance on the unwritten but long standing traditions of the society. The nomination forms, and the requirement to have two nominees, had been in use by the society for nearly 40 years. This was a long-standing custom that the court considered to have become a rule of the society.

In doing so, the court noted that voluntary associations are meant largely to govern themselves and to do so flexibly. A tradition or custom that is sufficiently well established may be considered to have the status of a rule on the basis that it has become an unexpressed term of the society's constitution.

The fact that the incumbents' nomination forms were incomplete was dismissed as a reason they too should have been rejected. Again, the court turned to the past conduct of the society for support. It had never been the practice or custom of the society to mandate completion of those parts of the nomination forms.

If you are a society member, remember to be mindful of its traditions and customs when dealing with its governance. A consistent course of conduct over a long period of time may result in the society, knowingly or otherwise, adopting an enforceable obligation that may or may not be in the best interests of its members.

In addition, try to get your nomination forms in earlier in case there is a problem with them. You may need some time to remedy them.

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Few in the franchising world doubt that McDonald's is a world-class organization.

Hallam Movius and Lawrence Susskind hold out the mouth-watering proposition that McDonald's is a world-class negotiation organization. And, they offer up their recipe for turning your franchise into something similar. Their recipe is contained in Built to Win. The ingredients are familar enough to anyone with knowledge of the Harvard Negotiation Program or Mutual Gains Approach.

McDonald's Is Built to Win

Why should other franchisors care that McDonald's overwhelming advantage is due, in part, to its negotiation capability with franchisees and vendors?

Well, if true, then despite the notorious secrecy of McDonald's, Movius and Susskind offer the posibility that your franchise system could duplicate McDonald's advantage by following their Built to Win curriculum.

That's a very tempting offer.

Let's look more closely.

"Happily, we sometimes find that leaders have recognized the value of relationships and converted them into bottom-line opportunities. For many years, Bob Jackson (most recently a vice president and division operating officer) was a highly successful regional general manager at McDonald's, responsible for an area of the United States that comprised more than six hundred sites.

His region was consistently among the best performing in the country. When we first interviewed Jackson [in 2003], it was clear that he and his most successful colleagues were already following a number of practices encompassed by the mutual gains approach (my emphasis). Jackson repeatedly described negotiations in which he worked with owner-operator franchisees to implement marketing plans, technology upgrades and other operational initiatives.

'Many times we have interests and goals in common. But sometimes the corporation's interests are not identical with the owner operators.', he commented. 'We do best when we work jointly with our franchisees to solve the problems and difficulties that come up, taking their worries and concerns seriously and trying to share information and invent options to address those concerns and interests while advancing our own.

'Having a good relationshiop helps to create value far out into the future, because you gain trust and the next time a hard problem comes up, you're in a much better position to deal with it productively." Movious and Susskind [pages 40-45]

Effective Cooperation

Now, you and I know that franchisees can be downright nasty and refuse to engage in constructive dialogue with the franchisor. (And franchisors don't fix nasty -they look to terminate nasty.)

Especially when it comes to: marketing, upgrades, retrofits, menu item changes, and numerous other operational issues. Franchisees feel the dynamic is: the franchisor's plans using the franchisee's money.

Franchisor and franchisee interests, positions or goals, can be either adverse, in common, or a mixture of both.

McDonald's, says Jackson, takes these differences seriously and provides sufficient information to the franchisees to establish a collaborative working relationship which advances everyone's interests. (It also helps the franchisor's credibility that they own 20% of the units. Thus, this franchisor isn't alwasy using other people's money.)

Operational choices made by McDonald's have a long projected payback. A good working relationship extends the trust created today to commitment tomorrow. This coordination is valuable. It is not a traditional asset because it is not owned by the corporation. It is an intangible value, which nonetheless can be measured.

Increase value and get a better bottom line.

Now, do you think other franchise systems can be Built to Win or is McDonald's in a unique position?

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Happy Thanksgiving

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You are a young cartoon writer, starting your career after returning from World War II.

You don't know it, but you are going to gross over 1 billion dollars from your cartoons, during the next 1/2 century.

You start off with a fight with the syndicate, and cannot get this satirical cartoon printed.

So, over the next 50 years, you get even by publishing every Thanksgiving the famous gag between Lucy and Charlie Brown.

Now, everyone knows who you were really satirizing, in 1951.

Not much has changed, sorry to report.

uncoveredPEANUTS.jpg

This is well known negotiation game - the Confidential Information Game.

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The job of a leader is to make good decisions, particularly when the economy is soft, as it is at the moment. In the franchise relationship the franchisor is the leader. While this tip is especially dedicated to senior franchisor executives, anyone facing an important decision will find it useful.

Not all decisions are equal. An important decision has three characteristics:

  • It cannot be easily reversed.
  • It will relate to boosting prosperity or keeping the business safe.
  • It is likely to significantly impact on others.

Important decisions are usually also complex which is why the following process is so useful. These steps are backed by good psychological research. Practice them and you'll immediately be a better franchisor.

Steven Strategies and One Tip

  1. Don't assume a good decision will be good for everyone. Sometimes the best decision is the "least bad" decision because the options aren't great.
  2. Gather all the facts. We all have a tendency to filter out information we don't find interesting, so be careful not to be selective in what you pay attention to. Keep asking "have we got all the facts?"
  3. Get input from relevant people. These will be people who have a significant stake in the outcome or who have relevant expertise. If you form a task force of smart people, ensure some are also emotionally intelligent.
  4. Minimise the impact of egos. Wise people change their minds in the face of new information. They appreciate that what is right is more important than who is right. For instance, one of our clients regularly reminds his team to hold strong positions loosely.
  5. Identify all options. Put everything on the table, even options that are disturbing. Remember you don't need to act on these. But in naming them you open the door to honest, frank discussion.
  6. Draw up criteria. Assess the options against these to see which get more ticks. For instance: What is the impact on franchisor profitability? What is the impact on franchisee profitability? Is it consistent with our brand and culture? How easy would it be to implement?
  7. Pressure test preferred options. Play the devil's advocate. Actively look for gaps, weaknesses and risks. Explore how readily these can be fixed or minimised.

These habits will greatly improve the quality of your decisions and your ability to intuitively identify more subtle threats and opportunities.

A final tip. Someone once said to me, "Never make a decision when you're too - too mad, too sad, too glad, too anything!" I think this is great advice because a common source of poor decision making is impatience. Just like a good wine, important decisions are sometime best allowed to sit for a time.

Until next time ...

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One of the greatest personal debates we often face centers on character.

Do you believe that it's possible for a person to possess both a public and a private character, even if the two are very different? What you do in private is your own business, as long as it doesn't affect your public performance, right?

Not necessarily - especially when your individual personal performance impacts your business performance. Once you divide your personality and your actions into two or more categories, you deviate from the very definition of the word "character." At its root, one's character is defined by one's integrity - "The quality or state of being complete, unbroken condition, unimpaired, of sound moral principle, uprightness, honesty and sincerity." - (Defined by Webster)

Therefore, if your character - which defines who you are - is broken into two or more entities, you no longer have integrity because you are no longer "whole." Without integrity, you don't have much character. Unfortunately, without integrity it is still possible to run a successful business. However, the chance of your being successful is greatly minimized, and while certain people may do business with you, it's most likely going to be out of necessity. When your integrity is low, "people know it."

How many times have you heard a franchisor or franchisee claim to operate with integrity? In the hospitality environment, integrity is achieved by walking the talk and doing for your franchisees, employees or guests what you say you are going to do.

Sounds pretty simple. . . and a great formula for a successful partnership, right? Partnership is achieved by accomplishing goals together and by teaming for the good of all parties. Unfortunately, just as in personal relationships, business partnerships sometimes fail because one of the parties takes his or her eyes off the original goal, or somewhere down the road loses integrity because of a flaw in his or her character (dishonesty perhaps, impaired judgment or in many cases the person "just doesn't care.")

Sink or Swim?

In the movie "Titanic," one of the primary reasons the ship was considered unsinkable was because of the way the compartments in its hull were designed. The theory was that flooding in one compartment due to a breach in the hull wouldn't affect other compartments because of the high walls between them.

What the ship's designers didn't consider, however, was that if the breach was big enough, water could spill over the walls from one compartment to the other, until the ship sank.

The same theory can be applied to the franchisor/franchisee relationship. If there is breach in the contract by either party, the negative impact on the relationship will begin to spill over from one area of your business into the next until eventually, the partnership crumbles, and the weaker of the two businesses possibly could sink.

How do you avoid such a tragedy? Franchisees looking to assure themselves of a solid, equitable franchise contract must first find a franchise company that is led by hoteliers with character and that is built on integrity. They will want to select a franchise based on the company's ability to provide them with the tools necessary to run a successful business, such as knowledgeable senior management, great marketing efforts, field support, an effective franchise board that has a voice in what goes on within the company, along with various other areas of support.

Likewise franchisors must be certain that they are building partnerships with owners who are willing to follow the standards and guidelines set by the franchise company to be successful. If a franchisee has done everything possible to make his or her businesses successful - even requesting the assistance and consultation of the franchisor when the first signs of trouble arise - and the business is still sinking, then it is up to the franchise company to provide equitable franchise termination and exit strategies.

If the mutual goals of the franchisor and franchisee are not being met, then there is cause to terminate the partnership. As long as both parties keep their integrity in check, and maintain their character in the true spirit of hospitality - taking each other's business and financial goals into consideration - then there should be an equitable separation.

Actually, sometimes it is just a prospective hotel owner, but whatever the case, it is always someone who has found frustration and confusion. The source of their problems is the contracts already entered into (or about to be entered) between them and the hotel franchise company. Whether I am in my office or attending a hotel-industry event, the conversation invariably is about problems that crop up between a hotel franchise company and a hotel owner.

Inference should not be drawn here that the problem in these matters has anything at all to do with devious franchise companies. While all of them are in the business of making money, none would survive for very long if they engaged in practices that are dishonest, unfair or morally bankrupt. So, it is clear that the problem is not that franchise companies are out to cheat potential and current franchisees. Precisely, the problem is that the franchise agreement is an intricate document designed to deal with as many situations as possible in favor of the side that draws up the contract--namely, the franchise company.

Besides, the franchisors and the executives they have hired are in possession of decades of experience, not only in the franchising arena, but also the hotel industry or other areas of hospitality. They have an ingrown advantage in dealings with hotel owners and that is something that will never change for as long as business is done.

The obvious solution is for the hotel owner to come as close as possible to simulating for himself the vast wealth of experience working in the favor of the franchise company. Knowledge must be drawn on wherever it is available, but it must be knowledge gathered with a critical eye and the realization that it is seldom the case that any two hotels' circumstances are exactly alike. Thus, what the potential hotel franchisee learns from a current franchisee must be taken with a grain of salt. No two businesspeople do business in exactly the same way, and no two hotels' properties can be run in an identical manner.

Hotel franchisors are already aware of this truth, and will go to great pains to prepare franchise contracts that are specific to the nature of the property involved. These companies have expertise in information gathering, historical data and travel-and-tourism patterns (to name a few items), and they know how to put all that data to very good use.

All of this is also pertinent to those hotel owners who are already in franchise agreements, and who now seek to be relieved of those agreements. There is an axiom about it being far more difficult to get out of a business contract than it is to enter one, and it seems that in all fairness the opposite should be true. But facts are facts, and whether entering a franchise agreement or seeking exit from one, the hotel owner must be as prepared and informed as is the franchise company.

Historically there has been only two ways of dealing with a franchise agreement, and liquidation or termination. You could endeavor to do it yourself or you could go out and hire a lawyer, who perhaps may be even more uninformed than you might be about the substance of hotel franchise agreements. The problem is that unless you are very knowledgeable about hotel franchise agreements or the varying atmosphere within the different franchise companies, you are probably not going to do an effective job entering or exiting a contract.

The franchisor/franchisee relationship is truly the ultimate in power sharing and character building. In the true spirit of hospitality, we as hoteliers need to look inwardly to see if our character is being defined by our business integrity.

Verbally trashing the franchisor if your business is doing poorly is not the way to seek an equitable resolution or to build your character in the eyes of your fellow hoteliers. Howling at the moon won't put more heads in beds or improve your integrity in the eyes of the franchisor, which most likely is able to help you get back on your feet.

Yes, owners should expect to get the very most - the highest return on investment - from the fees that they pay every month. But recognize that not all franchise companies are the same. Some operate with integrity and some may not. The one's that do will structure a fair franchise agreement that is equitable for both entities. If implemented correctly, there are ways to maximize the benefits provided by the franchise company to help increase guest satisfaction and improve overall asset performance.

True partners can weather any storm. Those who build a business relationship on integrity, looking inwardly at the character behind those building the partnership, will be those who swim upstream, even in the roughest waters.

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Franchises are created or started by a single founder.

The founder faces an interesting strategic challenge in persuading enough franchisees to voluntarily pay for & add value to the franchisor's property - the franchisor's trademark and confidential information.

1) If enough do, then we will all be better off because we have formed a brand.

2) However, some will not live up to the brand's standards and free-ride on the brand's reputation.

If enough of us expect that others will free-ride, we won't live up to the brand's standards either.

Our brand may just flounder along.

This problem is known by many names: social dilemma by game theorists, the social contract by philosophers, the buy-in problem by management theorists, and the tragedy of the commons by political theorists.

What sort of personality is effective and gets the job done?

How does the franchise system get buy-in from the franchisees? What happens when the founder leaves the system?

How does the franchisor continue to get buy-in from the franchisees?

Some social psychology research on social dilemmas suggests that the franchisor must be dominant and aggressive to lead.

A social dilemma exists when we know that if some us coordinated, we would be better off. But, we also know that most us think that not enough of us will coordinate and so any benefit is illusory.

Do such groups need to be lead by a dominant and assertive leader in order for the benefit of coordination to be real & exist?

Robert Livingston and many others argue for this conclusion. Lending support to benevolent dictator picture of a franchisor founder.

Being kind and self-sacrificing will get you plenty of friends, but won't help you win a corner office, argues management professor Robert Livingston.

The altruistic are typically seen as good people, but not dominant and aggressive enough to lead, Livingston's research shows.

"On the one hand, generous individuals are admired," he says.

"On the other hand, they may be perceived as feeble 'bleeding hearts' who lack the guts to make tough decisions.

When do we need dominant and aggressive leaders?

Livingston, argues that in social dilemmas "when groups had to compete against each other, dominant individuals rose to the top while benevolent people were least likely to be elected." (It is well worth listening to Livingston explain his theory of leadership in more detail.)

On the other hand, Tom Schelling explained, almost 35 years ago, the solution to a social dilemma didn't need a certain personality type. The solution required the existence of a group disciplined enough that, even though resentful of free-riders, its discipline could be profitable for the group (though even more profitable for those who stayed out.)

A combination of discipline but resentment. Not altruism, not dominance, but a combination of discipline with a type of resentment focused on the free riders would stop the group from unraveling.

Trainers in leadership have been using social dilemma exercises to produce various "AHA" moments, for quite some time. One such exercise is called "Win as Much as You Can". The AHA moment it produces is about self fulfilling predictions.

What is Next?

I want to step through an analytic discussion of the Win as Much as You Can exercise. (Only by playing it with real people can you get the experiential content. In most cases, the group fails to coordinate, and remains in the state of nature - and more so with dominant and aggressive leaders!)

Then, I am going to suggest an alternative exercise and provide reasons why, if Schelling is right, this new exercise should provide an "AHA" moment about how discipline and resentment can hold a group together.

In what follows, there will be -for some too much- use of calculation, simple graphs and decision theory. So let me give away the conclusion quickly -right after the description of the game.

Win as Much as You Can Game.

You and three others each have two choices, play Red or Blue, R or B. What each of you gets depends on what the others play and your choice, according to this table.

Group Individuals

4 Reds - Red player gets -1.

3 R, 1 B - Red players gets 1, Blue Player -3.

2 R, 2B - Red players get 2, Blue Players -2.

1R, 3B - Red player gets 3, Blue Players -1.

4 Blues - Blue Players get 1.

If this game is played, say for ten rounds, each player by playing only B, could win 10. Yet, in the thousands of exercises trainers have completed, almost no one or group gets to this outcome. (In most exercises, there are two bonus rounds, which simply complicates the scoring for no good theoretical reason.)

The group coordination of 4B's almost never happens. Even if it was expected, then some expect others to cheat and play R, and so they would play R first to "protect" themselves against the cheaters they have become.

Self fulfilling prophecies are at the heart of many a bad decision in which we start to expect the other person to act in a way contrary to our wishes - "seeing" them this way makes it more likely that they see us as acting contrary to some of their wishes. And so it goes.

But not always, and that is a bit curious. Schelling had an insight into this problem. Not all of us, at the same time, have to see everyone else as a possible threat which unravels the group's coordination.

Is Schelling right? Here is what I will show. If he is, then by changing the (1R, 3B) payoff to Red player gets 3, Blue Players get 0, two things should happen.

First, more groups should have higher scores in the modified Win as Much as You Can Game.

Second, the subgroup of 3 Blue players that coordinates should experience discipline and resentment.

By coordinating, the 3B players can lift themselves out of the state of nature, in which they all receive -1, to 0, for a gain of 1, but the R free-rider gains 3. Note, Schelling is not saying that this subgroup has to form, only that if a subgroup does, it will be this one.

And if it stays together, discipline and resentment will run together. Discipline need to stick together and resentment against the free-rider, who plays R.

If you are a trainer, you can run both exercises, report back - all without having to do any of the calculations, which follow below.

Justification

But for the intellectually curious, we push on.

It seems unlikely that the group will play 4 B's together. Further, if one person should correctly forecast that the group was leaning to 4 B's, it would be in their interest to act as if they were going to play B, just in order to play R at the last possible moment. Much like a good poker player bluffing the table.

Only one can succeed at this strategy - and this success will invite mimics. Soon the coordinated strategy of 4 Bs will completely unravel.

The remainder of this article will provide reasons justifying why the small change in the original game should bring about some subgroup coordination.

1. Transforming the Win as Much as You Can Exercise into a Multi-Person Prisoner's Dilemma Game.

First, we will take some time to show that the Win as Much as You Can game is a special social dilemma, one Schelling called a "Multi-Person Prisoner's Dilemma."

A prisoner's dilemma is a social dilemma in which the unraveling is caused by enough people reasoning using a principle from decision theory: If no matter what everyone else does, I would be better off choosing R over B, I should always chose R.

There is much to be said for this rule. Some have elevated it to a canon of rationality. If others disagree with the rule, then when it is available, their decisions make those who follow the rule better off.

The well-known problem with the rule is that its use in a multi person prisoner's dilemma produces dismal results.

(A word is needed about the diagrams that follow. I usually make mistakes drawing them - especially when I "know" how they should turn out. To avoid making mistakes, I have created a checklist or algorithm, which helps me. For those more talented than I, this checklist will be too tedious. However, for you and I, I believe it to be helpful.)

The Payoff Algorithm

Step 1. Identify the choices and individual can make, R or B.

Step 2. Identify the outcome the group can arrive at, counting each outcome as distinct based upon whether the individual played R or B.

Only Step 2 needs an illustration. Consider the pattern 3R, 1B. This is two outcomes - if you played Red, the outcome is 1, while if you played Blue, the outcome is -3.

Step 3. Count the outcomes in a systemic manner and plot.

There are eight outcomes in this case and not 10 because 2 patterns 4R and 4B have only one outcome, while all the other patterns have two outcomes.

How should we label these eight outcomes?

One way is to pick a variable k, running from 0 to 3, where k is the number of other individuals playing B. The outcome O2k+1 is the outcome where you play B and k other individuals also play B. The outcome O2k+2 is the outcome where you play R and k other individuals play B.

The outcomes range from O1 to O8.

O1 is the outcome where k=0, nobody else plays B, but you do. The payoff to the B player if the pattern is (3B, 1R) is -3.

O2 is the outcome where k=0, nobody else play B, and neither do you. The pay off to the R player if the pattern is 4R is -1.

For, k=1, 2k+1 =3 and 2k+2=4.

O3 is the outcome in which one person plays B, and so do you. The payoff to the B player if the pattern is (2B, 2R) is -2.

O4 is the outcome in which one person plays B, and you don't. The payoff to the R player if the pattern is (1B,3R) is 1.

Let's summarize all of the outcomes.

Pay Off.png

We can now draw a diagram, with k on the X axis, and the Y axis reflecting the payoffs of B and R, given k people have chosen already to play B.

There are two easy things to read off the graph.

Thumbnail image for Win as Much as You Can 3.PNG

1. Red dominates Blue - for no k, or group of individuals, would be better to be part of the k group of B players. For each k, you are better off being a R.

2. But O2, 4R, is a bad place for everyone compared to O7, 4B.

For those wondering if this hasn't been a lot of work to recover some obvious points, there had better be a reward for making it this far.

The reward is O5, and the horizontal line we can draw from O2 - the state of nature. The horizontal line is the payoff in the state of nature, any outcome above that -short of complete group coordination- is a group whose discipline is both profitable, yet profitable to leave.

Thumbnail image for Win as Much as You Can 4.PNG

The outcome O5 or the pattern (3B, 1R) has a payoff of -1, but is tantalizing close to the optimum 4B, O7.

If 3 players to played B, how much harder would it be to get the last person on board?

In this case, it should be very hard. For the R player, the pattern in O5 is the outcome O8 - how can you persuade him or her to accept 1 instead of 3?

Thus, if three players can coordinate their actions by playing B, their payoff isn't greater than the state of nature, O2. Partial coordination doesn't pay and it doesn't make it more likely that full coordination is reached. Two players cannot do any better.

But, what does the diagram look like if we change O5? Let's just move it above the horizontal line and give the B players 0 instead of -1, at O5'.

Thumbnail image for Win as Much as You Can 5.PNG

Now, the coalition of 3B in this new game satisfies Schelling's criterion:

"The smallest disciplined group that though resentful of free-riders can be profitable for those who join (though more profitable for those who stay out)."

Is it true? Can this simple change in pay-offs actually make a difference or is this a theoretical possibility only? What do you think will happen if this training exercise is played with both games instead of just the standard game? We need to try it and see if Schelling's analysis bears fruit.

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Imagine this television commercial: a bunch of teenage kids in a house, eating junk food, playing video games with rap music blasting.

The narrator says: "Hey kids: tired of listening to your parents? Why not do whatever YOU want to do? Join the Army!"

Ludicrous, right? (Imagine the kids' surprise when their hair gets buzzed off, they're issued identical uniforms and that whole "reveille thing" is explained for the first time.) No one in their right mind would advertise so foolishly, would they?

That would be like recruiting a franchisee, one who must faithfully comply with a system of rigid rules and guidelines, with ads that say:

"Entrepreneurs Wanted!"

"Imagine the freedom! Imagine the opportunity!"

"Promote yourself to President!"

I call it the BYOB! (Be your own boss!) marketing myth. Warning signs include phrases like: "Own your own business!" "Be your own boss!" "Achieve financial freedom!" "Fire your boss!" "Take control of your life!" or similar variations.

Marketing the BYOB! myth is one of the most dangerous mistakes franchisors make. And it's the cause of much of the conflict in franchisor/franchisee relations.

Many franchisors attract prospects with the promise of freeing them from oppression and giving them the chance to gain control. There's only one problem: Franchise systems are built on adherence, not independence. Franchisors want implementers, not rebels. They often recruit individuals who are yearning to break free from their harness, but as soon as the contract is signed the franchisor expects them to docilely slip into their harness.

Requiring conformity, adherence to an established system and a shared identity is not necessarily a bad thing. That's what gives franchising its power. So why do franchisors work so hard to attract the wrong people and set the wrong expectations?

The mything link

Why, you may ask, do we sell the opportunity to join a conformist system via a dream of individualism? Why have we, as an industry, perpetuated the link between BYOB! and franchise ownership?

First, because it's an easy sell. It makes ad copy pop. The dream of being freed from day-to-day tyranny is a powerful one. Telling one's boss to take this job and shove it is the real American Dream. It's Easy Rider. It's Thelma & Louise. It's One Flew Over the Cuckoo's Nest. Unfortunately, it often delivers the same outcome.

Second, too few franchisors have actually given much thought to their franchise marketing message. They tend to just say what everyone else says: B.Y.O.B.! Many commission marketing research and branding platforms at the consumer level; more need to create a thoughtful strategy and platform for their franchise brand.

The third reason for the prevalence of the myth is the influence of commissioned franchise salespeople and brokers who are compensated for short term sales, not long-term franchisee performance or satisfaction. By the time the franchisees start storming the castle, the commissions are spent and the salespeople are long gone.

Another reason for this myth is that many founders are themselves entrepreneurs who are guided by what would motivate them. But the fact is that few founders could survive very long as franchisees of their own systems. Those who are looking primarily for implementers should not seek entrepreneurs. One franchisor per system is enough (and, according to some, one too many).

A "Never-ending Battle of Wills."

Army recruiters say Be all that you can be. They don't say "Be your own boss," or "Do what you want." They appeal to the individual's self-interest: Communicating what the prospect will gain by trading in their freedom for the benefit of being part of something greater than oneself, of being disciplined and following directions. In Army recruiting, there is a regard for the brand, the team, even the rules themselves and the benefits they provide.

Franchisors must realize that the importance of avoiding the BYOB! myth goes beyond effective recruitment and setting realistic expectations. Its importance goes directly to establishing and preserving the trust that is critical to their success. As Peter Birkeland states at the end of his book "Franchising Dreams," establishing high levels of trust with franchisees is the most critical problem for franchisors. "For those who cannot achieve that," states Birkeland, "The problem of control is a never-ending battle of wills."

Prospective franchisees must do their homework and understand the true nature of the relationship they are entering. There are no do-overs in franchising. Once they sign that big fat agreement they are giving up their autonomy, and are expected to be team players even when they disagree. If they don't want to end up posting on UnhappyFranchisee.com, they'd better make sure the system they are joining provides benefits that outweigh the costs, and is run by people they trust.

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Here we are going to have a conversation about franchisor-franchisee communications. Prior to a franchisee buying a franchise, the lines of communication are flowing and positive. High integrity franchisors encourage questions and address them thoughtfully and timely. Here we will not go into the questions to ask, as there are many great sources for you to determine what questions to ask to address the needs of your business and concept.

What we are concerned about is the frequency of broken lines of communication after the franchise is purchased.

Some franchisors mistake control for empowerment. There are many areas of operating and managing a franchisor where the franchisor must take a strong stand for compliance with their concept. Some "crack down" on variations of the slightest amount. At times they take too long to address requests of franchisees to vary or adapt the concept to local or entrepreneurial desires.

Yet all the franchisee is experiencing after the purchase of the franchise is a continuing interest in the franchise that stems from greater and greater depths of understanding their role. Inevitably there are some gaps between what was taught at training and realities in the field. The wise franchisor should be glad to address in a non-defensive way.

Regrettably some do not and this keeps them from realizing the ultimate positive expression or fulfillment of their otherwise original Franchise DNA (the conceptual essence and value of the franchise, cite earlier blog on subject of Franchise DNA).

Let's draw some analogies and metaphors to make it clear why it is so important to maintain open and positive lines of communication even with the seemingly most recalcitrant of franchisees. Here we will assume that the franchisee remains committed to the concept and has not engaged legal counsel for the purpose of rescinding the franchise.

Differences of opinion are inevitable. Often seen as a "problem" in reality dynamic tension or friction is a precondition to greatness, not necessarily a sign of a problem. Instead, differences of opinion or perspective should be embraced and seen as healthy and useful for the betterment of the chain.

Think of the Chicago Bulls' 6 world championships. Were they a bunch of happy campers all the time? Far from it. The stories told of the animosities, jealousies and battles in the locker-room at halftime would shock those unaware of their problems.

But they won 6 world championships through it all under the guidance and leadership of people like Phil Jackson and Michael Jordan and so many more. Even the voice of Dennis Rodman was heard and incorporated into the fabric of the team that to this day is one of the, perhaps the, greatest reigns of a team in all time.

Championships forged from dynamic tensions, venting, arguing and coming together again and again for the legendary "Six-Peat".

Why should a chain of multiple franchisees be any different than another manifestation of the American Family living the American Dream. Great franchisors realize this and build recognition of it into the communications networks of their chains, the better off they will be, and the wiser for it. Dynamic tension is to be embraced.

Look what good can come out of communications. Take for example the franchisee that invented the Egg McMuffin. There are so many stories to tell of break-throughs from the "field".

Even the nomenclature of franchised chains is misguided and creates unnecessary lines of separation. Why is the franchisor in the "Home Office"? Why is the franchisee in the "Field". Where is home? The home is the chain and if anyone is anywhere at all, they are all in the field. And if properly directed in the field, everyone serves a unique and beneficial role that makes the system stronger and better.

Some franchisors think their role is to establish "control". But when they do this by stifling communications they delude themselves into thinking that they are in control. By not communicating opening and listening more than talking, in fact they lose control. Oppression leads to revolutions. It is as true in world history as it is the history of franchising.

Think of teams as families. Do you suppose Michael Jordan valued Steve Kerr's opinions? You can count on it.

Diplomacy and dynamic tension should be embraced at all times. Embrace it by not even being a part of it sometimes. Let the franchisees talk. Encourage them. Let them meet on their own at Conventions and in social media. Let them speak as a group. Listen. Listen. Listen. Listen.

Embrace differences of opinion. Your chain will only be better for it, particularly when you incorporate great new ideas (invented in the field cultivated by franchisees) into your system.

Question the franchisor that does not have a have open communications, across lines, up and down. Great franchisors employ franchisee focus groups, surveys and weekly or monthly telephone conferences, and feedback/innovation systems. They gravitate toward them, seeing and wanting the benefits they bring to the health of the chain.

If they don't have this? It's a sure sign they are not listening and, as such, in this bloggers opinion, the system is not performing to its peak.

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A couple of years ago, there was this fun little commercial from Domino's Pizza, which features a new product called "Bread Bites."

From the commercial, we learn that Bread Bites were created by a Domino's Pizza franchisee in Findlay, Ohio (watch the commercial below).

Franchisee innovation is nothing new. Franchisors often find that some of the best-selling products are created by franchisees.

For example, some of the most popular sandwiches (including the Big Mac, Filet-o-Fish, and Egg McMuffin) at McDonald's were created by franchisees. Indeed, the Big Mac is one of the all-time innovation success stories, having been created by franchisee Jim Delligatti in the 1960s and finally adopted by McDonalds in 1968 (the sandwich quickly became one of the chain's best sellers, accounting for 19 percent of all sales).

These success stories encourage franchising companies to carefully consider permitting franchisees to create new or different products.

That having been said, franchisors have to balance the idea of product innovation with the need to maintain system uniformity and system standards. Allowing franchisees free reign to create and sell new items can create customer confusion (when they can't find a particular item they liked at all locations) and an erosion of goodwill.

This is particularly true where the new item isn't up to the franchise company's brand and quality standards.

As a result, franchisors will ensure that their contract clearly prohibits a franchise from selling new or different products unless they are first approved by the franchisor. That was true in the case of the Big Mac, where franchisee Delligatti's creation was subjected to a rigorous approval process by McDonald's that took several years of evaluation and consumer testing before the sandwich was finally added to the menu.

Equally as important to a franchise company is that the ownership of products created by franchisees is undisputed. Where a new item has the potential to be successful and attractive to consumers, the franchisor wants to be sure that the product can be offered at all locations.

As a result, a careful franchisor will ensure that its franchise agreement clearly addresses the handling of innovations with a provision that explicitly states that any franchisee creations or breakthroughs will be considered the exclusive property of the franchisor.

I like to call this type of franchise agreement provision a "Big Mac" provision, in honor of the granddaddy of all franchisee innovations.

A well-written "Big Mac" provision will also require the franchisee who created the new item to assist the franchisor in obtaining and enforcing intellectual property rights to any such innovation, or, if the rights can't be secured by the franchisor, then to grant the company a fully-paid up and irrevocable license to use the product.

By controlling the ownership of such intellectual property, a franchise company can ensure that any improvements -- be they Bread Bites or Big Macs -- can be rolled out across all of its locations, thereby creating uniformity systemwide.

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I have a confession - which will either positively or negatively impact my credibility. You decide. My confession is that within the first six months of operating our franchised business, we lost money. Sales were actually up a little, but profits were down (even below those of the previous franchise owner, as we had purchased a franchise already in operation). That frightened me...because the previous owner got out of the business due to not making the amount of money he had planned.

Now, part of the reason we lost money is that the minute we purchased the business everything started breaking - the freezer needed repair as did the ice machine, almost half of the blenders stopped working (within days of each other), and a number of other issues quickly surfaced. We had purchased a café that specializes in smoothies (as well as a variety of wraps, sandwiches and other healthy food items), so you can imagine how important ice and blenders are! It was obvious the previous owner had stopped putting money into maintenance and he got out just in the nick of time, leaving us to foot the repair bills.

Lesson #1, if you are buying an existing business, have the seller warranty critical items for a certain period of time.

Another reason our profits were lower was differences in payroll. Sixteen days before we bought the business, minimum wage increased by $0.60/hour (almost eight percent). For those of you operating a small retail business, you know how tight your margins are to begin with. Eight percent is sizable in an all-hourly workforce.

But that wasn't all...the previous owner had been scheduling himself in lieu of one or even two employees to save money, and he'd been doing that for at least nine months (which is why it was somewhat hidden in the financials during our due diligence process - which leads me to:

Lesson #2 - ask for the last three to six months of employee schedules and worked hours so you can determine how your payroll may differ than the previous owner.

He also refused to pay overtime and paid his employees only what he scheduled them, not what they actually worked. Illegal, I know, but that's what he did. So, he ended up being taken to the National Labor Relations Board by a Shift Leader he erroneously classified as an exempt salaried employee, and paying out more than $18,000 in back wages.

Lesson #3 - know the critical aspects of employment law well enough to keep yourself out of trouble - or have an advisor who does. (Thankfully, we already knew that lesson.)

As I was lamenting about our labor percentages to the franchisor, they told me something I needed to hear - "You don't have a labor cost problem, you have a revenue problem. You need more sales, and your labor will come in line." Now, I know what you're thinking - the franchisor makes money off your sales, not your profits.

But, even so, they were exactly right. We were scheduling correctly for the business volumes (and not scheduling ourselves, because we already knew that our time was more valuable spent building the business than the $8.25 an hour wage we would save if we worked the cash register or food line).

So, we dusted off the marketing plan we had created six months prior when we purchased the business and got to work.

Lesson #4 - the business plan and marketing plan your franchisor likely had you create should actually be used - it's not just an exercise required to get approved as a franchisee.

We parlayed our modest increase in sales during the first six months to more than 8% in our second six months, and it's grown substantially from there. During the second year of operations we were up 21% in sales and another 5% up in operating margins.) How? Here are some of our high-level strategies.

  • Divide and conquer - Kriss spent countless hours in the café ensuring first and foremost that the service levels our employees provided to each and every customer was unparalleled. If we were going to spend money marketing to increase sales, we needed to make sure we would retain every customer we brought in.
  • Secondly, he learned how to maintain and service our equipment himself. It's amazing what you can find on the internet - or what your service providers will share with you. We knew that once our profitability was in line we could consider using outside vendors again if we wanted to.
  • (Note: if you have any equipment under warranty, be sure to know what you can do and cannot do personally before you work on the equipment. Also know if there are any preventative maintenance requirements to keep the warranty valid. The last thing you want to do is void a warranty. Also know what your warranties cover - your repair or maintenance may actually be included.)

I spent enough time in the café to get to know the employees, but the majority of my time was spent executing the marketing plan and handling the back-of-house functions (accounting and administrative work). If you are a solo-preneur, I highly encourage you to train your best employee to do some of this work. You probably have at least one person who wants to learn and grow and has potential to do more than they are doing (and if you don't, hire someone like that). Teach them to do the paperwork/data entry, and/or use your most outgoing employee to help execute the marketing plan. If you try to do everything yourself, or feel that you are the only one who can do it right, you will limit your success and approach "burnout" quickly.

  • Don't recreate the wheel - We scoured all of the resources our franchisor had to offer relating to marketing information and ideas. I am constantly amazed at how few franchisees use the resources available to them.
  • The fees you pay your franchisor are not just for the benefit of using the brand name - almost all franchisors have libraries of marketing materials for your use, and frankly they have a vested interest in your success and benefit from your increase in sales.
  • If you can't find what you need, call your Area Developer or Franchisor and ask for help. That's what they are there for - but don't expect them to do it for you; they are a resource, you are the business owner.

We are also fortunate that we have access to an online Franchisee Forum where any of the brand's franchisees can post questions or suggestions, and others (or representatives of the Franchisor) can comment on them. We've found some of our best ideas from other franchisees.

If you don't have such a forum, pick up the phone or personally go visit other franchisees - especially franchisees who are successful. They are generally very willing to help others because it benefits the brand. Do NOT spend a lot of time with negative franchisees.

They aren't going to help you achieve success, and remember the adage that you are the average of the five people you surround yourself with the most. Surround yourself with the best, most positive, most successful people you can.

  • Love your employees - or find new employees you can love. Your employees represent yourself and your brand to your customers. Are they doing it well? Are they doing it in a way that creates loyal customers who advocate your business to others?
  • Frankly, are you creating an environment that enables your employees to do that? How you treat your employees will almost always be reflected back on how your employees treat your customers. Want your customers to love you? Then love your employees. You often don't need new employees to do that, by the way. People are generally starved for recognition and praise. If you find things to praise your employees about, they will almost always do more to get that praise again.
  • And when you have to correct employees, do it in a way that's respectful and they will respect your feedback. We employ a lot of teenagers in our café. Think about their lives - they often have two working parents, they are digitally connected to almost everything and everyone, and they have instant access to almost everything they want to know via the internet. Their face-to-face interactions are primarily with teachers giving them direction or their parents - yet, research shows that parents today spend an average of 19 minutes a day actually conversing with their teens. That means their interactions with you have an opportunity to be the most significant in terms of the amount of adult communication they have - make that time count, and make it positive. It will make a difference in your business and on them personally.
  • Take care of yourself - If you want to have a successful business, you are going to work hard. And, there is no real substitute for you in your business. As most any franchisor will tell you, owner-run businesses are the most successful. (That doesn't mean you can't have a successful manager-run business - but no one will care about your business and your results more than you.)
  • That said, you need time away from your business, and you need to have people you trust on your team who can handle things while you're away. I have to schedule an out-of-town trip to get Kriss out of the café. Have someone who will hold you accountable for taking care of yourself.
  • And honestly, the employees need time away from Kriss as much as he needs time away from the business. Why? So they can prove they have the ability to do the right thing even when he's not there - and they feel empowered when he shows that he has that trust in them.
  • Also, if he doesn't take time away, he gets burned out and it shows. You may not think your own burn out is apparent to the people you work with, but trust me - your employees either see or at least sense it. And it impacts how the business operates and the service your customers receive. So, for the sake of your business, your employees, your customers, and your sanity, take time off. Book a trip and prepay it to force yourself if you have to.

All in all, losing money was the best thing that could have happened in our business. It was a great motivator to do things differently - actually, to do things right. In future blog posts we will expand even more on what those "right" things are.

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A couple of years ago, I was asked by Fortune 500 company about my ideas on "adult learning" and how to teach negotiation to their sales teams.

And the franchise complex sale is a negotiation, especially when the legal product -the franchise agreement- is not readily negotiable.

This was a very serious question, and it was an exciting opportunity for me to make a real difference to the organization -if the setup was right.

Organizations come down with enthusiams, which lack weight and the project leader is moved on to something new and shiny.

Sadly, for both of us, the main pre-requisite for continuous learning of negotiation in a sales environment was not in place.

When I learned of this, my visible enthusiasm for the project waned - perhaps at a later date, I thought.

What was this company missing?

It is useful to recall what Peter Drucker said about continuous learning in a corporation.

Feed back from the results of a decision compared against the expectations when it was made makes the even the moderately endowed executives into competent decisions makers.

So, how do we get continuous learning in sales or negotiation? (Without continuous learning, "training", "CRM software", and "best practices"are just words.)

One way to improve the organization's negotiation capacity - to turn a "moderately endowed sales team into a competent & professional negotiating force"- is to insist on a standard of recording expected versus actual results.

Every sales professional and some negotiators are familiar with the idea of a sales as a process, a sales funnel, which moves the prospective buyer from interest, to engagement, and through the sales door and off to customer service.

A sales funnel consists of discrete steps or stages. At any stage, a modern CRM should be able to predict based upon recorded historical results the chances that this buyer at this stage will result in a sale, and when that sale will likely occur. It is just a numbers game - with the right funnel.

The map of expected to actual is called "efficient" when it is roughly equal to line x=y; if we predict rain 14% of the time and 14 times out of 100 it rains, our prediction is efficient.

Most of our forecasts and processes remain stubbornly and wildly inefficient for the want of recording our intitial expectations and matching them up with the actual results.

Consider the salutory effect of your entire sales team recording, comparing, and then modifying your firm's CRM to make it more efficient, in the sense just described.

Even the most moderately endowed sales team could be turned into a a competent & professional negotiation force within several years. (If you only had a standard CRM, a negotiating brain.)

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The Vanishing Competent Franchisor

Franchise investors find, often too late, that the unique systems and concepts in which they have invested are neither unique nor have even competent execution by the franchisor.

The reasons for this are several. Some of them are the natural vicissitudes of living in any competitive marketplace over time, but others are fault ridden. Which is which? What are the identifiers? How early can they be spotted and what can be done to avoid or thwart them?

So far the courts have not seemed hospitable to the notion of going beyond the explicit wording of carefully drafted agreements entered into by seemingly sentient adults. From a macroeconomic perspective this is exactly what courts should be doing, as enforceable agreements are indispensable capital that underlie the value of enterprises.

But are the franchisees caught in an ever tightening noose of business contraction so constrained by contract language that the only diagnosis is: suffer a financially excruciating death? Should bankruptcy be the only resort/cure to being in contract with people who rely on legal enforceability?

How far can franchisees go without violating fundamental contract rights and thereby effectively changing franchisor inability into franchisee liability? Where is the line between act or die on the one hand and legal suicide on the other?

The Legal Framework

In today's franchise agreement one finds that the mission statement is not a term of the agreement. None of the hortatory rhetoric of the sales pitch/marketing materials is ever to be found anywhere in the actual contract language.

There is a bright line between all the positive reasons for investment and the machinery by which the investment, once made, is to be managed, performed and observed.

Investors seem not to notice that what convinced them to invest in the first place is nowhere to be found in the agreement itself. Franchise investors are in the main due diligence illiterate.

The agreement always provides that the goodwill of the business and the brands are all the sole and exclusive property of the franchisor and that the franchisor may change its configuration at any time, for any reason and without having to field test and performance prove any change before compliance with it is demanded of the franchisees.

The franchisees covenant to execute the business model as directed by the franchisor in the manual and otherwise, including participation in all programs mandated by the franchisor on the terms stated, all as may vary from time to time, and to guaranty the payment of royalties out to the end of the contract term regardless of termination or other reason for failure.

All fault for nonperformance is placed upon the franchisees while all decision making prerogatives belong exclusively to the franchisor.

Many attempts to modify the absolutist right versus wrong, franchisee versus franchisor abrasive interface have been tried and they have all come to naught.

Most of them have been in the guise of an imaginary unwritten covenant of good faith and fair dealing and more recently in the form of a so called franchisee bill of rights that exists neither in statute, ordinance or other document having any legal force whatsoever.

Finding Operational Salvation

Where does that leave the franchisees who see themselves caught in abandonment of the brand by the franchisor and in the inability of the franchisor to respond effectively to changes in market conditions?

Litigation/confrontation seems not to provide a remedy. Self help so often leads to litigation/confrontation.

And yet no one can live at sword points.

The only present tense answer to this problem lies in effective but insistent relationship management that is initiated by the franchisees acting mostly in concert with organization and a high level of competence that seems at such moments to be available only from the franchisees themselves.

How does that work?

Up to now it doesn't work at all/yet. Commitment at any effective level seems not to be an ability of groups of franchisees. As their collective minds now work, they feel entitled to competence/protection as a matter of "right" (whatever that is) and because of that they are simply waiting for someone to provide it.

Since no "right" on earth is self executing, no matter what they taught you in political science class, attitudes of entitlement produce nothing useful. Why can't franchisees seem to recognize that obvious fact?

They didn't get what they bargained for - in their minds - and want "justice". Inasmuch as what they signed on to did not provide for what they thought they were getting, they, as adults, in law are getting what they bargained for. The correct analysis is that they failed to recognize that the agreements they signed never said that they get what the sales pitch/marketing materials said they were getting.

They are not a "family".

They are in business by themselves.

They are not their own boss.

Nor, have they invested in any commercial vehicle that has prospects for a successful future -without a lot of work being done.

The courts enforce what they signed, not what they later wish they had signed.

Where does that leave them? It leaves them with only self help and self help is fraught with liability risk. The choice in a franchise system that is draining away their resources is between slow financial death and taking the risk associated with a turnaround through self help. How in hell does one accomplish that?

The Road To Glory

The road to glory is paved with personalities. There are definable personalities who are running your franchisor company. Their characteristics are known, unfortunately not any more deeply that epithetically. The things that need to be fixed spring from what is happening in the market place and the fact that their abilities to guide the company through the happenings without hurting franchisee financial performance are inadequate.

A method of approach has to be configured. It is not realistic to expect collaboration from people if your opening gambit is to itemize in loudly proclaimed expressions all their perceived shortcomings.

There is, after all, a bit of sonofabitch in each of us. We aren't perfect either. At least tacit recognition needs to be given to the fact that a close evaluation of our own constituency would uncover some warts too.

I am good and you are awful will not yield a desired response or open that door through which you must walk. This is reality.

I have sat in too many franchisee association meetings listening to epithets hurled at franchisor managers by people who were chronically late with many obligations, to put it mildly - and the principal reason for not doing what was agreed to was always self serving opportunism.

In some instances the franchisor was aware of the defaults but tolerating them for later use as bargaining chips - something that every franchise agreement specifically allows the franchisor to do but not the franchisee.

When the pain in the ass franchisee wants consent to open additional stores there will always be this stuff in his file to justify a refusal of consent. The same goes for anything else a franchisee might want to do that requires franchisor consent. The uses of those seemingly small peccadillos are many and delicious, which I have elaborated elsewhere.

While the personality profile of the people we must deal with is configured, and we have devised a few plans for how best to make the approaches we want to make, a goals agenda should be made and ranked in order of priorities. There are several, time being one and cost efficient feasibility being another. Rank the goals. Some goals will be interrelated so that they may be presented and achieved as a package, while others may need spacing.

Goals and projects need responsible people to take charge of their execution. Within your group there will probably be more than one person with a special interest in particular goals as well as the skill sets necessary to accomplish them. Identify them and privately vet their suitability and willingness to put forth the effort in a timely manner.

Each goal must have its own business plan. The plan must be cross examined viciously before it is presented, because that is exactly what management is going to do. If you cannot defend your thesis you have just wasted a lot of time and your credibility. Debug the plan to the greatest extent possible. There is an inside track for the plan. Find the management person who controls the track and win his/her support.

Until you have actually proved your ability to create and execute brand enhancing new concepts it is a hard sell. Once you have made your bones life will become easier unless you get cocky or careless.

You save up reputational wampum just like you save money. Don't spend your credibility before you make your bones on the next projects. Winners know how to share credit and shut the hell up about how great they think they are.

The road to franchisee primary participation in brand enhancement is not easy at first.

There will always be detours. It has to be managed and counseled by people who understand the process. Find such people and bring them on board to help guide you.

Theirs will be the job to ask the tough questions that members of your group will not want to ask for reasons of political correctness.

They pull their weight.

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Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop.

Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits.

A very long time ago (about 15 years) I wrote about why new franchisors fail.

During that 15 year period we lawyers have "improved" upon the legal infrastructure of the franchisor quite substantially.

As you may know, the franchise legal infrastructure, a/k/a franchise agreements and FDDs, have moved significantly along the road to elimination of all legal risks for franchisors, except maybe for the more hard core thugs.

If you are not and do not intend to become a hard core thug, you might just want to read all of this.

There is still a lot of room for sound concepts to be developed into investment worthy business replication models. And the fact that in doing that your legal infrastructure has morphed into much better protection should be a positive influence for you.

After all, isn't risk reduction what this is all about after you demonstrate to yourself that you have a profitable model and that you can translate that into a profitable business for others even after loading onto it the costs of being in a franchise relationship?

The Current Franchise Landscape

Even in the old days there were dodgy franchisors:

  • They sold tons of franchises and opened very few.
  • They made profit representations that were total fiction and impossible to achieve.
  • They said things about where the business was positioned and about the quality of the support they provided that were outright falsehoods.

In the 1960s some states began enacting franchise disclosure and relationship laws modeled somewhat upon the laws regulating securities selling.

But there were also a lot of really good, serious opportunity franchisors, and a reasonably careful person with some professional help could buy into such things as KFC, McDonalds, Little Caesars Pizza, Pizza Hut, Wendy's and Burger King, among others.

Today there are many more dodgy deals being put out for investment to less able investors.

The techniques for getting around the law one way or another have become more sophisticated. Analysis of potential franchise investments is more complicated. Most lawyers shrink from giving any business advice or analysis for fear of professional liability lawsuits. Asked about an opinion whether a particular franchise is a good investment, the lawyers say that it might be if they are telling you the truth, and stop there - utterly useless.

Franchise blog sites abound on the Internet, chock a block with broke and whining franchisees on their way to bankruptcy and unable to afford legal representation. Class action lawsuits against tough franchisors take years and are rarely certified by the courts. When they are, they drone on for a few years and settle out for paying the lawyers, with the franchisee class members getting little or nothing.

Where Does That Leave You?

If you really have long term intentions regarding the health and survivability of your franchisees, it helps to build a dynamic financial model of what the business is that your franchisees have to live in.

(None of the bozos do this. They don't really care anyway. All they want is as much fast revenue as they can squeeze out of the system)

For the serious long term franchisor, departure from the IFA norm can really help you measure the health of your system.

But you have to make the franchisees send in the tax returns their agreements require anyway, and from those, you can build the dynamic financial model, making the adjustments to derive an approximate EBITDA. It is not the impossible project that the IFA says it is. 

The reason it isn't thought to be a smart move is that then you would eventually find out which franchise system in any business segment is the most profitable, and once that got out no one would ever buy any of the others in that segment. Nobody wants to be known as tail end Charlie on producing positive cash flow.

The IFA also fears that such activity will one day lead to compulsory financial performance disclosure, which is a distinct possibility only if the IFA lobbying arm, Franpac, runs out of money.

So it is a bit of a dilemma. You really cannot count on the information not getting out. On the other hand, since the franchisees will soon be doing this for themselves, there is little justification for you to deprive yourself of the information. Dynamic financial modeling will enable you to see what the traffic can bear and continue to have positive, meaningful yield potential for your franchisees.

If your franchisees start a lawsuit or arbitration proceeding using dynamic financial modeling to show that you are tearing the financial heart out of the business they invested in, you would have to build your own model to dispute theirs, and yours might have to be rather contrived and convoluted in its attempt to show that theirs is not reliable.

Econometric modeling of markets has been used for decades in antitrust litigation, to positive effect. The government lost its first merger case under Section 7 of the Clayton Act because the target defendant used competent econometric modeling. The same thing soon after that happened when the FTC lost the breakfast cereal oligopoly case. I know because I brought econometric modeling into both those cases.

Financial Models for Franchise Systems

Financial modelling of franchise systems is not more complicated than that.

The universal solvent would be a cooperative project that produces a really high value dynamic financial model. That, as we say in Texas, ain't gonna happen.

Franchisors that operate numerous company stores, if they are going to consider this, should have a separate financial model for the company stores. While it may lack positive sales information potential, the ability to compare company owned versus franchisee owned financial results probably would yield marketing information. It would show what we have always believed to be true, that absent artificially imposed barriers to positive cash flow, franchisees really do better than the company does in producing cash flow.

But the really important value of dynamic financial modeling would be that it would tell you when you are approaching marginalization of the franchisees through add on extraneous periodic charges. If you went just one step further, you would also know your franchisees' debt structure profile and would be able to determine what they can afford in terms of remodeling the stores and even to prearrange the financing of large projects before you impose them.

Lenders pay commissions to those who bring them large deals like that.

In this interim before everyone is doing it, you can designate all information regarding financial modeling to be a highly secret body of information and treat it as such. If you designate it secret but everyone in the company has access to it, you are just kidding yourself. If more than five people have access to it you can forget confidentiality. The grunts who churn the basic data can be controlled if you don't fire them every now and again.

Attitude Issues

No franchisor is ever going to be loved by her franchisees. That is axiomatic. Within a year or two of becoming anyone's franchisee, the attitude becomes one of disbelief that there is anything special or unusual in being your franchisee.

They believe your support sucks and that they are getting little or no value from being affiliated with you. How virulent this attitude is will be the only variable. If you don't have a competent information management protocol in place your franchisees will rob you blind. There are just as many cheating franchisees as there ever were dodgy franchisors.

Back in the days when franchisees filled out monthly paper sales reports, the audit of their actual performance was their biggest fear. Of the literally hundreds of depositions I took in cases having to do with under reporting terminations, not one franchisee was ever under reporting unintentionally.

Some of the stories of whining franchisees and what they were charging to the business would make your eyes roll back. One franchisee in Florida was writing off a twin engine airplane against the revenue of a print shop with a three mile territory. His lawyer went ape when that part of the examination happened. Lawyers rarely make the effort to understand the finances of their clients before the horse leaves the barn, and clients never tell you where the bad stuff is hidden. If you don't find it yourself, you can usually bet that your opponent will.

Since you will never be loved in franchising, your contentment will come in providing a working positive cash flow franchise model from which you will become wealthy. If you need more than that, well, be prepared for large legal bills.

The Ultimate Franchise Solution

The ultimate franchise solution for anyone wanting to begin or expand a franchise system is to provide a concept that you have field tested and proven to be revenue credible in a franchise mode, and then to continue to measure its financial performance through dynamic modeling. To be sure, you will also have to improve its appeal to its customer base, but that is what you tell your franchisee prospects that you do best. It helps is that is true.

(I am publishing another article about the risks of becoming a franchisee. If you read that you might be offended. Franchisees who see that I drive both sides of the franchise road often criticize me for that, and some franchisors wouldn't touch me with a stick because I represent franchisees too from time to time. I never worry about that, but be aware that I see this business from both sides all the time, every year, year after year. My feelings about franchising are really love - hate, but that is because I wish I could make it better and that people could more safely invest in franchise opportunities.)

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

No one doubts that the interest of the individual is not the same interest of the group the individual is part of. Stars on teams, athletic or management, have special troubles aligning their interest with the team's goal. Even more so, when their team is unlikely to succeed at achieving the team goal.

The star may, despite being nominated as the leader, put his own goals ahead of the team's goal -bringing about a poor team performance.

Seeing how "lousy" the team is, the leader may be even more emboldened to put his interests ahead of the teams because team performance is so lousy.

Soon, team performance completely unravels.

Can you tell in advance which leader will fail to be effective?

Fail not because they are not talented, but fail because his followers don't believe that the leader believes that he can effectively discipline the "lousy" group to act as a unit?

Training Exercise

Here is a short exercise to determine how effective a leader is when confronting this problem - how to form coalitions when trust is needed to overcome skepticism.

This is a simple Simon Says task. The team and individuals gets points for following you. You win by getting the most points. But people also get more points if they accurately predict that the small group will not form a coalition, and ignore you. (This exercise is based on an exercise by Gerald Williams, the "Win as Much as You Can Game." Thomas Schelling analyzed a similar problem with his multi-person social dilemma games.)

The task is easy to describe. You have to get people, 3 on your team, to follow your commands, but your interests are not completely aligned with your team's interests.

You can utter one of two commands, "Left" or "Right". If you say "Left", the team wins if they all follow and say "Left". The entire team, including the Leader, wins one point. But, if you say "Left" and some other people say "Right", then you are penalized, along with your followers who also said "Left".

If you say "Right", however, only those who say "Right" win and those who say "Left" lose. But there is a catch: this time, if the entire team says "Right", then they all lose, including you.

To allow for learning, cooperation, and communication, play ten rounds of the game. Have a 5 minute discussion at round 3, 6, and 9. Otherwise, play in without overt communication. Limit the time in each of these rounds to 30 seconds.

The individual with the highest highest score wins the game, whether the team leader has the highest score doesn't matter.

Payoffs for the Game

Here is a chart which summarizes the exercise in terms of outcomes and pay-offs.

Are You an Effective Team Leader?

Outcomes Payoffs
4 Rights Everyone -1
3 Rights 1 Left Rights +1 Left -3
2 Rights 2 Lefts Rights +2 Lefts -2
1 Right 3 Lefts Right +3 Lefts -1
4 Lefts Everyone +1

(As an exercise, play a couple hands, using ordinary playing cards to get feel for what happens. Pick 4 red cards, for "Right", and 4 black cards for "Left".)

The game starts off with everyone making a guess about what you and the others will do.

How can you be an effective team leader in this simple game? You want a high or the highest score - but how can you achieve this?

A good and effective leader will get everyone to say "Left", even though some people will be better off by saying "Right". Can you hold your group together? Or will some just pretend to follow?

Achieving Disicpline

How would you turn this group of individuals into a disciplined group that would play only four Lefts?

Suppose that you started out by saying "Left" yet not everyone guessed this. How would you persuade those in the Right to give up their gains? How could they credibly commit to giving up future gains on future plays? How could they do this before the communication round?

What if you started with saying "Right" and found out that one other person guessed "Right" and two others guessed wrong. You would get 2, the other Right person would get 2, while each of the players who guessed "Left" would lose 2.

What would you expect on Round 2? Likely, those who lost would switch their strategy. It is reasonable that everyone would now play "Right" and each team member would lose 1.

It is reasonable, but if as team leader you could coordinate everyone on 4 Lefts, then each person would win 1. Can you do that? Can you do that after winning 2 from each Left on the first round? Can you do it without communicating with them, until the third round?

Now, let's make it harder - reward the team leader with an big bonus at the selected times, rounds, 3, 6, and 9, if he or she can get the group to say "Left" while he or she alone says "Right". Increase the size of that bonus - to reflect the "talent" of the team leader on the bonus round.

Will the group stay disciplined, or will it grow resentful? Will your followers expect you to eventually say "Right" and so "protect" themselves by guessing "Right" before you do? If everyone says "Right" on one round, who is going to say "Left" on the next round?

Try this exercise at your next franchise convention - see who can and who cannot effectively discipline the group. You might be surprised with the results. It would be very telling if none of the franchisor's C-Suite were effective leaders in this simple discipline game.

If your franchisor executives cannot lead in this simple game, then how are they doing in the real world?

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This article is about how to create a modern franchise owner's group.  An owner's group that benefits the brand, maintains and enhances franchise owner's equity & is not born after a bitter legal struggle.

A modern franchise owner's group 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.

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 franchise owner's group 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. Relability 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 franchise owner's group - it can create the benefit as a condition of membership. More accurately, the  modern franchise owner's group 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 franchise owners of having an neutral, trusted third party to do the invoicing, remittance, and customer service.

The communication, education and advocacy by the  modern franchise owner's group 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  modern franchise owner's group 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.)

Franchise owners using this reputational device get more cleaning jobs, while others would flounder. It becomes in the franchise owners 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 owners to join, bringing about increased funding.

(This mechanism is similar to how many QSR independent franchisee trade 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  modern franchise owner's group 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.

In 2012, I led a Independent Franchisee Association Roundtable Discussion at the IFA Legal Symposium in Washington D.C. Below is a summary of the discussion.

Predominantly we had franchisor attorneys at our table, although in the first session I was not the only attorney who primarily represents franchisees or dealers.

1. Recent FTC Rule

The table members did not see much effect from the recent amendment to the FTC Rule in the way that franchisors deal with their associations.

This would be disappointing for franchisee advocates to hear, as there was hope that the amended rule might create more market pressure in favor of the associations.

2. Decision Making by Association

Overall the franchisor attorneys at our table, and Mr. Saukas, a franchisor, displayed what I personally found to be a surprising level of resistance to the idea that franchisees, through their independent association, should play any role in the franchisor's decision-making process with respect to the brand.

This view was forcibly stated by several participants and none of the franchisor attorneys in attendance seemed to dissent.

The sentiment seemed to be that independent associations have no business seeking to invade the franchisor's decision-making province. Franchisee arguments to the contrary did not seem to persuade this crowd.

3. Why an Association instead of an Advisory Council?

 The franchisor attorneys also questioned why the franchisees would need an independent association in systems where there is a franchisor-sponsored advisory council. Obviously, it was recognized that franchisees may tend to regard a FAC as a rubberstamp, which is often the impetus for forming an independent association.

But again there was not much sympathy expressed for this position.

4. Incentives offered by an Association

One incentive offered to encourage franchisor acceptance of associations was the notion that, on any given issue if the franchisor can persuade the association of the merits of its position, the fact that the association approved the franchisor's decision could be evidence of the franchisor's good faith, which could be useful to the franchisor in the event of any challenge by any other dissenting franchisees.

This has worked in systems in which I have represented the association. But there did not seem to be much enthusiasm at our table for this carrot.

5. When to Recognize an Association

The question of what constitutes recognition of the association was also discussed. There is no formal process for this, unless of course in a given system the franchisor and the association enter into a contract. Experience teaches that this usually happens after a lawsuit.

The question of when the association represents a sufficient number of franchisees to have standing was discussed. There is no clear bright line. 

Financial modeling is not new to business planning. It is attempted in one form or another, crude and sophisticated.

The pro forma in every franchise investor's business plan is an example of crude, incompetent financial modeling.

Many Item 19 FDD presentations are incompetent or deliberately misleading attempts at financial modeling. In decisions to franchise businesses, pie in the sky financial modeling is the delusional mind expansion medium that caused many doomed franchise attempts to be initiated. In this article we will discuss them all.

Anyone who has ever contemplated turning their established successful business into a franchise operation has gone from the anecdotal "This would make a great franchise" suggestion from friends and customers, to contact with a franchise consultant whose sales pitch enthuses the mark with suggestions of revenue streams capable of slaking the greatest thirsts.

A hundred sold franchises at $ 25,000 initial fees provides $ 2.5 million - never mentioning that most new franchises never attain that number ever.

A hundred franchised stores generating $ 500,000 a year in gross sales represents at 6% of sales $ 3 million a year in royalty revenue and, at 2% of sales, another $ 1 million a year in advertising revenue that can be used for all sorts of yummy venture functions.

Four and a half million a year plus initial fee income makes many otherwise rational people delusional.

But, reality may be seen in my article Why New Franchisors Fail The new franchisor field is strewn with the wreckage of misled business owners who were successful at what they did and lost everything in the world to unscrupulous franchise consultants.

In my opinion, in addition to all the failure causes dealt with in that article, there is the matter of failing to model with financial competence the business that the franchisee will be operating.

If there is no competent success financial model for the franchisee's business, you cannot arrive at a decision that your business is franchisable.

More importantly, franchise investors have no ability without focused specialist assistance to sort out the incompetent and misleading information presented. Consequently, the field is also strewn with the financial corpses of duped franchisees who thought they understood what was set before them. 

Constructing a competent franchisee's business model is an exercise in multivariate regression analysis. That isn't as complex as that fancy name suggests, but it must be honestly done if a reasonable financial model is to result.

(Using wishful thinking financial modeling causes incompetent financial planning in the franchisor model and in the information that will end up in your Item 19 Earnings Claim calculated to enthuse franchisee investors to buy into your system.

Then only litigators will make money on your franchise and you will spend years in misery funding nightmare dispute resolution instead of sipping good single malt on the fan deck of your yacht.  Examples of this are Cuppy's and Java Joe coffee; 1-2-3 Fit; Curves; Dagwood Sandwiches; and many others that are on the brink of collapse but not quite yet in the tank.)

Boiled down to a very simple statement, financial modeling is an exercise in which you establish a chart of accounts that your franchisee's business will use and then populate the chart with the numbers/ranges of numbers that you can identify as reliable.

That will leave a number of line items that you have no current reliable data to corroborate, where you have to provide an estimate for each category.

How you do that is to repeatedly, ad nauseam, ask "What if..." questions until you believe you have probably exhausted the range of expectable events that could influence the number than goes into each line.

Actually, you also do "What if..." analysis on the lines where you are fairly certain you already know the appropriate number, discounting for learning curve impact and discounting further to arrive at an imputed value for unidentifiable risk. What's that, you ask.

Unidentified risk includes such things as the extent to which others may not be as adept as you are in the operation of your kind of business; or that it may take quite a while for them to get the hang of it while you fine tune your franchisee training program; or the vicissitudes of any geographic market (or the market as a whole) for your products or services; or "gambler's ruin" - poor estimating of the time required to achieve break even/positive cash flow (which may not result in "free" cash); and several more such categories.

Asked simply, the question you would be trying to answer is "Can a franchisee, using my business format, have a reasonable potential to achieve a good return on his investment if he operates my type of business competently in another geographic area and had to carry, in addition to all other expenses, the costs required in order for him to be a franchisee?" These costs include more than simply the initial fee, the royalties and the advertising fund contributions.

For example, if you believe you will confine your franchisees' purchase of supplies/inventory to vendors designated by you, and that those vendors will be paying you for your approval to be vendors to your franchisees, the franchisees will incur an opportunity cost of not having access to competitively priced vendors and the cost of their having to pay you for the privilege of being designated vendors.

Inasmuch as there will be opportunities for you to impose other expense categories from which you will intend to derive extraneous revenue, these will also be franchise relationship carrying costs.

The "What if..." analysis is a lengthy exercise if you intend to come up with a reasonable financial model of what your franchisee will encounter.

For more of Richard Solomon's articles, please click here.

What makes a person think about taking his or her present business and franchising it, becoming a franchisor? It isn't just the fact that they have heard of Ray Kroc and what he did with Mc Donalds or the miraculous story of Wendy's having come into what everyone thought was an already overcrowded hamburger franchise universe, having to practically give away their first few franchises, and then eventually becoming another superstar franchise organization.

Of course, every franchise salesperson claims that his or her franchise offering is going to be the McDonald's of the widget industry, as McDonald's has become the quintessential term for ultimate franchising success.

No. It takes more than that. We think the typical potential franchisor has a profile that goes beyond mere anecdotal celebrity references to the rich and famous.

An irreducible minimum requirement, before anyone is eligible to even think franchising, is a business operator who had at least several years successful experience operating the 'model'. The 'Model' is not the franchise company. The model is the business that the franchisees will operate if the concept is sound. Throughout this article you must constantly distinguish between the model, the business to be franchised, and the franchising company. They are completely different kinds of businesses. The failure to constantly keep this distinction in mind is one of the leading causes of early franchisor failures.

In all likelihood, a reasonably franchisable concept will be operated by its owner in multiple locations, all running successfully. This evidences that the concept is replicable and that it can be run by managers who can be trained. If the owner has to be everywhere all the time to keep the multiple units afloat, that is a strong sign of replication difficulty.

Either the system is too complicated to teach to a lot of people, or it is idiosyncratic, the extension of the owner's unique personality, unlikely to be successfully replicated with others at the helms of the various units.

In such a scenario, it is to be expected that customers have helped plant the seed of franchisability in the owner's mind. People come in, have the customer experience for that business, and exclaim their pleasure, their having been impressed with the idea and the manner of its execution, and their belief that it would be very nice to have such a business in their home town. 'Have you ever thought of franchising this?' will have been asked many times.

Eventually, the owner's thought processes turn into the franchise thinking neighborhood, and he starts talking to people who are in franchising, no matter at what level they may happen to live.

The model owner starts hearing money talk - initial fees of $30,000, royalties of 6% - 8% of gross sales, an advertising fund swollen with franchisee contributions of another 2% of gross sales, area development agreements through which entire states are sold off with large initial fees and a contractual requirement to build out and open a substantial number of stores within a very short time.

The model owner goes to the library and reads up on success stories of multi-millionaires who made it big from franchising.

There are no stories of franchisor failures - wrong spin control. In the world of franchise literature, everything is wonderful all the time, prospects are always bright, franchisor organizations constantly bestow awards upon their membership at conventions held in exotic places.

Soon, the model owner is slavering over a virtual feast of franchising good fortune and is ready to write checks to get the structure established, to get to the first sale. The entire focus becomes sales fixed, there is a great hurry to get to that first closing, and carts get put in front of horses.

The franchise sale is the last step in establishing a potentially successful franchise system, not the first. To be sure, even after the sale there are details like franchisee training, site selection and store opening assistance, but even these post sale responsibilities have to be prepared and tested well before the first sale closes.

Where does one start, then, in deciding to franchise. One starts with trying to find the answers to the feasibility issue.

Albeit I have a very good business that I have operated successfully in several locations for several years, how can I find out whether this concept, configured as I have configured my own businesses, has very good potential as a vehicle for franchising? If more people began here, at the real beginning, fewer franchisors would be in failure and fewer franchisees would have wasted their investments in an incompetently evaluated franchise opportunity.

Unfortunately, so many new franchisors start with lawyers drawing up contracts and disclosure documents, a fantasy trip with zero value and enormous potential for harm.

What the lawyers have never learned is that the legal work has to match the business concept, not vice versa.

The legal work is done last. Then it can, if done by attorneys who understand the franchising business as well as simply being able to draft contracts, become a charter that has rational positive value to the franchise relationship rather than merely being some set of rules cut and pasted out of somebody else's franchise documents, that most surely won't fit the situation to which it is being applied in many very difficult areas, and that become litigation breeding machines.

The business comes first, not the legal work.  (Part 1 of a four-part series on Why New Franchises Fail.)

Many, including myself, refer to franchising as an industry... even though we know it's really not an industry. A business model is probably one of the better definitions, but what does that really mean?

When referring to a franchise, even many within franchising choose from a variety of terms as a point of reference - franchise organization, franchise system, franchise company.

Of course, there's also the varying terms relating to the franchise relationship - franchisee, franchise partner and not to mention the slang, zee. And to the other side of the relationship - franchisor, head office, corporate office, parent company... and yes, zor.

And what's the difference between franchisor and franchiser?

Confused yet?

And, franchise locations are independently owned and operated. Yet, the franchise relationship is interdependent... or at least it should be interdependent and not dependent or independent upon... Well, you get it, right?

Now let's look at the people serving the franchise community. Yep, franchise community is another reference for the franchise list above but let's move on. Franchise consultants, do they sell or consult? How about franchise brokers, sales agents, sales representatives, and again, franchise consultants. Whew!

Moving down the chain there are franchise suppliers, service providers and vendors... What's the difference? Preferred or approved? Is there really a difference?

Of course, there are references to segments within franchising such as master franchising and sub-franchising... Which one is correct? And, isn't the sub-franchisor actually the master franchisee? I guess it all depends on which end of the relationship one is on.

How about now - confused yet?

Franchise services means what, and providing services to who? Franchisee to end-user? Franchisor to franchisee? Franchise service provider to franchisor and/or franchisee?

Same can be said of franchise marketing, right? Does marketing in a B2B or B2C scenario but within a franchise environment mean that it's franchise marketing? Or, is franchise marketing actually marketing to franchise candidates?

Speaking about franchise candidates, when is a candidate actually a candidate and not a lead or just an interested party? Does this fall under franchise sales or franchise development? And who's in charge - the VP of Franchise Sales, VP of Franchise Development, or VP of Franchising?

And then there's reference to franchise professionals. Is a franchisee a franchise professional? How about if the franchisee is a multi-unit franchisee with 25 locations? How about a franchise attorney? Franchise service provider?

If a franchise executive is a franchise professional, at what level of management does one begin to be considered a franchise professional? How about within the franchise organization itself? Secretary, if their support is purely administrative as opposed to an admin that actually communicates with franchisees?

Oh, and should the CEO of a franchise company be considered a franchisor as we often refer to them as such at franchise events?

Ironic how franchising is the replicating of a system with focus on consistency in image, appearance, product and service from one location to another. Yet, there's little consistency in the terminology used to define many aspects of franchising

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First up, I need to congratulate Greg and his team. The Franchise Excellence Research Report is clearly the result of a mammoth research effort. In turn, the output has significant implications for profiling, targeting, selecting, supporting, managing and leading franchisees.

The research pulls together dimensions of four key concepts; namely franchisee performance, franchisee satisfaction, franchisee psycho-social factors, and franchisee bio-data (a mixture of franchisee demographics and operating facts). Bottom-line, the report seeks to better understand the drivers of franchisee satisfaction and performance.

Each concept comprises a multitude of variables. As examples:

Franchisee performance gives consideration to financial achievement, customer experience, and the extent to which the franchisee behaves constructively within the network;

Franchisee satisfaction comprises 10 different measures ranging from work satisfaction, and franchisor trustworthiness to intentions to remain;

Franchisee psycho-social attributes comprise 16 variables including, for example, brand passion, pro-activity, sale orientation and vigour; and finally

Franchisee bio-data, ranges from age, gender and education, to franchise tenure, hours of work, literacy and original franchisee motivations.

In total there are more than 45 variables, giving rise to lots of interesting correlations to consider. I also have to acknowledge the considerable work on scales underlying each variable. Not a 5-minute job by any stretch.

The dataset comprised just upward of 1,800 mostly Australian [and a few New Zealand] franchisee responses covering measures of franchisee satisfaction, psycho-social and bio-data factors. These were then matched with circa 1,600 franchisor responses categorising individual franchisee performance, behaviour, and, the likelihood they would be selected again (by the franchisor).

Overall there are over ten separate chapters exploring the impact of one category of variables on another. I have to admit, my appetite was firmly whetted by the half way mark.

With such a large array of concepts, dimensions and variables, I'd describe the report as a data mining exercise - with a focus on identifying and displaying significant relationships.

Three chapters I found particularly interesting include:

Chapter 5: The relationship between psycho-social attributes and performance. Here we find especially interesting correlations between franchisee self-reported measures of brand passion, family & social support, positive outlook, sales orientation and pro-activity on franchisee performance and/or the franchisor's decision to re-select the franchisee in hindsight.

Brand passion, in turn, was interesting because franchisees with low brand passion were, amongst other correlates, less likely to participate in franchise network activities, comply with operational systems, and, promote their businesses locally.

Chapter 9: Impact of background and demographic factors on performance and satisfaction. Here you might be interested to know that male franchisees make more money than women franchisees and are more satisfied with their financial performance.

Meanwhile, female franchisees make better franchisee citizens and are rated higher on measures of constructive participation. In another separate example, we witness the significant and important impact English as a Second Language can have on each aspect of performance.

Chapter 13: How franchisees differ by industry type. Whilst the six industry categories discussed (Retail Food, Retail Service, Retail Product, Mobile Sale, Mobile Service and Business to Business) no doubt roll up a diverse range of businesses, and the data sets were sometimes individually small, there were some very interesting insights.

Many of the insights related to demographic or bio-data like, as examples, the facts:

22% of responding Retail Food franchisees worked more than 60 hours per week, compared to the next highest, Retail Product at 15%.

Mobile Service involved the least at 5%.

Retail Food on average hired 25.2 staff, compared to 9.9 in Retail Product.

Analysis of franchisee psycho-social factors and performance by industry also yielded interesting differences. As examples, brand passion, family & social support, and intrinsic motivation were the top discriminating factors differentiating between high and low performers for retail food.

By contrast, for Mobile Sales, key differentiators were leadership potential, comfort with technology, and intrinsic motivation.

But no finding hit me between the eyes like this one: That is the finding that franchisees with postgraduate university qualifications make significantly less money than franchisees featuring a high school only education. Clearly no franchisor in their right mind would select me.

This isn't a book for the light of wallet. The price is AU$790. However, you do need to expect that given the density of information.

Those deeper thinking Franchise Geeks will get more out of the book, as it does requires some interpretation, consideration and contemplation. Some ideas may also require consultation before application.

Congratulations again to Greg and the team at FRI. With more than 70 charts (often comprising multiple variables), and considerably more analysis to boot, this is a monumental and valuable piece of work.

You can purchase the book here

California is rightly the envy of all for its commitment to public education, consumer protection and sophisticated agribusiness.

However, the current legal franchise model allows franchisors to either deliberately or inadvertently skirt their civic responsibilities.

First, Franchising needs to return to its roots, in which the franchisor set quality control standards for a reason and not just to trap the franchisee into paying for high fees to the preferred suppliers, who then kickback  money to the franchisors.

The standards which protect the food supply chain are too important to leave to the federal government to enforce.  We need the unintended good consequences of brands maintaining quality control and funding the appropriate training and education.  

We don't need, however, a kickback economy.

Second, the current legal franchise model has an unbalanced picture when it comes to information: there is no legal balance between what the franchisor markets the benefits of the system and what the franchisor is contractually obligated to perform.

Private Brand Standards and Public Safety

To understand the first benefit of Bill AB 2305, we have to return to 1950-1970, when McDonald's enforcement of private brand standards were of assistance to the public good and helped maintained a safe food supply chain.

Ray Kroc's franchise model - complete with Hamburger University and passing on volume pricing rebates to the operators- had quality control standard which had a beneficial and unintended good consequence. Kroc's enforcement of private standards produced a safer food supply chain for the public. Sadly, Kroc's vision is not upheld by many modern franchisors.

To see how Kroc's system worked, we have to pay attention to some details.

In the 1970's, Kroc and McDonald's set quality control standards and operating standards. But, the operators purchased food from local sources.

Here is just one clever example of how the private brand's standards had a public benefit. Kroc shipped hamburger buns in package containing enough to make 100 hamburgers. The operating standard was that an operator should go through 100 patties for each package of buns. If the operator went through more, say 110 patties, then:

"Either his meat man was shorting him or someone else was stealing from him."

A meat man who would cheat on weights and measurements is a risk to public safety.  Kroc would have the meat man dead to rights, if he was found to be cheating.  

Today, we have more difficult contamination problems to detect and solve.

But, today many brands set standards for a different reason.  They require the operators to purchase from preferred vendors. Many of these preferred vendors are simply competing on cost - how much money they can rebate to the franchisor? There is no legal requirement for the vendors to compete on value and safety.

To understand why the modern franchise standards don't produce a public good, we have to understand how legal kickbacks work in the franchise industry.

Current Brands - The Kickback Problem

The franchisors you hear from today will tell you how strong their standards are. But, what they will not tell you is is the reason for these strong standards.

Many franchisors have used the current legal model to primarily obtain kickbacks or commercial bribes from their suppliers. The franchisor mandates that the franchisees purchase supplies, at an artificially high price.  The supplier then splits all or some of this extra price with the franchisor. This is perfectly legal as long as it is adequately disclosed.

The franchisor may elect, and many do, to report these kickbacks as essentially royalty income on their intellectual property and transfer the money out of state without paying California state income tax.

But, you will rightly feel uncomfortable with this arrangement, whether or not legal. Kroc was appalled by it.

A supplier who was being richly reward by his business relationship asked Kroc what he might like in return.

"Let's get this straight. I want nothing from you but a good [safe] product. Don't wine me. Don't dine me. If there are cost breaks, pass them on to the operators."

Promises to the Small Business Operator and Consumer

The second benefit of Bill AB 2305 is to protect the consumer, the consumer of information seeking to purchase a franchise. If the brand markets to prospective purchasers by making promises about volume rebates, quality standards, or continuous training, then their legal obligations in the franchise contract will have to match these promises.

Currently, most brands are only contractually required to provide sufficient training to open a location.

Further, the brands are only required to disclose somewhere in the fine print of a 500 page plus "Disclosure" document in legalese that the operator can only expect sufficient training to open a location and there are no price discounts.

But, of course these truths make hard marketing. Bill AB 2305 simply requires the brands balance their marketing hype with what the franchise document delivers by not allowing the brands to disclaim or ignore its marketing promises by disclaiming them in the franchise agreement.

The Benefits of Balance

A return to a balance in which quality standards are used to strengthen a brand, and indirectly contribute to public safety, franchisors who live up to their marketing promises will protect the small business operator and consumer.  We can do no better to reflect upon Kroc's view of franchising.

"We are an organization of small business [operators].  As long as we give them a square deal and help them make money, we will be amply rewarded."

Bill AB 2305 provides that square deal for franchisees, and the franchisors, consumers and public will be amply rewarded by its passage.

 

 

For those of you eagerly awaiting my comments on your baseless and delusional perceptions of who I really am, and what really happened here-- free of speculation--a simple phone call to me would have certainly set your misperceptions very straight!

However, because of the cowardly approach of writing anonymously, which merits no respect, I am unable to confront my meek adversaries. Steinberg and Webster, you guys just do not get it!

Therefore,this is the ONLY time that I will write on this blog on this issue! I have many more valuable causes in which to invest my time!

You really believe that S and W out- foxed me? Who are you kidding? Believe as you wish! Steinberg's op-ed piece wreaks in professional envy! How unfortunate for you miserable souls!,

Ask Mike Regan from Kahala and David Rauch from S and W if they feel the way you do! I assure you that they do not!

Because David Rauch chose to share through an academic piece how the historically competing worlds of franchisor and franchisee can work together and align their interests to achieve a common goal for the benefit of both parties, demonstrates intellectual, business, professional and social maturity!

Although it is no secret that Kahala has in the past and currently is in the midst of very tense relations with both it's franchisees and some of it's Area Developers, as unorthodox as it may be, it must be credited with it's creative and pro-active approach of seeking assistance from it's long-time adversary in order to protect the Brand from a highly inflammatory public relations crisis!

The reality is that the franchisees were even more worried than Kahala because it was their stores which were being boycotted in order to send the message of public disapproval to Kahala? But it was the franchisees whose sales were plummeting and therefore became justifiably alarmed!

My agreement to represent the NIACCF and collaborate with Kahala was done only after receiving specific and unequivocal direction from the NIACCF and its franchisees to take all action necessary to protect the Brand so that the franchisees, who so heavily rely on it, will NOT continue to be damaged by it's complete destruction.

I never "crossed the line", or "betrayed the franchisees" or "went to the dark side", or "sold my soul" to Kahala or any one else! Never have and never will! No conflict of interest exists with Kahala.

The only reason that Kahala agreed to pay the Modest sum of attorneys fees that I was requiring to be paid by the NIACCF( franchisee association) to retain me was because without such financial contribution, the NIACCF would not have been able to afford my firm's legal services and would not have been able to support the defense of the Brand name which the franchisees so heavily rely upon.

So if the franchisor wanted the assistance and support of the NIACCF in derailing the CNBC public relations efforts to disparage the Cold Stone brand, then it was only fair and appropriate that Kahala and NOT the franchisee association pay the legal bills associated with this coordinated effort.

Frankly, I believed it was a rather brilliant strategy to have the franchisor pay for a benefit to be derived by the NIACCF and the franchisee stores as well as the franchise system for protecting the brand. If the same situation would arise today where the franchisees wished to take legal action to defend their businesses but could not afford to do so, and the franchisor would have an interest in protecting it's brand, rest assured that I would be knocking on the Franchisors door to pay the bill and without creating any potential conflict of interest!

The bottom line is that the brand and the franchisee stores were well served- all without any financial or other cost to the franchisee association-NIACCF.

I still actively represent the NIACCF as well as a majority of the Area Developers in Cold Stone on issues of concern to them vis a vis Kahala. Rest assured that my commitment to the franchisees is unwavering and my integrity and honor will never be compromised! However, I refuse to discuss my strategies, legal advice or other sensitive matters on the Internet as my duty is solely to and always will remain with the franchisee!

It is unfortunate that those accusing me have no facts whatsoever which support the baseless accusations. Get on the board and become actively involved in your franchisee associations legal affairs committee and you will see the light! Clearly, you must be living in the dark as you have no backbone or internal fortitude or sufficient character to identify yourself in this blog!

I owe no one, except my clients, an explanation as to why or how I give particular legal advice in the manner that I do. And whether you approve or not of how I practice law, frankly, I do not give a damn! It has benefitted and served my clients really well over the last 25 years.  

My family, partners, and employees as well as many charitable organizations, community programs, religious institutions, universities and law schools have substantially benefitted financially from my unselfish generosity. All this after having grown up poor, mowed lawns since the age of seven, cleaned toilets on my hands and knees while at Harvard and worked over 3000 hours per year, year after year over the last 20 years while owning my law firm.

So criticize till your hearts desire. It will make no difference!

Life is like a game of chess. Make one move at a time. Move up- not down, and when you reach the Top, you may move as you like!

This has been a guest post by ROBERT ZARCO.

The ABA Forum on Franchisng strives for balance, objectivity, and a focus on legal accuracy. The overall goal is to emphasize collegiality and foster personal relationships between franchisee side and franchisor side attorneys.

Snell & Wilmer's article in The Franchise Lawyer about how Coldstone collaborated with its "franchisee association" is a major blow to the ABA Forum on Franchising's overall goal. The S&W article is a bombshell.

It is hard to believe that the ABA Forum would not carefully vet this piece before it appeared in The Franchise Lawyer, even if the The Franchise Lawyer is a legal newsletter and not a Law Journal.

The role of the ABA Forum on Franchising is troubling for the following reasons.

For more than a decade, the Forum has shied from contentious debate. It has chosen (wisely, in my opinion) to stress civility and a "just the facts" approach.

Essentially, the article is discussing public relations: a franchisor was accused of behaving badly against most of its franchisees in a television show aired on CNBC, citing large franchisee failure rates.  The franchisor sent a fat bank wire to the franchisee attorney on behalf of the non-franchisor controlled franchisee association, whereupon that franchisee attorney went on television to say that only disgruntled franchisees were at  fault for the rash of franchise failures. 

Is there a lesson in there for the readers of The Franchise Lawyer? Umm... it is unlikely that Justin Klein is now going to take a check from Ric Cohen, or Michael Dady will go on the payroll of franchisor The UPS Store. So the article is of rather limited utility in informing franchise attorneys?  There is very little legal point to this article.

Wors is the legally ludicrous argument in the pages of an ABA publication. With nary a single citation to law, the article suggests that statements of opinion are defamatory, something a first year law student knows is simply not true, at least not in the United States:

Cold Stone believed the allegations that there are "hidden fees," that Cold Stone profited from subleasing locations to franchisees, and that Cold Stone forced franchisees to buy unnecessary equipment were defamatory and false.

Cold Stone also believed that the allegation that there was a "yet-to-be-filed class action" was false. [emphasis added]

Apart from the matter of what is "hidden" and "unnecessary" is in the eye of the beholder, the article implies that the subleasing markup did not exist. Note the careful use of the word "profited" rather than "marked up":

Cold Stone most certainly did mark up leases by at least 2%, and did not always remit lease payments to the landlord even though Cold Stone debited the franchisee bank accounts.

While it is true that the editors of The Franchise Lawyer are not defamation experts, this is not exactly a tough point of law.

Of equal ethical importance, the editors of the publication are no doubt familiar with some uncomfortable details such as Cecil Rolle's prominent play in the infamous Zarco letter to CNBC and the resulting ethical storm.

The omission of any discussion about Rolle is puzzling, since The Franchise Lawyer lauds the Zarco letter as being the catalyst for CNBC to cave in, and the Zarco letter is less than three pages of type, with more than a full page being devoted to a blistering attack on Rolle. Logically one would think that The Franchise Lawyer would mention that the primary focus of this wonderful strategy is to attack your ex-franchisees.

Did The Franchise Lawyer editors demand a full and balanced article?

Well, read it for yourself. Pay close attention to what is not discussed, in particular any discussion of the actual contents of the Zarco letter, or the legal requirements to pursue a defamation action against a publisher.

(Some time after the BlueMauMau articles appeared, a television executive explained that NBC legal was aware that the program was not defamatory but that the producers just did not want to deal with franchising anymore.The individual indicated that after dealing with the brouhaha, he felt as though he had walked through a sewer. Those familiar with the backstory to the CNBC program may well feel the same way.)

Now, I have the utmost admiration for all the good work that Robert Zarco has done for franchisees over the past decades. I disagreed with him as to how he handled the Cold Stone matter. But I did so publicly. Zarco was a good sport and replied to me publicly.

I also admire S&W because they are doing their job, and doing so in a methodical and devestatingly effective manner.

Snell & Wilmer wrote a clever article for its masterful grasp of the use of publicity to eviscerate a litigation adversary. The tactical brilliance of Snell & Wilmer's litigation strategy is to be admired. When I die, I want to be reincarnated as a S&W litigation associate.

They came not to praise Zarco, but to bury him.

S&W's story in The Franchise Lawyer is intended to inform Zarco's colleagues. S&W placed the story on legal blog sites such as JDSupra in order to ensure that non-ABA Forum on Franchising attorneys did not miss it, and also to ensure that news feeds such as Google would both push the story and ensure search engine users would find it.

That S&W comes out with this publicity at the worst possible time for Zarco is no accident. Not only does the story harm Zarco, but it also reinforces the case, which former franchisee Cecil Rolle is (according to reliable sources close to Rolle) pressing with both Florida's disciplinary body for attorneys and possible direct litigation. Having patiently waited until the story was off the front pages, S&W now puts the story back in the headlines and in a way which Zarco cannot defuse.

And S&W did so with the imprimatur of the "American Bar Association, Fall 2011 Vol. 14 No. 4 " (When was the last time a major law firm could not do a proper BlueBook cite? But then again, it has more impact being published in the "American Bar Association" rather than "The Franchise Lawyer" fall edition.)

However, for the ABA Forum on Franchising to be a part of this is more than not sporting. Wading into an ongoing legal and ethical morass, while avoiding discussion of it is not worthy of the Forum. In confirms suspicions about the ongoing irrelevance of the policy of collegiality.

Fair Franchising

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This article will separate the optimists from the pessimists on the important subject of “fairness” in hotel ownership. Hopefully, we will make an optimist out of even the most cynical readers amongst us.

We begin with a simple question: Which of the following is the most likely to occur first?

a) America’s leading hotel franchisors will voluntarily embrace AAHOA’s 12 Points of Fair Franchising.

b) The U.S. Congress will pass comprehensive “fair franchising” legislation (or the Federal Trade Commission will enact a new regulation) that effectively implements the 12 Points and makes further efforts by AAHOA members unnecessary.

c) The U.S. Supreme Court will decide a “fair franchising” case that establishes, once and for all, that liquidated damage clauses (and other contract provisions to which franchisees usually object) are “unconscionable” because they “shock the conscience” of the Court.

d) None of the above.

Obviously, if you answered (a), (b), or (c), you have an optimistic nature, while those that say (d) are probably doomed to spend their lives as pessimists. We respectfully submit that too many observers of franchising are far too pessimistic about the prospects for “fairness in franchising”; in the balance of this article we hope to persuade you to join the optimistic camp as well!

Furthermore, for the optimists, we are going out on a limb to say that the correct answer is (a), that the franchisor community will voluntarily embrace the 12 Points of Fair Franchising long before fair franchising is imposed upon them by law.

That said, the pessimists unfortunately have a lot of history on their side that cannot be ignored. Like a voice in the wilderness, the first known calls for “fair franchising” came nearly 40 years ago when a dedicated Boston lawyer, the late Harold Brown, decried the commonality of franchise agreement provisions that left most franchisees vulnerable to a total loss of equity in their investment. Two obvious examples were provisions that allowed arbitrary terminations, and liquidated dam- ages clauses that make it hard, or impossible, to extricate oneself from a failing brand or a bad deal.

Over the last 40 years, there have been many attempts to “level the playing field”. Among the high- lights, or lowlights, in 40 years of “Fair Franchising” efforts:

1) The FTC in the late 1970’s en- acted franchise regulation, but the FTC Franchise Rule has always been limited to the regulation of what the franchisor must disclose to prospective franchisees, without regulating the contents of franchise agreements or imposing limitations on franchisor conduct.

2) A handful of states enacted their own disclosure laws and some states have legislated against arbitrary terminations, but no state has en- acted comprehensive protection that would come anywhere near the protection for franchisees that AAHOA seeks in the 12 Points of Fair Fran-chising. No new state franchising legislation has been enacted in the last 20 years!

3) Efforts to enact a comprehensive federal fair franchising law peaked in the 1990’s, as the proposed legislation never made it to the floor of the U.S. Congress.

4) Judicial efforts to restrain franchisor conduct have historically centered on both efforts to impose fiduciary duties upon franchisors and efforts to hold certain clauses unconscionable. By and large, franchisors have beaten back efforts to establish fiduciary duties, as most courts see franchising as a two-way business relationship, and not as a fiduciary relationship akin to the relationship between a trustee and beneficiary. Likewise, there have been a handful of cases, mainly from the West Coast, in which courts have found some arbitration clauses in franchise agreements to be unconscionable, but at this time there is not a good precedent in any jurisdiction to argue that a franchise agreement that does not meet the 12 Points is unconscionable.

By and large, the courts have imposed a “good faith and fair dealing” standard on franchisor behavior in performing their contract duties; and of course, the courts remain willing to protect a franchisee from fraud in cases where it can be proved. Thus, it remains possible for individual franchisees to win specific cases, but because most individual, single unit franchisees lack the resources to fight back, the prospects of being defeated in individual cases has not persuaded franchisors to change the terms of their standard franchise agreements fundamentally. Being a good franchisor today remains more a matter of enlightened self-interest among those franchisors that desire “win-win” relationships with their franchisees, more so than any legal mandate.

5) Franchisees in a minority of systems formed independent franchisee associations in an attempt to engage in collective bargaining with their franchisors. There have been some notable successes on this front, but so far, the independent franchisee association movement has not gained serious traction toward the goal of negotiating agreements that are more palatable to the franchisee. Moreover, efforts by associations to bring system-wide litigation or arbitration to redress franchisee grievances have had mixed results, as it remains difficult to establish association “standing to sue” (or to obtain class action certification) in any case that depends on proof of franchisor conduct with respect to specific individual franchised locations.

6) Efforts to establish national umbrella franchisee associations (such as the American Franchisee Association and the American Association of Franchisees & Dealers) have achieved limited success as these organizations are perennially out- funded by the International Franchise Association, which speaks for franchisors.

7) The Federal Trade Commission in 2007-08 adopted the first serious amendments to its franchise rule since the late 1970’s. However, to the disappointment of most franchisee advocates, the FTC declined again to go beyond the regulation of the franchise sales process. Efforts to extend regulation to the contents of franchise agreement — or to franchisor conduct during the relationship or upon termination — were considered but rejected.

8) One bright spot, however, is that in the amended FTC Franchise Rule, franchisors must now disclose whether the franchisees in its system have created an independent franchisee association and whether the franchisor recognizes the association as legitimate. Other highlights/low- lights of the amended FTC Rule are that:

[T]he amended Rule requires more extensive disclosures on: lawsuits the franchisor has filed against franchisees; the franchisor’s use of so- called “confidentiality clauses” in lawsuit settlements; a warning when there is no exclusive territory; an explanation of what the term “renew- al” means for each franchise system . . . In a few instances, the amended Rule requires less than the UFOC guidelines — for example, it does not require disclosure of so-called “risk factors,” franchise broker in- formation, or extensive information about every component of any computer system that a franchisee must purchase.

9) Last but not least, AAHOA has adopted the 12 Points of Fair Franchising, but so far, the major hotel franchisors have been slow to embrace them.

Against this history, I remain very optimistic that franchisees — whom AAHOA correctly refers to as “hotel owners” — have a future that is much brighter than the past. How- ever, the question that we posed at the beginning of this article was a trick question. No great change in the direction of “fair franchising” will simply occur but instead this important goal must be achieved. Furthermore, franchised business owners in general and AAHOA members in particular have much greater odds of success in striving to achieve voluntary compliance with fair franchising standards for the simple reason that “self-help” is al- ways better than waiting for charity from others. To wait for the courts, the legislatures, or the regulators to rescue hotel owners from “unfair” contracts is to place your fate in the hands of others, who have much more funding, and to abdicate personal responsibility for your own future. That would be a tragic mistake, especially since all the ingredients for hotel owner success are readily at hand. Specifically, hotel owners will win the struggle for fairness when three things happen:

1) Enlightened hotel owners will decline to sign contracts that do not meet the standards established by the 12 Points of Fair Franchising. You would not buy a car that was unsafe and place your family in physical danger. Why would you buy a hotel on terms that are legally unsafe and thereby place your family in economic danger?

2) Taking advantage of the amended FTC Franchise Rule, hotel owners will create single-brand independent franchisee associations and demand recognition, and will demand the opportunity to collectively bargain the franchise agreement. Future hotel purchasers will scrutinize the Franchise Disclosure Documents that must now comply with the amended FTC Rule (replacing the old Uniform Franchise Offering Circulars or “UFOCs”) to see whether the particular brand has recognized its association.

3) Savvy hotel owners will explore alternatives to being franchisees. Two alternatives come readily to mind: Establishing cooperative associations, and becoming franchisors instead of franchisees. Both of these alternatives are very viable from a legal standpoint. The question is not whether these developments will occur, but when, and whether AAHOA members will be at the forefront.

Each of these three actions are steps to independence, and hence to fairness. As more and more hotel owners take these steps, there will very quickly come a tipping point at which the established hotel brands either will have to get on board with the 12 Points of Fair Franchising or lose franchise sales. By taking the steps outlined herein, hotel owners will change the game in their favor. Am I optimistic? You bet! 

Published in AAHO Lodging Business Magazine March 2009, by Carmen Caruso.

Steve Memorial.jpg

Steve Ellerhorst was a firm believer in the value and necessity of franchisee associations.  Steve's entire working life was spent in franchising: franchisor executive, franchisee operator and as a franchisee association leader. 

Steve, along with others in the Hardee's system, was instrumental in forming the Independent Hardee's  Franchisee Association. 

The  Independent Hardee's Franchisee Association exists today because of the foresight of Steve, his deep appreciation of the three different views and needs of the franchisee, franchisor, and supplier -and how to reconcile those needs within the business framework.

Steve was a master of finding great ideas, presenting them to the right person in the franchise system - then stepping out of the way so that person could get their necessary credit and applause.  He created the best audience for great ideas, which then got implemented because of the audience's enthusiasm.

Steve was also instrumental in the growth of a number of franchisee associations: the Meineke Dealers Association, the American Association of Franchisees and Dealers,  the Curves Association,  and the Coalition of Franchisee Associations.

Steve was also one of  the founders of the International Association of Franchisees and Dealers.

The IAFD is a testimonial to Steve Ellerhorst's grand vision of how franchisee associations exist to strengthen, help and promote the franchise brand through member benefits, communication, advocacy and education.

A great organizer, with a keen and penetrating mind peering out of a loveable soul, Steve will be dearly missed by all his family, friends,  franchisees, suppliers, and franchisors.

Please feel free to add your own remembrances of Steve in the comments section.   (You will have to register by providing your name and email.)

 

Memorial Notice

 

Beloved husband of Lisa Krummen Ellerhorst; loving father of Elizabeth 
(Matt) Yingling and Katie Ellerhorst

Loving grandfather of Micah Yingling;  dear son of Margie and the late 
Jack Ellerhorst;  dear brother of John (Julie), Dan (Lucy), Tom (Vicki), 
Scott and Patti;  dear uncle of many nieces and nephews.

Died May 30, 2011 in Indianapolis, Indiana.  Graduated from Purcell High 
School in 1975; was CEO/Executive Director at International Association 
of Franchisees and Dealers;  


Memorial service to be held Saturday, June 
4 at 11:00 am at Holy Trinity Church, 201 Clark Street, Middletown, Ohio 
45042.  

If sending flowers, please send by Friday, June 3, 2011 to Holy 
Trinity Church;  In lieu of flowers, family asks that donations be made 
to the American Cancer Society.
Jeff Johnson of Fran Survey has a short executive summary of their recent review of franchisee satisfaction at Comfort Keepers.

"The survey asked Comfort Keepers franchisees to rate their franchisor through a series of questions regarding overall growth potential, quality, support, communication, and other important areas. 

The results, according to Johnson, show that Comfort Keepers has an enthusiastic, energetic franchisee community of which 92 percent agree that their franchisor understands that if the franchisee is successful, they will be as well. 

According to the FranSurvey system, Comfort Keepers achieved a positive rating from 94 percent of its new franchisees for 'initial opening support,' while 95 percent rated the 'initial training' provided by the franchisor as positive. 

"It takes a quality franchise system to achieve this high level of results," added Johnson."

I would encourage individual interested in this system to spend the $25.00 and obtain the entire survey. 

Then my preference would be to de-construct it by focusing on only two answers: the best and worst.  Aggregating survey answers is often misleading.  The difference between awarding a franchise a top mark, say a 5, versus the next top mark, say a 4, is very large.  Looking a raw scores of best/worst and how they vary overtime gives a broader view of franchisee satisfaction.

Franchisee satisfaction surveys should be conducted by the independent franchisee association as another method of gaining valuable intelligence with which to communicate to the franchisor. 
 
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Transcript Sheena Lyengar: What's interesting is that the way we go about finding our marriage partners today is quite different from the way it used to be in this culture.

When you look at... I've done a number of studies with speed dating and Match.com and what's interesting is that you know we still walk into a speed dating event, you know, thinking about what it is we're looking for in a mate and so you ask people, like women will say "I'm looking for somebody who is really kind and sincere and smart and funny."

And guys will say looks matter, but they'll also say things like "Well, she should be smart and kind."

And you know those are... so the typical responses and if you give them just a few options, like five or six, then they will rate them on the very characteristics that they said were really important to them.

You know if they said kindness or funniness was really most important to them then they will be more likely to say yes to the person that they thought was kind and funny.

Now if you expand their choice set-say you give them 20 different speed dates-everything goes out the window.

Everybody starts choosing in accordance with looks because that becomes the easiest criteria by which to weed out all the options and decide."

So who am I going to say yes to?

What does this suggest to you about how prospects choose franchise systems when "speed dating", attending a franchise trade show?

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Gerald Ghikas, of Borden Ladner Gervais, LLP writes designing a dispute resolution process for long-term relationships, such as franchise systems.

This is an important area and Ghikas has some interesting ideas.

"Major projects and long-term relationships present special challenges to corporate counsel and external legal advisors charged with designing a dispute resolution process. 

They include: 

Some disputes will be about technical or scientific issues, some about legal rights and obligations, some about business issues, and some will be mixed.

Disputes may involve a wide range of amounts of money. 

Resolution of disputes on the legal merits can be important, particularly when large amounts are involved.  

Speed of decision-making can also be important, to keep the project or business going.   Disputes may involve more than two parties   

Disputes may arise under more than one contract. 

Disputes may arise in more than one jurisdiction   

Maintaining a constructive business or working relationship may be important.

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