If Your Franchisor Is Incompetent, Do You Have to Continue to Pay Royalties?

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.