April 2015 Archives

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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You believe that your franchisor has intentionally, with little or no justification, inflicted serious economic harm on you and other franchisees.

A group of franchisees has formed The Fight Association, and wants to hire the biggest baddest franchisee trial lawyer to punish the franchisor. The Fight Association's trial lawyer fires a couple of strongly worded missives to the franchisor, with the message: Capitulate or be Sued.

Some other franchise owners, horrified by the damage to the relationships, to the brand, and their ability to resell their own units, want some form of negotiation, discussion or mediation with the franchisor. Even in face of the clear economic damage inflicted by those working at the franchisor's corporation.

Should you fight or negotiate?

There are three important lessons for franchisees and their associations to learn from Mnookin's research.

1. Fight your franchisor only when they have shown themselves to be an unreliable negotiating partner.

2. It is smart to start bargaining from outcomes that neither party can from either the litigation or arbitration process

3. The franchisee community as a whole needs to commit resources to continual training in interest based communication. If interest based negotiation is going succeed over the long haul, you need to commit funds to training.

Background- Managing Mental Traps

Robert Mnookin is the Director of Harvard's Program on Negotiation, and so it unsurprising that he frames the advice in his book as a way of managing two types of mental or intuitive traps, one set of traps which promotes fighting and the other which promotes cooperation.

(This is conceptually similar to one of the original themes from the Harvard Program on Negotiation: negotiation is the rational management of the inherent tension between claiming value and creating value, explored more throughly in The Manager as Negotiator, Lax and Sebenius.)

Mnookin identifies (6) mental traps in Chapter 1 of the book, and then goes on to evaluate (7) major confrontations in which one or both sides could reasonably see the other as the devil; someone who had intentionally inflicted serious harm with little or no justification. (Of particular interest to the franchise community is the chapter 8, "Disharmony in the Symphony".)

Here are Mnookin's traps, which shape the perceptions of the conflict

1. Tribalism involving an appeal to group identity, creating an in-group. It is us against them. Universalism is at the opposite end of the scale, the tendency to overlook important differences in culture, history and group identity. "Why it is just business, after all."

2. Demonization is the tendency to see the other party's action completely defined by being rotten or bad to the core. Contextual rationality is the impulse to find reasonable explanations for individual bad behavior.

3. Dehumanization is way of putting the other party outside normal moral concerns, treating them as a mere object. The other end of this spectrum is one of Redemption: everyone deserves a second chance.

4. Self-righteousness is the tendency to frame the problem in which you are blameless, but the other fellow is entirely to blame for this problem. The other extreme is to see parties always being Equally at Fault for a conflict.

5. Zero-sum trap in which my interests necessarily are in opposition to yours. At the other end is the view that there is always an Win/Win which makes both parties equally well off.

6. The Fight/Flight response, which for the franchisee community would be litigate or sell. At the other end of spectrum, we have Policy of Accommodation.

Finally, there is the call to battle in which the trial lawyer has to call out the franchisee troops for a battle with the franchisor in using the language of war, and the techniques of demonization, tribalism. and others.

The (3) Lessons: When to fight, How to Negotiate, and How to Follow Through.

(1) When to Fight - Only Fight as a Group with an Unreliable Business Partner.

In Chapter 5, Mnookin, relying upon recently declassified reports, examines Churchill's decision not to negotiate with Hitler. He does a remarkably good job of situating us in a world in which Hitler's manifest evil is not yet apparent and Churchill's War Cabinet is unmoved by Churchill's emotional appeals.

It is not known yet that Dunkirk will be a resounding success, that England will win the Battle of Britain, nor that Hitler will uncharacteristically hesitate for many months about deciding to cross the English channel.

A Britain that had insufficient resources to win a war on their own, seemingly without powerful allies, had to seriously consider whether a separate peace might be worth entering into.

Churchill was convinced that Germany was aiming at enslaving England, but his War Cabinet was more persuaded that Germany's goal was only more territory in Eastern Europe.

Since both England and Germany shared a hatred of Communism, it made sense to the War Cabinet that Germany would have to turn east and face down Russia.

What was critical, according to Mnookin, was that Churchill eventually framed the problem this way: if the negotiation was to fail, and this was likely given Hitler's total unsuitability as a bargaining partner, then British morale would be so undermined that they could not credibly commit a fight to the finish. The failed attempt at negotiations with Hitler would end in surrender.

This strikes me as correct. If the party you want to negotiate with has shown themselves to be utterly capricious, unable to be counted upon, then the very attempt at negotiation, should it fail, will undermine the group's commitment to prolonged litigation.

Fortunately, I don't believe that many franchise systems -although there are a few- have franchisors who have absolutely no credibility as a bargaining partner.

My own view, is that systemic challenges are not well suited to litigation, but the franchisor who owns little or no units will have always have trouble convincing the franchisee community to adopt systemic changes, when there has been a local history or either mistrust or bad decisions.

It will be hard for the franchisee community in these cases not to see the franchisor as acting intentionally to harm their own economic interests and misplaced litigation is the likely result.

(2) How to Negotiate out of Shadow of the Law

In 1983, after a bitter commercial fight, IBM and Fujitsu concluded an agreement over the extent to which Fujitsu could use, copy, or otherwise reverse engineer IBM's operating system. One year later, the agreement was in shambles - with each side reasonably convinced that the other had acted intentionally to inflict serious economic harm on the other with out justification. Devils!

For the next 10 years, Mnookin would play an important role both as arbitrator and mediator in both settling and assisting the parties to settle their dispute.

At one point, Mnookin and the other mediator, Jack Jones, had to convince each party of viability of IBM giving Fujitsu the right to inspect, in a very secure environment, IBM's source code. This was needed if Fujitsu was going to be able produce a compatible IBM OS, without infringing or copying on IBM's source code.

IBM could have rejected this deal by saying "Are you crazy, Fujitsu is a major competitor! The 1983 agreement doesn't give them the right to inspect our source code and they will never get that in arbitration. Screw them."

Fujitsu might have also rejected the deal because the restrictions placed on them by the secure environment were highly disruptive to their own programming practices.

But what both parties, even though intense rivals, came to see was that starting from a point which was not available through either litigation or arbitration produced an agreement superior to what any party could get through litigation or arbitration.

This is important advice: don't start bargaining from only those outcomes possible from litigation or arbitration. Both the franchisor and franchisee community need to focus on what would be the best outcome for all of them, and identify what steps need to be taken to get there - especially in the face of previous intractable conflict.

(3) Follow Through and Interest Based Negotiation Training

The last lesson is very important for the franchise community. In 1997, Mnookin was contacted after a bitter strike by San Francisco orchestra.

The orchestra's bargaining committee was itself bitterly divided, barely on speaking terms. Management's representative was seen as a destructive bully, intent on getting his own way.

"Moreover, the musician's relationships with one another were badly strained. They were traumatized. They had no authority structure, no strong leadership in collective bargaining."

Mnookin was able, in the short term, to introduce both sides to interest based negotiation, which involves both active listening and the management of creating value versus claiming value techniques. Both parties took part in the standard Harvard negotiation program, with some excellent short term results.

The parties spent, in 1998, six days in total to come to a new contract. However, they had spent almost 14 month in communication and in joint sessions prior to the bargaining at the table. "For complex negotiations, with critical conflicts behind the table, this is an appropriate ratio." says Mnookin.

However, 6 years later the symphony negotiating committee shunned additional training in interest based techniques, despite having new members who did not have these skills.

It's new attorney was suspicious of interest based negotiation and had argued in public that collective bargaining was essentially adversarial in nature and that the best deals could only be made when everyone was facing collective disaster.

Interestingly, the former management representative, Pastreich summarizes the value of interest based negotiation best:

"The greatest value of adversarial negotiation might be the opportunity it gives musicians to express anger and frustration accumulated during 3 years of doing a job that, by its very nature, allows them relatively little control over their working lives, while the greatest value of interest based bargaining might be the opportunity it gives musicians to work with managers and board members at solving problems in an atmosphere of teamwork and cooperation."

The parties did not make the necessary long term commitment to interest based negotiation, so reverted to the ordinary form of collective bargaining - a process which favours the ill prepared, but obstinate negotiator.

Conclusion

Franchise relations are not going to change overnight, but many franchisee associations, franchisors, and counsel can learn a great deal from Mnookin's book on negotiation.

Finally, the thoughtful exercises Mnookin prescribes in managing the (6) traps are worth reviewing to see which could be employed in your franchise system.

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One of the most common provisions in franchise agreements is the "forum-selection" clause.

Under these provisions, the parties agree that any lawsuit filed by either one of the parties will be brought only in a court in a specified city and state. The chosen court will almost always be in the city where the franchisor has its home office.

A forum-selection clause is used as a cost-shifting tool in franchise contracts.

The franchisor, which presumably has a large number of franchisees in diverse geographic locations, would find it financially burdensome to have to hire different lawyers in a number of different states to defend or prosecute lawsuits against its franchisees. Using the forum-selection provision, it shifts the burden of traveling for a lawsuit (and obtaining counsel in a sometimes-remote forum) to the franchisee.

Some states have laws that consider forum-selection clauses in franchise agreements to be void - so that a franchisee protected by the state law will be able to sue and be sued in his or her home state.

Other states will stop short of voiding those provisions, but will permit a franchisee who sues the franchisor first to do so in his / her home jurisdiction.

Case Study: Maaco Franchising, Inc. v. Tainter

Even where these state laws do exist, they don't always carry the day. Take, for example, the recent case involving Maaco Franchising and two California-based franchisees. In 2004, Maaco entered into a franchise agreement with Richard and Diane Tainter for the operation of a Maaco automotive painting and repair shop located in Palo Alto, California.

The Franchise Agreement

The franchise agreement contained a Pennsylvania choice-of-law provision, as well as a forum-selection provision requiring that all litigation occur in Pennsylvania federal or state courts. Under the franchise agreement, the Tainters agreed that they would submit to the personal jurisdiction of Pennsylvania courts, and waived all objections to the jurisdiction or venue of any action brought in Pennsylvania. This type of language - requiring a franchisee to waive objections to the jurisdiction of the other state's courts - is common in franchise agreements.

Before signing the franchise agreement, the Tainters also received a franchise offering circular with a California-specific addendum. This type of addendum can be found in any franchise disclosure document where the franchisor is registered to sell franchises in a registration state like California.

The California addendum in the agreement stated that California has a statute that "might supersede" the franchise agreement, "including the areas of termination and renewal." Importantly, however, the franchise agreement itself did not have any state-specific addendum modifying the terms of the contract.

Maaco's lawsuit against the Tainters

In September 2012, Maaco sued the Tainters in September 2012, alleging that the Tainters failed to pay royalty and advertising fees, and for failing to comply with an audit. Maaco filed the lawsuit in Pennsylvania court (in accordance with the forum-selection clause).

Opposing Maaco's decision to sue them in Pennsylvania, the Tainters argued (among other things) that:

(1) the forum-selection clause was invalid because the parties did not reach a "meeting of the minds" agreeing to a forum outside California;

(2) the forum-selection clause should not be enforced because it is contrary to California's "strong public policy disfavoring the enforcement of out-of-state forum-selection clauses," citing California Business & Professions Code §20040.5; and

(3) that even if the forum-selection clause was valid and enforceable, other factors weighed in favor of transferring the case to the Northern District of California.

The Court analyzed the matter by referring to 28 U.S.C. §1404(a), which allows a court to transfer a case to any other district or division where the case could have been brought "for the convenience of parties and witnesses, and in the interests of justice." The Court recognized that the forum-selection clause in the contract was entitled to "substantial consideration," but that it would not be dispositive.

The Court noted that the Tainters, as the moving party, had the burden of showing why they should not be bound by the forum-selection clause and that a transfer was necessary in this case.

1. Meeting of the Minds

The Tainters argued that they did not "agree" to a forum outside of California based on the U.S. Court of Appeals for the Ninth Circuit's holding in Laxmi Investments, LLC v. Golf USA, 193 F.3d 1095, 1097 (9th Cir. 1999). In Laxmi, the court found that there was no "meeting of the minds" about the forum-selection clause because California Business & Professions Code §20040.5 prohibits franchise agreements from "restricting venue to a forum outside of California.

Based on the above statutory provision, the Tainters argued that they never agreed to a Pennsylvania forum for its dispute; in other words, that there was no "meeting of the minds" between the parties regarding the Pennsylvania forum-selection clause.

To support that argument, the Tainters pointed out language in the Franchise Disclosure Document (which said that California "might have statutes that supersede the Franchise Agreement") meant that Maaco could not insist on a forum outside of California.

Analyzing the Tainters' argument, the Court said that, "under federal law, forum-selection clauses are presumptively valid and enforceable unless enforcement is shown by the resisting party to be unreasonable under the circumstances."

To meet this burden, the resisting party must show:

(1) the clause was invalid for such reasons as fraud or overreaching;

(2) enforcement of the clause would contravene a strong public policy of the forum in which the suit is brought; or

(3) that enforcement of the clause would be so gravely difficult and inconvenient as to be unreasonable and unjust and that it would deprive the party of its day in court.

Reasoning that the unambiguous language in the agreement clearly stated that the parties waived any objection to the jurisdiction or venue of Pennsylvania courts, the Court found that the language in the separate disclosure document was "insufficient to negate the Tainters' express agreement to litigate in a Pennsylvania forum."

In other words, the fact that the disclosure document said that California law "might supersede" the parties' choice of Pennsylvania as the proper forum for disputes wasn't good enough to overcome the clear language of the contract.

As a result, the Court found that there was a meeting of the minds between the parties regarding the forum-selection clause in the Franchise Agreement.

2. Strong Public Policy

Next, the Tainters argued that the forum-selection clause was unenforceable as it contravened California's "strong public policy," as embodied in California Business & Professions Code §20040.5.

Turning to this argument, the Court said that the question is not whether enforcing a forum-selection clause is contrary to any strong public policy, but whether it would "contravene a strong public policy of the forum in which the suit is brought."

Pennsylvania courts, the Court said, regularly enforce clauses electing a Pennsylvania choice of forum. As a result, the Court held that the Tainters' "strong public policy" argument could not override enforcement of the forum-selection clause.

3. Transfer for Convenience of Parties and Witnesses

Lastly, the Tainters argued that the Court should transfer the case for the convenience of the parties and witnesses, as permitted by 28 U.S.C. §1404(a). The interests that can be considered under this Section are "plaintiff's forum preference as manifested in the original choice; the defendant's preference; whether the claim arose elsewhere; the convenience of the parties as indicated by their relative physical and financial condition; the convenience of the witnesses -- but only to the extent that the witnesses may actually be unavailable for trial in one of the fora; and the location of books and records." Quoting Jumara v. State Farm Ins. Co., 55 F.3d 873, 879 (3d Cir. 1995).

The Court found that a California forum would certainly be more convenient for the Tainters, who live in the State.

Presumably, the Tainters' witnesses, books and records would all be located there.

On the other hand, the Court reasoned that Pennsylvania would be a more convenient forum to Maaco, which had its principal place of business in the State during its relationship with the Tainters and maintained offices there.

Noting that the function of a venue transfer is not to "shift inconvenience from one party to another," the Court held that a "plaintiffs' choice of venue should not be lightly disturbed," particularly in light of the contractual forum-selection clause.

Additionally, the Court said that Pennsylvania courts are more familiar with Pennsylvania law, which the parties had chosen as the law governing the franchise agreement. Therefore, the Court declined to order transfer of venue to California.

Maaco v. Tainter: Lessons Learned

Currently, many franchise registration states specifically require, as a condition to registration, that the franchise agreement have a state-specific addendum to the franchise agreement (as opposed to the disclosure document, as in the case of the Tainters) that says that the franchisee has the right to sue or be sued in her home state. Those provisions will usually be enforced.

The key takeaway for franchisors from Maaco v. Tainter is that forum-selection clauses are valuable tools that can help them shift some of the burden of litigation costs to its franchisees.

Courts in states that don't have special franchise laws will usually enforce forum-selection provisions, unless there is a clear reason not to do so. A state-specific addendum to a franchise agreement, which may be at play in certain franchise registration states, will usually be enough to require a court to transfer a case to the franchisee's home state.

For prospective franchisees, the lesson from Maaco v. Tainter is that it's important to read and understand the franchise agreement - and any state-specific addenda - before signing the contract. If your proposed franchise agreement contains a forum-selection clause, understand what that provision will mean to you if your relationship with the franchisor implodes.

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

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

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

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

The Evolution of Business Models

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

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

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

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

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

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

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

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

Renewals - Is there Value?

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

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

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

Animosity keeps growing, and revolts happen.

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

Termination Conditions - Legal and Business Reality

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

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

Franchisees Revolt

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Americans negotiating in China must understand the Chinese decision making process.

One of the difficulties negotiating Win-Win deals in China is widespread usage of gate-keepers (assistants and other access-controllers) in Chinese business.

Unlike their American counterparts, Chinese access-controllers often take on the appearance of important decision-makers, when in fact they are low-ranking functionaries.

The American gatekeeper says, "He's unavailable, would you like to leave a message?"

In China, you are more likely to hear, "He's leaving the country on business tomorrow and you need to send a detailed proposal including technical specs on your product or service by noon."

Gatekeeper as Messenger

The trick to handling gatekeepers in China is to understand that they are one-way, one-time messengers directly to your decision-makers office - and treat them that way.

You can't and should not negotiate with a gatekeeper - but you needn't obey him either. He wants a proposal that, according to him, will go right to the top people.

Treat this for what it is - a one shot delivery system. Craft your message accordingly.

Gatekeepers as information sources

The Chinese gatekeeper says a lot about the organization, decision-making structure and boss that he is working for - you just have to know what to look for.

Is he treating his boss with imperial deference? You'll be expected to do the same.

Is he hostile or condescending to foreigners? That probably means his boss is too.

Is he an informed, helpful, professional facilitator with the authority to begin and maintain a business relationship? That indicates his organization may make a good partner.

Most of all, the gatekeeper will tell you exactly what the company wants from you - he just wants it the next day, for free.

How can We handle this?

In many cases, the gatekeeper is a frustrated, neglected, disrespected poor wretch, toiling away in obscurity in the shallow end of the bureaucratic pool.

A little attention may go far. "I need your advice - how have past Western suppliers / partners handled this?" "How does your boss like to see information - tech specs, financials data or detailed explanation?" "What kind of proposals has he been happy with before?" "What would you do if you were part of our team?"

Dealing with gate-keepers

1. Identify what they want. HINT: It's probably not a transaction. Chinese gatekeepers are notorious for acquiring IP, plans and big-picture technical data. This can work for you or against you.
2. Control the content of your proposal or message. Figure that whatever information you provide will be lost and used against you. If it's advertising or a semi-public whitepaper - no problem. If it's highly sensitive or proprietary data, then that is a problem.
3. Information is a two-way street. Talk about "WE" a lot, and find out what others have done right in the past. Play on his desires to do a good job. "I don't want to waste your boss' time...", "I consider this a tremendous opportunity and I'm nervous about making a mistake..." Let him fill in the blanks on who makes the decisions, what their criteria will be. Try your best to get names and titles. If you can get him talking about the decision-making process, that's a win.
4. Don't invest anything you aren't afraid of losing - and that includes TIME. Gatekeepers are a direct, one-way conduit to the real decision-maker, and should be treated as such. Service providers in China have learned not to spend the time crafting detailed proposals - even outlines. Most of the consultants I know have a two page introduction prepared that they customize for prospects in China. Don't outline projects, provide timetables or analyze problems for free. Local service providers (probably related to the boss in some way) will get the actual contract based on your assessment.
5. Know your limits - and know when to walk away. If the gatekeeper was sent to steal information then this is never going to turn into a deal. Sometimes the most important piece of information is that the negotiation is not worth the time or effort.

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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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As Chief Development Officer for a capital intensive franchise, I knew that we had an advantage in the marketplace - we could tell franchise candidates how much money they could make - because of our Item 19, or what is now called a "Financial Performance Represenation".

But we had a problem. While our ads in the Wall Street Journal could explain our business model and make representations consistent with our FPR, we had to be compliant with the FTC Rules on Misleading Advertising. We had a great average unit volume story, AUV, and we just had to tell it in the right way.

I knew all of this, wrote the ad & added the FTC required disclaimer -sent the ad to our legal counsel. We were "experts" on compliant franchise sales.

It was great! We had a terrific response, and we were in compliance with the law.

My joy was short lived -replaced with nerve racking fear. Our great advertising success was about to become a liability that would kill the franchisor!

A competitor of ours phoned me up. Here is their story. "Joe, saw the ad you were running. Just a word to the wise. We ran the exact same type of ad, pulled information from our FPR, and inserted the standard FTC disclaimer language. The next thing we heard was not from a happy or excited franchise candidate, but from the dour FTC. We had forgotten something. And it was going to kill us.

We didn't put on the ads the number of units and percentage that they represented which reached or exceeded the AUV. And the FTC wanted $11,000 for each ad we ran because of that one infraction. Just a word to the wise."

Now, we never got that call from the FTC. Thank heavens. But, I sure moved quickly to change the ad so that we told franchise candidates not only the AUV, how much they could make, but how many units were hitting that mark, and what percentage of the system they represented.

The joy returned. Our aggressive ads were working.

I still see franchisors advertising and selecting figures from their FPR, but either leaving out the disclaimer language or forgetting to put in the number of units and percentage they represent. I guess that they can afford the FTC fine - but I know we couldn't.

I was thankful that a competitor who was marketing with their Financial Performance Representation - FPR in their advertising as we were, was thoughtful enough to let us know. This way we could avoid the pain of having to pay the FTC fines of well over $100,000, at $11,000 per infraction, and have our reputation needlessly damaged.

So if you see a franchisor marketing with non-compliant sales claims in their advertisements do them a favor and give them a heads up so they can make a quick and easy fix. Feel free to send them this article.

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