As most of you are aware, independent franchise owners associations (FOA) took a giant step towards legitimacy and official recognition by franchisors with the publication of the Federal Trade Commission’s (FTC) amended Rule in 2007. By following the FTC’s procedural guidelines († see footnote below for a description of the guidelines), a franchise owners association can request that its franchisor identify the association in its Franchise Disclosure Document (FDD), including contact information.
In July 2008 it became mandatory for franchisors to comply with the amended FTC Rule, and many associations have elected to have their information listed. But how will FOA’s capitalize on this new opportunity for public awareness?
Assuming that your association has been included in the FDD for your franchise system, a series of important questions come to the surface, namely:
- Why did you want to be listed?
- Who is actually going to take the calls from prospective franchisees?
- What are they going to say? What are the risks involved?
Some of the considerations for each of these questions are discussed below.
Why did you want to be listed?
The obvious answer to this question is contained in the lead-in sentence above. With the assistance of the FTC (influenced greatly, we are proud to add, by the active efforts of the AAFD), owners associations have an opportunity to move from the shadows to the forefront of prospective franchisees’ awareness and to be a significant resource for their investment decision-making. In addition, although incidental to the broader purpose of education of prospects, the recognition also affords an opportunity to market the benefits of your organization to prospective new members if in fact the prospects go forward with their purchase.
Perhaps more important, an FOA’s ability to influence investors presents an opportunity for negotiating leverage with your franchisor. Suddenly, your association’s ‘opinion’ about the franchise system, your franchise agreement, and the responsiveness of your franchisor is of great significance. If handled strategically, this opportunity can lead to a huge improvement in franchisor/franchisee relationships.
Who is going to take the call?
Franchisees have often expressed the concern that prospects do not get a balanced picture of a franchise system because the franchisor specifically directs the prospects to speak with “franchisee shills” for the corporation who paint a very favorable and unbalanced picture.
Franchisors on the other hand are concerned that owners associations are filled with malcontents that give a message that is just as unbalanced in a negative sense.
If an association is going to get the most leverage from this new-found opportunity, it must put into place a protocol that is in fact fair and balanced to all. The responses don’t have to be sugar-coated, but neither should they be white heat. Who delivers the message also must be well thought out. Presumably, the contact information included in the FDD would lead a prospect to call the association’s office and might be initially fielded by a staff person designated to receive general business calls. That person is probably not the appropriate spokesperson to discuss the franchise opportunity, and, in fact, even an experienced Executive Director is likely not be the right person, and viewed as an outsider by the franchisor.
A prospect in all likelihood will want to talk with an active owner who can offer current real-world experiences to his or her inquiry. Most likely that means that a designated member of the association’s Board (or, if it is a large system, perhaps a team of designees) may be appropriate. Whoever the designee(s) is should be known to the staff of the association and they should have a ready script of how to get the caller into the right hands.
What are they going to say? What are the risks involved?
If you are the designated spokesperson for your association, what are you prepared to say to a prospect? Heretofore franchisees throughout the system may have received random calls from prospects and informally answered questions, including the introduction of any biases that they may have had. Franchisees that responded to prospects had no need to have a prepared position as the calls were fairly random and even if they were too “hot”, a franchisor could slough it off as a “…oh yeah, you happened to call one of the few franchisees that is discontented and has a personal axe to grind” situation.
Having sought out the opportunity to be a player in this process, the association should develop a strategy to gain full advantage of the ability to validate or discourage future investors! At a minimum, your association should accept that it has a heightened responsibility to be prepared to present its position in a professional and consistent manner. In fact, it can probably expect to receive “test” calls from the franchisor to make sure that misinformation is not being dispersed.
The paradox for association leadership is the natural desire to promote and applaud your franchise brand, and your personal business, while utilizing the leverage of being able to ‘tell it like it is’ as an implicit encouragement (if not threat) to a franchise system to address critical concerns so the report card is deservedly positive.
A forward-thinking franchisee association recognizes that it shares a common goal with its franchisor – betterment of the franchise system for the common good. The definition of betterment can be broad, but it includes expansion of the system to maximize name recognition and optimize marketing opportunities. Prospective franchisees epitomize the opportunity to expand and since the number of prospects that knock on any particular franchisor’s door is a finite number, each one of them is a precious commodity to the franchise system. More than reason enough to have a well thought-out response.
The failure to take a strategic approach to responding to FDD inquiries could lead to disastrous results. Rather than increase the level of collaboration between management and your FOA, you might do little more than prove to management that the FOA is as ‘evil’ as may have been suspected. Criticisms that are not based upon strategic thinking may devalue your franchise, your relationship with your franchisor, and your own business—certainly not the hoped for consequence of gaining FTC disclosure rights!
The AAFD has a recommended solution for associations that can help provide a reasoned response to prospects. The solution involves two steps:
- Have the AAFD prepare a comparison of your franchise agreement to the AAFD’s Fair Franchising Standards. It is strongly suggested that this review include the creation of a focus group of franchisees to constructively evaluate the actual practices of your franchise systems (to compliment the AAFD’s grading of your franchise agreements).
- From the contract comparison exercise, the AAFD can prepare an Initial Opportunity Review for your Franchise System that can be distributed to prospects.
- Share the AAFD’s tentative report with management, and encourage an opportunity to resolve negative aspects of the report. Critical to this step is convincing management of your FOA’s strong desire to issue a positive report to the investing public.
- Following negotiations with your franchisor, the AAFD will issue a final report, ideally one that that is a product of a newly embraced collaborative culture inspired by the FTC disclosure opportunity.†
Having the AAFD independently grade and evaluate your franchise system has several benefits. Foremost is that fact that you are engaging a third party opinion that does not pit your members ‘opinions’ directly against management. Indeed, your goal will be to address issues raised by the AAFD for the mutual benefit of all. The AAFD will share that goal in petitioning your franchise system to address concerns raised by our evaluation.
The AAFD’s Fair Franchising Standards is one of the cornerstones of the AAFD’s Total Quality Franchising initiatives. It is a collaborative body or work that reflects consensus among franchisors, franchisees and franchise attorneys. No standard gets adopted without a majority vote from each of the constituent groups, thus ensuring that it is balanced for all interests. Having your contract compared and graded against those standards provides you with a disciplined, independent review of your contract and helps you to formulate a strategy for possible discussions with your franchisor on contractual matters.
Ultimately, the Initial Opportunity Review is a product designed to help prospects rationally review a franchise system. But the larger purpose, and the real goal of FTC disclosure, is to urge negotiated agreements and relationships that address the legitimate concerns of franchisees. This must be the foundation of your strategy towards FTC disclosure.
Contractual matters are a key element of the AAFD review, but there are many other aspects as well. With the baseline of a contract comparison, preparation of an Initial Opportunity Review flows in a natural progression. The value to the association is that it represents a pre-packaged analysis that is professional looking and independently prepared and provides a consistent message to prospective franchisees. It is also possible that it could be a revenue generator for the association if you charged a fee for it, but that is something that you might to consider carefully if you intend it to have wide-spread circulation.
Preparation of an Initial Opportunity Review may offer associations a new point of leverage for negotiations with your franchisor. Some associations have asked us to grade their contracts on behalf of the franchisees only to find that the franchisor had no desire to consider the comparison or modify his/her contract. Knowing that the AAFD’s Franchise Opportunity Review is for public consumption will likely compel your franchisor to have renewed interest in the grade your franchise system achieves.
† Where or what is this footnote – is this even necessary to this article, or should we simply reference our earlier article on this subject?
† Consider engaging the AAFD’s negotiation strategy workshops conducted personally by AAFD Chairman, Robert Purvin, to build an effective plan and strategy to accomplish your ultimate association goals.