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How to Protect Your Franchisee Equity

Posted on Date: Jun 27, 2019

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The theme of the 2019 AAFD Franchisee Leadership Summit is “Protecting Your Franchise Equity,” but we very well might have called it “Reclaiming Your Equity.” Truly, the important benefits of business ownership expected by franchise owners have been under siege for decades, and franchisees continue to see serious erosion of their ability to increase and secure the value of their franchise investments.

Over the past sixty years franchisee equity rights have continued to erode, with franchisors aggregating their control over a franchisee’s location, suppliers, marketing, and even retail pricing, in addition to the expected control over the branded franchise system. The notable exceptions to a disturbing trend are the rise of franchisee associations that have been able to leverage their collective strength to reclaim prized incidents of ownership that define and protect the equity value and return on investment.

In the 2019 Franchisee Leadership Summit General Sessions we will alert conference delegates to the continuing ways that equity ownership is eroding. More importantly, we will examine strategies and tools to reclaim and protect franchisee equity – mostly by encouraging strong independent franchisee associations that are able to leverage the collective strength of their members to maximize the value of their businesses through increased market power, negotiating leverage, legislative initiatives, and when necessary, through available dispute resolution tools.

Negotiating the Best Outcomes

The first and most desirable strategy to gain, secure, and protect the equity ownership of your business is through negotiation. The best relationships and deals are achieved through a collaborative process designed to garner agreements that satisfy and reward all parties to the relationship. Honing your negotiation skills to achieve a fair and balanced agreement is a learnable art.

Skilled counsel is an underappreciated and under-utilized tool at your disposal. Bring on counsel that understands the franchisee’s perspective and who can guide you through the negotiation process so that you can recognize and appreciate great outcomes.

Acting alone, most franchisees have insufficient negotiating leverage to entice and bargain effectively. By sharing your resources with your fellow franchisees through your franchisee association, you can afford serious and expert counsel to guide your negotiations. Your association also has the ability to deliver and trade value to your franchisor in exchange for the contractual rights and benefits needed to help your businesses succeed and to protect and enhance your business equity.

Take the time to analyze your association’s strengths, weaknesses, opportunities and threats. Do the same for your franchisor. Listen to your franchisor’s goals and be prepared to prove that your members are the best people on the planet to help achieve those goals. Then offer to bargain to deliver your franchisor’s goals in exchange for your own. Rather than demand rights, make a bargain for them. The best deals occur when everyone wins.

And at the end of the day, the best trade may be to achieve a franchise system where the stakeholders all feel rewarded and respected, and where the marketplace rewards the franchise system by an accreditation that says the franchise is “best in class.”

All of this can be gained through collaboration and negotiation. It is made possible by having a strong owners association applying its resources with able counsel.

The Importance of Legislative Influence

Every state and federal legislative district in the United States has franchised outlets in it, owned by franchisees. Franchisors most often only reside in one or a few legislative districts. Yet, franchisors have carried far more political influence. Why? Because franchise owners have historically done a poor job of working together, and becoming active in the political process, in efforts to protect their equity in their businesses.

It’s time to change the landscape and speak up. Franchisees are the money that drives the industry.  Franchisees invest, employ, support, and pay taxes in these local legislative districts. Our elected representatives need to be reminded of that, over and over. Will it make a difference?  It sure will.  Imagine Congress hearing from 10,000 franchisees on one issue. Not possible? Why not? There are that many franchisees in Subway alone. If we truly engage franchisees, properly brief them, give them succinct talking points, then why can’t we become a political force?

Much of the problem exists because we franchisees too often have our blinders on. We are just operating our franchises and dealing with the day-to-day problems keeping them operating. In doing that, we continue to grow our business, and most importantly, build equity. But, is that equity protected? Read your franchise agreement in detail before you answer that question. Being protected legislatively can help give you rights you currently don’t have, like freedom of association, termination rights, transfer rights, and most important of all, the fair opportunity to monetize your earned equity.

It won’t happen without effort. Franchisees need to cooperatively work on legislative efforts and develop relationships with their elected representatives. Most of all, franchisees need to engage in mass to support causes that benefit franchisees. We can make this happen and we will be successful!

Litigation Tools – Maximizing Resources for a Crucial Last Resort

Franchising can be a breeding ground for litigation due to the unique relationship between the parties. When the franchisee is not as successful as expected or when the franchisee perceives that the franchisor is not providing proper support, the seeds of litigation are planted.

Many times, franchisees who are struggling and facing significant financial losses look at litigation as their first option. Franchisees invest more than money into their franchise. They also invest significant mental and emotional energy. When all of that is threatened, the natural response is to go on the offensive. The major disadvantage of litigation is that it is not a quick and efficient method of resolving disputes. During the litigation process, the franchisee must be able to put emotion aside and look at options based on sound business decisions.

Franchise disputes may involve product pricing issues, issues related to costs of remodeling a location, encroachment on protected territories, or use of the advertising funds just to name a few. Frequently the parties are not seeking to end their relationship but to clarify the requirements under the franchise agreement. If the goal in these types of cases is to maintain the franchise relationship, the franchisor and franchisee must be mindful of their tactics and strategies. Litigation is an adversarial process where each side wants to “win” their case.  However, it can also lead to irreparable damage to the relationship.

An important caution is that litigation may often result in the termination of the relationship and can end rather than preserve and enhance a franchisee’s equity.

Hiring an attorney experienced in representing franchisees is essential. There are options available short of filing a lawsuit or claim in arbitration. Many franchise agreements require the parties to  attempt to resolve disputes by negotiation or mediation before litigation can begin. While informal efforts are a wise first step, they may consume limited franchisee resources and may limit a franchisee’s rights of investigation afforded in court. For the franchisor, early resolution may permit them to enter into a confidential settlement without having to disclose the terms in the Franchise Disclosure Document. An experienced lawyer can help guide the process and keep franchisees alert and informed.

As should be clear by now, franchise litigation usually is not the best first option when a franchisee has a dispute with their franchisor. Many franchise disputes arise due to a breakdown in communication between the franchisor and franchisee. In turn, the parties may no longer trust each other, preventing both parties from rationally assessing the business issues at stake in the litigation. The parties become entrenched in their positions.

A franchisee association may be critical. If there is a system-wide issue, a strong franchisee association may be key to reestablishing communication, and it is more difficult for a franchisor to opt to terminate a relationship that involves a large number of franchisees.

Not surprisingly, many franchisors discourage franchisees from forming associations. One of the goals of the association early in the process is to convince the franchisor that an association can assist in preventing and managing conflict with the franchisees. The officers of the association, elected by the franchisees, can serve as informal mediators in potentially contentious situations, such as when the franchisees are struggling financially or when large numbers of franchisees are upset with the performance of the system of the franchisor’s business decisions. If the franchisor is still resistant and the problems persist, the association now has significant strength due to the numbers of its members to proceed to litigation if necessary.

While franchise litigation can be a valuable tool to assist franchisees in enforcing their rights and protecting franchisee equity, it must be carefully considered. Otherwise, franchisees may find themselves in a long and costly battle with no certainty as to the end result.

Negotiation, legislative influence, and litigation are all tools franchisees can use to protect, preserve, and even broaden their franchise equity. One of the best tools, however, is building a strong and cohesive franchisee association.

The AAFD invites you to attend the 2019 Franchisee Leadership Summit and Annual Conference, Sept 15 – 18th in Mesa, AZ (in the Phoenix metro area) to attend our session on protecting your franchise equity. Learn more about our leadership summit.

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