From Favorite Son to Outcast Before You Realize It

Picture this. You were a top performing franchisee, displaying some of the highest percentage sales and growth in the entire franchise system. You attained an enviable position among other franchisees, as they looked to you as a leader in the system. Similarly, the franchisor showcased your operations to the franchisees and prospective investors as one to emulate. You were comfortable in your position, and you felt assured of a smooth, prosperous future in the franchise system. In fact, you were so confident that your present success would continue that you became lax and complacent in fulfilling what you regarded as "technical" obligations to the franchisor under your Franchise Agreement. Instead of minding the shop, you spent more time playing golf and basking in your prosperity.

Even though you did "technically" violate the terms of your Franchise Agreement on more than one occasion by not paying some of your monthly obligations to the franchisor on time, you were reassured of your position by your Franchise Business Manager and your District Consultant, over drinks at a charity ball. As a result, you were completely unprepared for the troubles that awaited you.

Changes in franchisor personnel or philosophy, as well as changes in the manner in which the franchisor does business affected your franchisee goals and direction. You resisted the changes, recognizing that these changes would adversely affect your business’s financial performance and the profitability of your organization. Predictably, your resistance upset the franchisor, who then took steps to transform your previous feelings of invincibility into cries of victimization.

Today, the franchisor regards you as readily expendable and easily replaced, either by aggressive franchisees who are more receptive to the changes in the company’s philosophy, or simply absorbed by the corporation itself. Unfortunately, your past complacency and failure to consistently fulfill your franchisee obligations now provide the perfect justification for the franchisor to remove you from the system, regardless of any oral representations made by the franchisor to the contrary.

All of a sudden, the number of QSC and Quality Assurance problems increase. Areas and issues previously overlooked and/or passively accepted by the franchisor are now specifically scrutinized, albeit unreasonably. Previously accepted "late payments" over the last 10 years are now critical elements of a less-than-stellar "payment history," which now precludes you from expansion, rewrites, extensions of your Franchise Agreement, and may even provide sufficient justification for premature termination of a midterm Franchise Agreement.

Wishfully thinking, this factual scenario would be unique and rare in the franchise world. However, too often, such events play out in franchise systems across the country, causing the demise of franchisee organizations, families, and the permanent destruction of livelihoods. How do you protect yourself?

1. DON’T BE COMPLACENT

Strictly follow the terms and conditions of your Franchise Agreement, including timely payment of all contractual obligations. Do not be overconfident in your relationship with the franchisor and its executives, for changes in personnel and policy can occur quickly, and the newcomers will not be clouded by any friendly relations with you and may simply apply the plain language of your Franchise Agreement. To be safe, do not rely on new policies or new courses of action that have been disclosed to you by the franchisor through conversation, especially any new policies as to when monthly payments are due to the franchisor. Confirm these new policies by writing and sending a Certified Letter to the franchisor, basically stating that based on the franchisor’s representations, you will now be making your royalty payments on or before the 25th of the month, rather than the 10th of the month, as it reads in your Franchise Agreement, and that the franchisor is to advise you in writing if it does not agree with your interpretation of the new policy. When you send the Certified Letter, include the subject matter of the letter on the Certified Receipt, or write the Receipt number in the heading of the letter.

Keep specific, detailed records of your payment history to the franchisor: when they are made, for what are they made, and to whom they are made. If possible, maintain proof of delivery receipts. Furthermore, always follow up important conversations where promises are offered or representations are made with a nice but confirming letter memorializing the conversation. In these times of revolving-door management, such letters are a necessity rather than a luxury. A rule to keep in mind is that franchisees who are the best documented are the best protected, and vice versa.

2. KEEP YOUR FINGER ON THE PULSE

A. Equipment

Visit your franchise business frequently, paying specific attention to details such as your Quality Service Controls. For QSR franchisees, focusing on food safety is critical, because of public and judicial sensitivity to outbreaks of salmonella, e-coli, and other such bacteria and/or disease. Regularly check the performance of each piece of equipment, especially where temperature is an issue of food safety. Although QSC’s are inherently subjective, objective measurements of temperature are difficult to dispute, unless the equipment prescribed by the franchisor is unable to achieve such temperatures because it is defective, or if health department standards have changed beyond the capacity of the equipment.

As with your payment history, maintain specific, detailed records of your operational equipment. Specifically, keep track of how much money you have spent on equipment, and maintain records of all repair and maintenance that you have performed on the equipment. Further, implement daily cleaning practices in your stores in order to provide you with immediate notice of when you need to focus on repairing any equipment in your store. Arguing to a court of jury in support of a termination proceeding that the franchisor is trying to save lives and protect the public’s health, safety, and welfare is a highly persuasive argument that is often used by the franchisor.

B. Employee Relations

A good employee today could be a rebellious employee tomorrow. Follow all government requirements imposed on employers, including the Fair Labor Standards Act and Title VII of the Civil Rights Act. Keep track of all employees’ overtime hours, and be specific as to their classifications and duties as "executives," if you wish to treat them as "exempt" from overtime pay. Simply classifying employees as "managers" creates more problems and offers little protection under the FLSA. Be certain to create, implement, and reinforce an anti-discrimination policy in hiring and treating employees, as well as in serving customers at your business. Document all employee misconduct, and maintain files for each employee. Establish a system of oral and/or written warnings for when employees deviate from required conduct. However, if you suspect that the employee could pursue a retaliatory action, consult an experienced labor lawyer before firing or taking any drastic measures with your employees.

C. Advertising

Comply with all provisions in your Franchise Agreement regarding national, regional, and local store marketing requirements. Document all monies invested in advertising, especially local-store marketing when such amounts can be credited against your advertising requirements in your Franchise Agreement. Only use those advertising materials which have been pre-approved in writing by the franchisor, and create and maintain files of the advertising performed by your franchise business.

D. Renovation and Remodeling

Gradually reinvest to comply with the franchisor’s current image and specifications requirements, as set forth in the Franchise Agreement. Document the work performed, the money spent, the timing of such expenditure, and the contractor used for the projects. Be sure to photograph the store before the work commences and after the work is completed, and send prints of the pictures to the franchisor to keep the franchisor updated. Confirm in writing with the franchisor that you are current with all image and specifications requirements. However, do not permit the franchisor to overstep its bounds and abuse the remodeling requirement. Remember, in the franchisor’s view, it is easy to spend someone else’s money.

III. WHEN ENOUGH IS NOT GOOD ENOUGH

If you receive a Notice of Default from the franchisor, immediately contact an attorney who specializes in franchise law. Do not ignore the notice or wait until the last minute to react. Ignoring the notice is the first step to extinction. Cure all legitimate defaults immediately. If you believe that the alleged defaults are pretextual and based on ulterior motives, protect yourself. Check the alleged defaults against your contractual obligations. Dispute all defaults in writing and send them by Certified Mail to the franchisor. Work with advisors and counselors to determine the franchisor’s true purpose. The best way to do this is to analyze your own goals and objectives as a franchisee and compare them with the apparent goals and objectives of the franchisor.

Not all franchisees are favorite sons. However, being diligent and active by thoroughly scrutinizing and documenting the progress of your business relationship with your franchisor will keep you from becoming an outcast.