Can Uniformity [Really] be Achieved in Franchise Relationships?
In a comment to a recent post - "5 Things to Know before Buying a Franchise" - the Franchise King, Joel Libava, raises the critical issue of maintaining "uniformity" in franchise agreements. That is, the insightful Mr. Libava, challenges the propriety of promoting negotiated modifications to franchise agreements. The point raised by Mr. Libava is a legitimate and genuine issue that must be evaluated by both franchisors and prospective franchisees.
From a franchisors perspective uniformity is a critical factor that must underly the franchisors legal relationship with its franchisees. Similar to the uniform standards and procedures inherent in franchise systems, franchise agreements must also maintain consistent levels of uniformity. Such uniformity will, at a minimum, serve to reduce litigation exposure and foster a consistent platform for the management and growth of the overall franchise system.
From a franchisee's perspective, uniformity in franchise agreements may be a positive factor (i.e., a franchisor committed to its franchise agreement and systems) if the proposed franchise agreement is "balanced" and the franchisor possesses a substantive track record. So how do you determine if the franchise agreement is "balanced" ? You do your research, review the franchise agreement and FDD with a qualified franchise lawyer, speak to qualified franchise consultants and conduct the necessary due diligence. Chances are that there will be "imbalances" in your proposed franchise agreement - there always will - but you must honestly evaluate the impact of this relationship.
So how do I put all this together, i.e., "franchisors perspective", "franchisees perspective", "balance", "imbalance"? Here are my thoughts:
1. If you are a franchisor, focus on the development of a balanced franchise agreement that fosters the maintenance, protection and growth of, both, your franchise system and business interests of your franchisees. Once this is achieved - really achieved - then stick to your franchise agreement and be prepared to "walk-away" from potential franchise sales;
2. If you are a prospective franchisee and you have viable questions or concerns about a potential franchise investment (after you have conducted the necessary due-diligence and evaluated the legal implications of the franchise agreement) then be prepared to "walk away" .
The real issue comes down to a "third scenario" involving a "franchisor not prepared to walk-away" or a "franchisee not prepared to walk away". These are the situations where negotiations and targeted franchise agreement modifications come in. For that prospective franchisee I would much rather obtain targeted franchise agreement modifications that I know will have a substantive impact on the prospective franchisees rights. I think that Mr. Libava's position would be that there should not be a third scenario?
Charles,
Great topic. (But, a complicated one)
Thank you for the shout out..
Now, you know I tend to lean towards franchisee protection, even though most of my income is derived from franchisors that I've been able to find great franchisees for.
(I'm a little different than other franchise consultants/brokers)
Here's where this topic gets weird for me;
Say that I just invested in a franchise of 1-800-DOLPHIN, and I was able to shrewdly negotiate better territory terms for myself then were offered in the FDD. A year later, at the company convention, I blab this fact to a franchisee that is successful, and has been around a while.
That franchisee then blabs it. Then this very successful franchisee starts getting a resentment. This resentment keeps growing. He is not doing as well as a franchisee, because his head is messed up by this.
Maybe, he'll try to sue the zor-whatever.
Even without litigation, this little side-deal has cost this franchisor royalty money from the successful franchisee who isn't doing as well, and some possible legal costs to boot.
Was it worth it for the franchisor to negotiate the FDD?
The Franchise King®
Most of the required uniformity comes through the operations manual, consistent franchise agreements are not necessary.