Franchising World, December 2006
By Ken Houck, CFE
Franchisees and franchise companies come together to build a business relationship for a period of 10, 15, 20 years or sometimes longer. The goal is to be mutually, financially beneficial. Each party enters into the franchise agreement with a certain vision of their future in mind. As in any relationship, business or personal, things may not always go the way one had envisioned them. That is natural, but what causes the relationship to go sour, or become adversarial? Let’s face it, neither party gets pleasure from an uncomfortable, sometimes confrontational and possibly financially-expensive situation.
There are many ways a franchise relationship can become strained. The franchisee may believe he was misled before signing the franchise agreement. The franchisee may not be making the profits expected, not receiving the support he believed he should receive, may not have faith in the business model any longer, may not understand the franchise agreement or may have never read it. The franchise system may believe the franchisee is a renegade, not truthful or even deceitful. The franchise company’s culture and philosophy may be to let each franchisee make it on their own. These are just a few of hundreds of reasons for deterioration of the relationship.
Top 10 list of issues that can cause conflict:
1. Encroachment and non-traditional locations-defined protective radius,
2. Remodel requirements, clear-cut requirements, no surprises,
3. New product introductions or unapproved products,
4. New system introductions-reasonable time for implementation,
5. Inferior operating standards-consistent tool for measurement and consistent application,
6. Use of advertising funds-establish co-ops,
7. Transfer of ownership-clear policy,
8. Non-compete covenants,
9. Default and termination procedures, and
10.Renewal issues (facility upgrades, modifications to the franchise agreement).
Imagine that, at some point, one of the parties involved makes the conscious decision that he has had enough. He closes the door on the relationship. This usually comes from a breakdown in communication somewhere. The conversations may have evolved from avoiding the facts to keep from hurting someone’s feelings, not having the courage to have tough conversations and leads to communication that becomes personal and heated, then talks just stop. At this point everything seems to get done in writing, documenting the communication, and getting poised for some form of legal action.
Neither party enters into the agreement initially with failure as the goal. The loss of a franchisee is expensive for both the franchisee, as well as the franchise company. Although the termination of the franchise agreement sometimes is the final answer, it should be the exception and not the rule. A strained relationship becomes worse due to poor communication and resolution skills. Ironically the way to begin the repair of the relationship is still through communication and relationship skills.
A disenchanted franchisee may not be willing to listen to the franchise system or its consultants at the beginning of the conflict-resolution process. This is where the members of the franchise advisory council, if a system has one, may be helpful in explaining the reasoning behind the franchise company’s methods. After all, the members of the franchise advisory council are themselves franchisees and peers of the financially- and emotionally-injured party. Sometimes the franchisee may have a valid complaint and the advisory council members may be able to better communicate the problem to the franchise system as they are emotionally-removed from the situation. After all, it is hard to be logical when one is emotional.
Franchise advisory councils are usually made up of some great operators, businesspeople and mentors. Finding the right member of the advisory council to talk to the franchisee involved can usually be done without going to great lengths. This person, or mentor, can walk the franchisee through the resolution process from start to finish in many situations. However, the franchisee involved must seek the advice from a mentor with an open mind and a goal of repairing the relationship with the franchise system. The business relationship didn’t deteriorate overnight and the repair will also take considerable time as each party must build credibility with the other again.
Larry Tate, chairman of the International Franchise Association’s Franchise Relations Committee and senior vice president of franchise sales for the 500-unit Golden Corral Buffet and Grill chain recalls the song “I’ve Got You Under My Skin” and the line “Let’s stop before we begin.” “I think the best way to resolve franchise relationship problems is to stop them before they start whenever possible.”
"Open lines of communication with personal contact and feed-back will allow many issues to rise to the surface early, when they can be productively discussed and resolved, before reaching the stage where both sides have hardened their positions and are digging in for a pitched battle.
“This franchise system works hard to keep the lines of communication open and operating. However some situations do require formal methods of dispute resolution and one of the three processes outlined here may be appropriate for you.“
Methods of Resolution
There are three methods of resolution prior to litigation that can be used if progress has not been made to this point. They are an ombudsman program, mediation and arbitration. Each one has their place in the resolution process and you will have to consider the details of your case to pick the avenue that is the best fit for your situation.
Ombudsman
The ombudsman program seems to be the least intrusive to either party involved. The ombudsman is one that investigates reported complaints, reports findings, and helps achieve equitable settlements. “An ombudsman is a third party who helps the franchisee and franchisor work through their differences,” says Haynes & Boone Partner Joyce Mazero. “The ombudsman will typically work with both parties over an extended period of time to help them identify their issues and find answers to their challenges. This person can be a member of the staff of the franchisor, another franchisee, or an independent third party.”
Both parties will agree on the individual who is to be the ombudsman. The ombudsman is working as a liaison between both parties and strives to get a win/win situation as the final result. An ombudsman program is available through IFA at www.IFAresolve.com.
MediationMediation is an intervention between conflicting parties to promote reconciliation, settlement or compromise. “Mediation involves the selection of a third party to help the parties talk to each other, and help them find solutions to their problems,” says Mazero. “In a typical mediation, the mediator will set aside a full day to meet with the franchisor and franchisee as to the issues outstanding, and how each proposes to address those issues. At the start of the mediation, the mediator will typically meet with both parties in the same room, explain the mediation process, and allow each party to verbally expound upon their initial submission. The mediator will then typically separate the parties, and meet with each one individually, help them find potential solutions to their problems, and remind them of the risks they face in failing to reach a mutually acceptable accommodation. Ultimately, when the mediator believes a proposal has been made from one side that will be acceptable to the other, the mediator will bring the parties face to face and outline the solutions.”
Mazero adds: “There are certain steps each party can take to improve the likelihood the mediation will be successful. First, mediation is not simply a time for the lawyers to meet. While lawyers who are involved in a dispute may need to be present at mediation, the decision-makers from both franchisor and franchisee must be present. The decision-makers must come to the mediation with an open mind; if either party thinks mediation will magically produce a resolution, they will be disappointed. It is also helpful if everyone is ‘invested’ in the mediation process. Investment can occur by sharing the expenses of the mediation, but it also occurs when everyone understands that mediation is crucial. A good mediator does not have to have formal mediation training, but they do need to understand franchising as franchise mediation is different from mediation in other businesses where the parties either are not likely to do business together in the future, or do not want to do so. The mediator must be creative, as solutions are typically not obvious, and typically not found in the initial proposals of the parties.” Mediation can be a positive situation, but usually one or both parties may have to make some concessions.
Mediators can be found on the franchise system’s staff, a fellow franchisee, a franchise consultant or franchise attorney. If using an employee of the franchise firm or another franchisee, mutual trust from both parties is a requirement.
Arbitration
Arbitration is the hearing and determination of a case in controversy by an arbitrator (judge). Binding arbitration must be agreed upon by both parties and many systems include in their franchise agreements that arbitration must be an avenue taken before or in place of litigation against either party. With arbitration, there will be a judge hearing the case and there may also be a small panel of peers or experts. The arbitration may not be held in a court room, it could take place somewhere as simple as a conference room in a nearby hotel. Each party will have the opportunity to state their case and witnesses may also be used to support claims made. After all testimony is heard, the arbitrator will make a decision. Both parties are bound by the arbitrator’s decision. With arbitration there is definitely a winner and a loser. Neither party may be completely happy with the outcome of the arbitration, but nevertheless, they must abide by it.
Resolving Conflict
The methods listed above are all to seek the resolution of the disagreement. If no resolution can be reached using the ombudsman program, mediation or binding arbitration then the franchise company and franchisee will end up in costly litigation, the result of which may be the termination of the franchise agreement and the closure of a viable business with or without continuing financial obligations. The franchise system may elect to release the franchisee from the agreement and the franchisee would have to cease doing business under the brand’s name and business format.
Hopefully, one of the three methods of dispute resolution discussed above will be effective and the franchisee and franchise company will have many more years of a successful business relationship.
Ken Houck, CFE, is vice president, franchise operations west of Golden Corral Buffet and Grill. He can be reached at khouck@goldencorral.net.
By Ken Houck, CFE
Franchisees and franchise companies come together to build a business relationship for a period of 10, 15, 20 years or sometimes longer. The goal is to be mutually, financially beneficial. Each party enters into the franchise agreement with a certain vision of their future in mind. As in any relationship, business or personal, things may not always go the way one had envisioned them. That is natural, but what causes the relationship to go sour, or become adversarial? Let’s face it, neither party gets pleasure from an uncomfortable, sometimes confrontational and possibly financially-expensive situation.
There are many ways a franchise relationship can become strained. The franchisee may believe he was misled before signing the franchise agreement. The franchisee may not be making the profits expected, not receiving the support he believed he should receive, may not have faith in the business model any longer, may not understand the franchise agreement or may have never read it. The franchise system may believe the franchisee is a renegade, not truthful or even deceitful. The franchise company’s culture and philosophy may be to let each franchisee make it on their own. These are just a few of hundreds of reasons for deterioration of the relationship.
Top 10 list of issues that can cause conflict:
1. Encroachment and non-traditional locations-defined protective radius,
2. Remodel requirements, clear-cut requirements, no surprises,
3. New product introductions or unapproved products,
4. New system introductions-reasonable time for implementation,
5. Inferior operating standards-consistent tool for measurement and consistent application,
6. Use of advertising funds-establish co-ops,
7. Transfer of ownership-clear policy,
8. Non-compete covenants,
9. Default and termination procedures, and
10.Renewal issues (facility upgrades, modifications to the franchise agreement).
Imagine that, at some point, one of the parties involved makes the conscious decision that he has had enough. He closes the door on the relationship. This usually comes from a breakdown in communication somewhere. The conversations may have evolved from avoiding the facts to keep from hurting someone’s feelings, not having the courage to have tough conversations and leads to communication that becomes personal and heated, then talks just stop. At this point everything seems to get done in writing, documenting the communication, and getting poised for some form of legal action.
Neither party enters into the agreement initially with failure as the goal. The loss of a franchisee is expensive for both the franchisee, as well as the franchise company. Although the termination of the franchise agreement sometimes is the final answer, it should be the exception and not the rule. A strained relationship becomes worse due to poor communication and resolution skills. Ironically the way to begin the repair of the relationship is still through communication and relationship skills.
A disenchanted franchisee may not be willing to listen to the franchise system or its consultants at the beginning of the conflict-resolution process. This is where the members of the franchise advisory council, if a system has one, may be helpful in explaining the reasoning behind the franchise company’s methods. After all, the members of the franchise advisory council are themselves franchisees and peers of the financially- and emotionally-injured party. Sometimes the franchisee may have a valid complaint and the advisory council members may be able to better communicate the problem to the franchise system as they are emotionally-removed from the situation. After all, it is hard to be logical when one is emotional.
Franchise advisory councils are usually made up of some great operators, businesspeople and mentors. Finding the right member of the advisory council to talk to the franchisee involved can usually be done without going to great lengths. This person, or mentor, can walk the franchisee through the resolution process from start to finish in many situations. However, the franchisee involved must seek the advice from a mentor with an open mind and a goal of repairing the relationship with the franchise system. The business relationship didn’t deteriorate overnight and the repair will also take considerable time as each party must build credibility with the other again.
Larry Tate, chairman of the International Franchise Association’s Franchise Relations Committee and senior vice president of franchise sales for the 500-unit Golden Corral Buffet and Grill chain recalls the song “I’ve Got You Under My Skin” and the line “Let’s stop before we begin.” “I think the best way to resolve franchise relationship problems is to stop them before they start whenever possible.”
"Open lines of communication with personal contact and feed-back will allow many issues to rise to the surface early, when they can be productively discussed and resolved, before reaching the stage where both sides have hardened their positions and are digging in for a pitched battle.
“This franchise system works hard to keep the lines of communication open and operating. However some situations do require formal methods of dispute resolution and one of the three processes outlined here may be appropriate for you.“
Methods of Resolution
There are three methods of resolution prior to litigation that can be used if progress has not been made to this point. They are an ombudsman program, mediation and arbitration. Each one has their place in the resolution process and you will have to consider the details of your case to pick the avenue that is the best fit for your situation.
Ombudsman
The ombudsman program seems to be the least intrusive to either party involved. The ombudsman is one that investigates reported complaints, reports findings, and helps achieve equitable settlements. “An ombudsman is a third party who helps the franchisee and franchisor work through their differences,” says Haynes & Boone Partner Joyce Mazero. “The ombudsman will typically work with both parties over an extended period of time to help them identify their issues and find answers to their challenges. This person can be a member of the staff of the franchisor, another franchisee, or an independent third party.”
Both parties will agree on the individual who is to be the ombudsman. The ombudsman is working as a liaison between both parties and strives to get a win/win situation as the final result. An ombudsman program is available through IFA at www.IFAresolve.com.
MediationMediation is an intervention between conflicting parties to promote reconciliation, settlement or compromise. “Mediation involves the selection of a third party to help the parties talk to each other, and help them find solutions to their problems,” says Mazero. “In a typical mediation, the mediator will set aside a full day to meet with the franchisor and franchisee as to the issues outstanding, and how each proposes to address those issues. At the start of the mediation, the mediator will typically meet with both parties in the same room, explain the mediation process, and allow each party to verbally expound upon their initial submission. The mediator will then typically separate the parties, and meet with each one individually, help them find potential solutions to their problems, and remind them of the risks they face in failing to reach a mutually acceptable accommodation. Ultimately, when the mediator believes a proposal has been made from one side that will be acceptable to the other, the mediator will bring the parties face to face and outline the solutions.”
Mazero adds: “There are certain steps each party can take to improve the likelihood the mediation will be successful. First, mediation is not simply a time for the lawyers to meet. While lawyers who are involved in a dispute may need to be present at mediation, the decision-makers from both franchisor and franchisee must be present. The decision-makers must come to the mediation with an open mind; if either party thinks mediation will magically produce a resolution, they will be disappointed. It is also helpful if everyone is ‘invested’ in the mediation process. Investment can occur by sharing the expenses of the mediation, but it also occurs when everyone understands that mediation is crucial. A good mediator does not have to have formal mediation training, but they do need to understand franchising as franchise mediation is different from mediation in other businesses where the parties either are not likely to do business together in the future, or do not want to do so. The mediator must be creative, as solutions are typically not obvious, and typically not found in the initial proposals of the parties.” Mediation can be a positive situation, but usually one or both parties may have to make some concessions.
Mediators can be found on the franchise system’s staff, a fellow franchisee, a franchise consultant or franchise attorney. If using an employee of the franchise firm or another franchisee, mutual trust from both parties is a requirement.
Arbitration
Arbitration is the hearing and determination of a case in controversy by an arbitrator (judge). Binding arbitration must be agreed upon by both parties and many systems include in their franchise agreements that arbitration must be an avenue taken before or in place of litigation against either party. With arbitration, there will be a judge hearing the case and there may also be a small panel of peers or experts. The arbitration may not be held in a court room, it could take place somewhere as simple as a conference room in a nearby hotel. Each party will have the opportunity to state their case and witnesses may also be used to support claims made. After all testimony is heard, the arbitrator will make a decision. Both parties are bound by the arbitrator’s decision. With arbitration there is definitely a winner and a loser. Neither party may be completely happy with the outcome of the arbitration, but nevertheless, they must abide by it.
Resolving Conflict
The methods listed above are all to seek the resolution of the disagreement. If no resolution can be reached using the ombudsman program, mediation or binding arbitration then the franchise company and franchisee will end up in costly litigation, the result of which may be the termination of the franchise agreement and the closure of a viable business with or without continuing financial obligations. The franchise system may elect to release the franchisee from the agreement and the franchisee would have to cease doing business under the brand’s name and business format.
Hopefully, one of the three methods of dispute resolution discussed above will be effective and the franchisee and franchise company will have many more years of a successful business relationship.
Ken Houck, CFE, is vice president, franchise operations west of Golden Corral Buffet and Grill. He can be reached at khouck@goldencorral.net.
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