REPRINTED FROM THE FRANCISE VOICE, CANADIAN FRANCHISE ASSOCIATION
OFFICIAL MEMBER MAGAZINE, November 12, 2021
By: Frank Zaid
The effect of the COVID-19 epidemic on franchising has been enormous. Much has been written and spoken about the economic effects on franchisors and franchisees, the distribution problems caused by lockdowns and social distancing, the inability of service franchise systems to work at customer locations, and the restrictions on franchise location systems, particularly restaurant and food service franchises, to host customers at their locations. The industry has responded to these challenges in many ways, and will continue to do so. What are some of the emerging trends and future prospects, particularly in respect of franchise relations, communications and dispute resolution?
During very challenging times, many franchisors seek advice from established outside sources as they have no experience in dealing with new challenges which arise. Franchisees seek increasing support from their franchisors and relationships between the parties can become strained leading to the emergence of new forms of franchise system communications and alternate dispute resolution.
How have some franchisors utilized expert advice and assistance to help them deal with difficult challenges to their systems, especially when they are only experienced in their own business models and have little knowledge of alternate ways to operate their systems?
Franchisor advisory boards
My answer is rooted in a structure that I highly recommend to franchisors at all levels. An increasing number of franchisors have formed a board of directors or a structured franchisor advisory board with handpicked, trusted advisors who can draw on their own experience, knowledge, and judgment in franchising to assist the franchisor in planning growth strategies, solving challenges and analyzing performance. Franchisor advisory boards are used by many franchise systems in the United States, and the concept is gaining more traction in Canada. Franchisor advisory boards are solely for the benefit of franchisors. There are no franchisee representatives on these boards as contrasted with franchisee advisory boards or councils (commonly called “FABs”). Franchisor advisory boards can include individuals with financial, legal, operational, technology or management experience. Potential candidates can be located through other franchisor recommendations, present and historic franchise leaders, and on social media platforms for professionals like LinkedIn. But they must fully understand the franchise model and be objective, flexible and creative. Meetings are structured and held at regular intervals or more frequently as needed. The more independent advice the franchisor receives, the more likely the franchisor will be successful in growing the system, solving challenges, minimizing mistakes and resolving disputes. The cost of an advisory board is minimal compared to the operational savings which can be achieved.
In 40 years of franchise law practice, I worked with over 400 franchise systems. In 10 years acting as a franchise mediator and arbitrator, I have seen many unnecessary and very costly mistakes. I have served and continue to serve as a director and advisor on franchisor boards and have learned much from brilliant owners and board members. This experience has led me to the view that a franchisor who does not consider forming a franchisor advisory board must have a valid reason for not doing so, or is otherwise misguided.
Franchise system communications
A number of years ago the International Franchise Association Franchise Relations Committee published a handbook entitled “Resolving Disagreements by Working Together: A Dispute Resolution Handbook for Franchisors and Franchisees”. In the Introduction to the handbook it was stated that “[R]esolving disagreements to the satisfaction of both franchisors and franchisees has become the hallmark of successful franchise systems.” That premise has equal, if not greater, application today.
The enormous strains placed on franchise systems during the pandemic have given rise to a growing number of franchise disputes which often result in litigation. Franchise litigation is disruptive, expensive and unpredictable for both sides. And it is very difficult to maintain positive franchise relations while there is ongoing litigation. It is therefore in the interests of both franchisors and franchisees to resolve disagreements before they reach litigation. What are the causes of these disputes or disagreements and what are franchisors doing to resolve these disputes at an early stage to avoid or minimize litigation? Will these trends continue?
Experienced franchisors and legal counsel know that franchise disagreements or disputes are not necessarily rooted in legal issues. Nevertheless, a prime source of franchisee unrest results from poor franchisor communications.
Successful franchise systems need to grow in numbers of franchisees and system sales. But growth often results in changes in the franchise relationship brought about by acquisitions, new management, and the withdrawal of the original founders. Franchisors must communicate changes to franchisees and allow them to absorb the effects of the changes.
Market conditions and new competition will inevitably lead to systemic changes. But nothing has affected franchise relationships and communications more in recent years than technology. While technology developments are intended to improve efficiency and operational information, franchisors are frequently guilty of introducing new technology too quickly and without adequate research. They need to communicate with the franchise community, give specific information on what is being introduced, the cost, and the expected results and obligations. And they need to test the technology and seek some input from franchisees on what they feel is needed.
It is not uncommon that franchisee unrest may result from inconsistent treatment of franchisees. How often do franchisees complain that other franchisees are being favoured to the exception of others? Does the franchisor explain why there may be legitimate exceptions to the requirement for system compliance?
Early dispute resolution
The logical way for franchisors to deal with possible disagreements or disputes is to ensure that there are adequate programmes in place for early dispute resolution (EDR). These programmes can result in quick solutions and maintain and enhance the franchise relationship. They can be operated at low cost, with minimal disruption to the franchise system, and provide an opportunity to resolve disagreements or disputes without litigation.
One such programme may be the use of franchisee mentors. A new franchisee is paired with an experienced franchisee, for a period of time, to assist in explaining franchise system operational matters and generally answer questions. Often the mentor will correct a new franchisee’s misunderstanding about an operational matter before the problem becomes more acute.
Another programme used by some franchisors is an “executive hotline” which allows franchisees to contact the CEO or another high level management officer on a confidential telephone number or via Zoom to raise a concern or answer a question. The franchisor officer must be certain that the issue will be dealt with in a timely manner. There is no cost to the franchisee, and the matter must be kept confidential without repercussion to the franchisee. Sometimes the matter may even result in a positive system change.
Franchisors have been compelled to set up a number of programmes for better and more frequent communications. The programmes are traditionally carried out by field consultants, through call centres, at regional or town hall meetings, via a system wide intranet, at conventions, and/or through surveys or questionnaires. But most commonly in recent times the programs have been virtual. The key is for the franchisor to listen to, appreciate, and respond to the concerns expressed by its franchisees. During the challenging times of the pandemic pro-active franchisors have stepped up the information flow to their franchisees and taken aggressive steps to assist the franchisees with new and alternate marketing advice, fresh product and service offerings, and cash flow and revenue management. No doubt these system improvements will continue.
Franchisee advisory boards or councils
FABs have become much more popular and functional during the pandemic. Most FABs have written by-laws or rules and procedures to prevent their operations from becoming avenues for individual complaints. FABs should consider major operational matters, new system developments, and significant changes to the system, and matters that will require substantial investment to franchisees. With the approval of a FAB to these types of matters, acceptance by the franchisee body is almost assured.
One very successful franchisee advisory board with which I have experience has the following written purpose for its FAB in its by-laws: “To provide an effective platform for the franchisor to secure valuable feedback from the franchise community, leading to a stronger franchise system. The franchisee advisory board will seek to positively and meaningfully influence the franchisor, acting as a conduit to enhance franchisee performance and engagement, share best practices and inspire confidence across the system.” Since the start of the pandemic the franchisor has enhanced communications with its franchisees through virtual webinars, town hall meetings and intranet communications, regularly including members of the board of the FAB as a speaker and panellist in virtual town hall and convention meetings. This trend will undoubtedly continue in the future.
Independent franchise system ombuds program
The final EDR program which franchisors can consider is the establishment of an independent franchise system ombuds program. The program is funded solely by the franchisor at no cost to its franchisees. There must be commitment by franchisor senior management and acceptance by franchisees. The ombudsperson should operate under a written agreement with the franchisor as an independent contractor and not an employee of the franchisor. The ombudsperson effectively operates as a go-between with the objective of resolving the disagreement or dispute whether it is raised by the franchisor or a franchisee. There must be a defined written process which is consistently followed and the franchisor must appoint a high level management representative who will be readily accessible to interact with the ombudsperson. There are no repercussions to a franchisee that raises a matter with the ombudsperson and there is no direct interaction between the parties. Independent ombuds programs are becoming more popular in the United States with large franchise systems, but have not been widely used in Canada, most likely because they have not been understood or publicized. However, they can be very useful in difficult times to assist the parties in resolving disagreements and improving the franchise relationship.
Mediation
Finally, a word about mediation which is a more legalistic procedure and which requires the consent of all parties to the dispute. Mediation is becoming a more popular method of resolving disputes. Many franchisors are providing for mediation in their franchise agreements or ancillary documents. It is frequently required before a formal claim can be commenced and in some jurisdictions mediation is required before a law suit can be set down for trial. The parties can agree to mediate a dispute at any time whether or not the process is called for in the franchise agreement or another document.
Mediation has proven to result in a high success rate of settlement or negotiated solutions even though the process is non-binding and confidential. Mediation is an open process in which the parties analyse the issues, consider their goals, and discuss possible options. If a settlement is reached, the mediation should not adjourn until minutes of settlement are prepared and signed.
An independent facilitator (the mediator) is chosen by the parties to conduct the mediation according to defined procedures which can be modified during the mediation process. Mediation allows the parties the opportunity to learn more about the other side’s case and to consider their options for resolving the dispute with a negotiated agreement or other options which will likely not be as desirable.
In the case of franchise disputes, I highly recommended that the mediator have broad franchise experience and an understanding of the business and operational aspects of franchise systems. Of course the mediator must also be trained in mediation processes. Typically a mediator of franchise disputes may be a franchise legal expert, a respected former judge, or an experienced general commercial mediator.
Franchisors have needed to adjust, learn, communicate, and be pro-active during the pandemic. The necessity for positive and frequent communications with franchisees has never been greater, and smart franchisors have turned to trusted advisors by establishing franchisor advisory boards to guide them and provide additional leadership during challenging times.
I know that many of the suggestions and models I have outlined above have become best practices for many pro-active franchisors and I predict will be industry trends in the future.
Frank Zaid
Franchise mediator, arbitrator, business operations consultant, expert witness, ADR Chambers
