Most of the challenges encountered by young franchise systems can be avoided with planning and following best practices. Common routes to trouble include the failure to ensure strong unit level economics, charging too much or too little in franchise royalties and fees, or launching into franchising undercapitalized. Early systems can also end up recruiting the wrong franchisees and end up tangled in litigation.
Build with the end in mind
Emerging brands often make two big recruiting mistakes. First, they don’t know who their ideal franchisee is. Second, they may ignore their ideal franchisee profile just to get some early franchisees in the door. One client called this group “the dirty dozen,” as in, “if we can just get that first dirty dozen signed up and moving, we can be more selective later.”
This is wrong. Early franchisees are among the most important recruiting you will ever do. They set the tone, their results show up in your Item 19, they serve customers and build your brand, and they are also your first validators. Guard your brand reputation by only admitting great franchisees right from the beginning.
Move out recruiting mistakes
What happens if you let in the wrong type of franchisee? Not surprisingly, this same client found themselves in exactly this situation. A franchisee recruited early on just wasn’t a good personality fit. They struggled to work collaboratively with the franchisor and with clients. This franchisee wasn’t successful, complained constantly, chewed up hours of phone support (mostly complaining) and was a terrible validator.
The franchisor threw tons of extra effort, additional training and resources at this franchisee in the hopes of turning things around. The franchisee’s business results were actually good. But they were still unhappy. Having learned the corporate team was willing to jump and throw resources to address the smallest complaint, complaining loudly became that franchisee’s main modus operandi.
If you need to unwind and to gracefully move a bad-fit franchisee out of the system, first ensure you’ve provided the full support and training promised in your recruiting materials and disclosures. If you have done that and even put in extra effort (all of which needs to be documented) and the franchisee still isn’t a happy or productive member of your brand community then move to Phase 2.
This is a critical conversation. Once you have delivered everything the franchise promises, if that franchisee is still underperforming, not delivering a quality experience for customers or is unhappy, you need to let them know they cannot continue in the system this way. If truly unhappy, they may be relieved that you want to try to find a path to let them leave the system. Usually if you make concessions around personal guarantees and other things to allow them to sell their business and gracefully leave, that’s best for everyone. But sometimes even when a franchisee is unhappy, you asking them to leave can be a blow to their ego and cause them to lash out with threats of litigation.
Involve counsel and listen to your advisers
Problems are often further exacerbated when franchisors fail to take the advice of their professional advisers. One significant piece of litigation could bring a franchise system down or significantly impair growth. Engaging in litigation with a problematic franchisee can cause the franchise to incur significant legal fees and costs. Those funds are better used for system growth, critical investments in technology, franchise development, and staff to support franchisees.
“Litigation” need not involve a court action, as many franchise agreements require mediation or arbitration before any court action can be taken. However, when we speak of the enormous toll that litigation can take upon young and emerging franchisors, this may occur even well before a statement of claim is issued or even before a disgruntled franchisee threatens to issue a claim against the franchisor. A franchisor can get caught up in reminding its franchisees of their contractual obligations and then get into heated discussions. The threat of litigation is ever present. Franchisors need to be concerned about the language that they use in all their correspondence with their franchisees, as one never knows whether such correspondence will end up as evidence before a court of law. Contentious exchanges of emails can easily cause consternation and be counter-productive or even harmful from a legal perspective.
Establish strong relationships
Franchisors that inadvertently get caught up in distracting litigation-oriented issues often missed the opportunity to establish strong relationships upfront and end up having to back-pedal. But even if this is the case, it’s never too late to try to reboot the relationship and work on ways to improve communication. Rather than engage in contentious exchanges with their franchisees to enforce their franchise agreements, franchisors are encouraged to first look for ways of bridging the gap with their unhappy franchisees. Of course, there are occasions when franchisors need to take legal action, but they often do not, at least in the initial stages.
The relationship also depends on a strong and accurate franchise disclosure document. Inaccurate or misrepresentative disclosures are a recipe for trouble. It is critical for the management team to personally approve every new franchisee and ensure they are proceeding with full disclosures in place and have no erroneous or overly optimistic expectations. Establishing clear guidelines in the legal documentation is the first step in this relationship. If later you mutually determine it is a poor fit, returning to that documentation will help create a logical path forward that will hopefully avoid litigation.
Alicia Miller is a managing director at Catalyst Insight Group. Her Development Savvy column covers smart ways to market and grow a franchise. Reach her at email@example.com. Joseph Adler, a partner at Hoffer Adler, contributed to this column.