Purchasing a franchise is not just starting a business. It’s entering into what all parties hope will be a long-term
relationship between the franchisor and the new franchisee, many of whom plan to use this new venture to build the
business and life of their dreams.
Focusing on the business itself is, without doubt, critical. But equally critical is a constant focus on and commitment to the relationship, from beginning to end.
Franchisors and franchisees must establish a solid foundation for the relationship, enter into it with eyes wide open, and, like all “couples,” be willing to devote the time and effort to rationally and reasonably make it through the rough patches. This foundation is necessary if they want to stay together long term or “part as friends” if the relationship becomes irretrievably broken.
Establishing the Foundation
The existence of a “pre-nup” is no longer surprising in modern relationships, particularly where one or both parties
have had some measure of success prior to entering into the relationship. It may seem illogical to plan for the end of a relationship before it officially begins, but that is precisely one of the functions of the franchise agreement. Some of the most controversial and sensitive points negotiated prior to signing the agreement are the “what ifs” – what rights does either party have to end the relationship and what happens to the business if that unfortunate trigger is pulled.
Often, perhaps because the default and termination provisions typically appear later in the agreement, these are among the last points the parties negotiate before saying “I do.” The goal, of course, is that neither party enters the
relationship with the intention of ending it. But if the franchise agreement is the “pre-nup” of that relationship, both parties are wise to suffer the awkward discussions and negotiations to achieve a degree of certainty around what happens if the relationship does end.
Sustaining the Relationship
Communication is the fuel that drives every relationship. Franchise systems have countless stress points that can
easily undermine the relationship, and many – if not most – are rooted, not in the fundamental viability of the
business itself, but in the parties’ neglect of their relationship through failure to communicate. Too often in franchise
relationships, the franchisor and franchisee – like the husband and wife in a marriage – lose track of each other. The franchisor might be too focused on selling franchises, opening new units, attracting private equity, or expanding or contracting its own infrastructure.
The franchisee may be struggling with the types of issues that plague all business owners – attracting and retaining the best employees, increasing and reinvigorating the customer base, delivering quality products or services, dealing with supply chain challenges and simply paying the bills. Because they become focused entirely on their own respective challenges and lose focus on the relationship itself, the franchisor and franchisee can easily let communication lapse, neglect and lose respect for each other, grow apart, and ultimately see no value in continuing the relationship.
It is, therefore, critical that the parties make conscious efforts to communicate, touching each other on a regular basis.
Wise franchisors and franchisees insist on regular, periodic in-person check-points to take each other’s pulse, to re-establish, reinvigorate and re-affirm the value that each gets from the relationship, and to identify and resolve any issues that might be starting to percolate before they become relationship-breakers. This exercise should be modeled from the chief executive level down and, where necessary, the parties should not hesitate to bring in a neutral voice to facilitate the discussions.
Fundamentally, they each need to make it a priority to either solidify the relationship and swiftly resolve issues when they arise, or agree on a plan to amicably part ways.
The End Does Not Have to Mean War
No matter how much one party might want the relationship to continue, it almost never works unless both parties are committed.
If, despite their hard work, the franchisor and franchisee encounter irreconcilable differences, they must ultimately accept the realities while recognizing that there is benefit from ending the relationship amicably rather than wasting their respective resources on costly litigation.
For the franchisor, an amicable resolution will remove impediments to protecting and expanding the brand’s goodwill in the marketplace, allow for a quick and seamless transition of the business, and avoid costly diversion of focus, resources and momentum. The franchisee, on the other hand, has opportunity to extract value even where the facts, franchise agreement and applicable law support an involuntary end to the relationship.
By helping the franchisor avoid costly litigation, bad publicity and disruption of its business, the franchisee might, for example, be able to negotiate compensation for the value it created in the franchisor’s brand and for facilitating a seamless transition of the business. The franchisee might also be able to preserve value for itself by getting the franchisor to allow it time to find a qualified buyer rather than shutting the business down or having the franchisor exercise its purchase option.
Absent ammunition in the franchise agreement itself, the franchisee’s real bargaining chip is its willingness to cooperate with the franchisor for a swift, seamless transition with as little disruption to the business or harm to the brand as possible.
Happily Ever After, Whatever the Outcome
In many respects, franchises truly are like marriages. They require work and attention. They require communication
and commitment from both parties. And, despite everyone’s good intentions and hard work, many franchise relationships do end up in “divorce court.” When that happens, both franchisor and franchisee have an opportunity to walk away with value if they are able to remove unproductive emotions and work together toward a rational end to the relationship.
Michael Daigle is a partner with the Chicago law firm of Cheng Cohen LLC (www.chengcohen.com). Having spent
most of his career as chief development and legal officer for several high profile, aggressive-growth franchisors, he has created franchise development programs and negotiated and documented franchise transactions around the world.
He speaks and writes frequently on the topic.
For more information contact michael.daigle@chengcohen.com.