Franchise Leaders Reflect on Period of Rapid Change

Sometimes, an e-mail isn't enough. “When things get hot, I tell our CEO that you need to get out and see our franchisees ' this is your hour to be a leader ' and it works. We have not had litigation in a long time,” Blackwell said.

Kevin Adler is associate editor of LJN's Franchising Business & Law Alert. He can be contacted at [email protected].

Disruptive technologies, new expectations from franchisees, tight profit margins, and limited access to capital for growth are among the issues challenging franchisors these days. Franchise attorneys must position themselves to help franchisors overcome those issues, or they will be marginalized as business leaders move forward, observed panelists at the International Franchise Association's 44th Annual Legal Symposium, held in May in Washington, DC.

“We're facing clients who are demanding more for less,” said Rochelle B. Spandorf, partner, Davis Wright Tremaine LLP. “But we have reacted in a linear way, such as by offering alternative billing models. We have not looked at fundamental ways of changing.”

Franchisors' ability to outsource some of their legal needs has affected law firms' profit margins, and this is starting to affect what outside counsel need to contribute to their clients, Spandorf continued. “We have to be able to join the [business and strategic] conversation and get in the boardroom,” she said. “We need to figure out how we can be change agents. Right now, I'm lucky if I get a call after a decision is made. ' We are not in the room because we are seen as naysayers, and we need to answer those calls with something besides No.”

Yet, while working its way into the boardroom, outside counsel still needs to serve its independent role, Spandorf said. “Collaboration within a company can become group-think, especially in bad times when everyone is cautious,” she said. “Giving a different perspective is how we can become change agents.”

Co-panelist Steve Joyce, president and CEO of Choice Hotels International, said that he expects his counsel to look beyond the legal strictures. “I tell my attorneys that if they're not playing a business role first, they're not doing their job,” he said. “I tell my general counsel that his job is to be the calm voice in the room, not to be a fighter. The point is not the business contract between franchisor and franchisee ' it's the business.”

Especially at times when disruptive technologies are affecting both franchisor and franchisee, legal counsel must take a role that incorporates business demands, said Joyce. In lodging, for example, Expedia and Orbitz have overwhelmed traditional travel agents, “and they have a goal to get between Choice Hotels and our customers. Now there are even newer competitors such as Google that have customers that they believe they 'own,'” he said. “How do we maintain our contact with our customers and defend our distribution channels to get customers into our hotels, but in ways that do not violate competition laws?”

Technology is changing the pizza business, too, said another panelist, Victoria Blackwell, general counsel, Papa Murphy's International, Inc. Blackwell said that about 70% of Papa Murphy's sales were driven by print coupons a few years ago. “That's all shifted online, so we're learning how to put our money into social media,” she said, with all the attendant complexities that social media creates for companies that have brands to protect.

Franchisee Perspective

Aziz Hashim, president and CEO of multi-brand franchisee NRD Holdings, LLP, represented yet another part of the equation: the franchisee with enough size and sophistication to make his own demands on franchisors. As a franchisee of about 50 Popeye's, Checkers/Rally's Drive-In Restaurants, Subway, and Moe's Southwest Grill units, Hashim's company is substantial in its own right, and his loyalty and financial future do not ride with a single brand. “We want to enter into long-term engagements with brands that want us to be successful,” he said. “If you're asking me to spend $250,000 or more, your business model has to make sense for me.”

While franchisors speak of their franchisees as partners, Hashim pointed to what he sees as an inherent conflict in the parties' motives: “The franchisor makes money on top-line revenue, but the franchisee makes it on bottom-line profits,” he said.

Multi-unit, multi-brand franchisees such as Hashim are demanding greater protection of that bottom line, or at least clearer information about how decent profitability can be achieved by a particular franchise brand. That, in turn, shifts a burden to franchise executives and legal counsel to decide what they can deliver. “When I started as a franchisee, I was advised not to read the franchise agreement because it would not be changed,” said Hashim. “I signed one-sided agreements, and it was a mistake. But if the document is truly a partnership beyond protection of the franchise's brand, then it needs to serve me, too.”

Hashim said that he will not invest in a franchise brand unless he is able to speak with the CEO and chief legal officer. “I want to look them in the eye,” he said. He added that he insists on riders to the Franchise Disclosure Document “in almost every contract,” usually on matters such as removing any requirement that he is responsible for liquidated damages. “I've already lost money, so now you're going to add insult to injury?” he asked.

While franchisors might be flexible about liquidated damages claims, some of Hashim's other comments could cut more deeply into the traditional franchisor-franchisee relationship. For example, Hashim cited his frustration with a common feature of franchisee agreements that the franchisee provides a personal guarantee to pay royalties. “I'm asked to give a personal guarantee on royalties,” said Hashim. “What do I get a guarantee on? Do I get a guarantee that the executive leadership won't change or protection from a catastrophic product decision?”

Spandorf commented that Hashim is “challenging the paradigm” of franchising, but she said that franchisors and their attorneys are perhaps more attuned to the uses and limitations of the franchise contract than franchisees commonly assume. “Attorneys write contracts, but there is no blueprint for the future,” she said. “Our contract can be turned against the franchisor, too, if unexpected events occur.”

Even thinking about a franchise relationship as a partnership might be inadequate to maneuvering a rapidly changing business climate, added panel moderator Brian Schnell, CFE, partner, Faegre & Benson LLP. “We think it's better for franchisors to think of franchisees as stakeholders,” he said. “The good franchisees want provisions in the contract that will keep the brand strong.”

Leadership in a Fast-Paced Era

Panelists agreed that, because the future is uncertain, a rules-based franchise arrangement is inadequate to the task of achieving system excellence. “The contract is not the same thing as leadership [from a franchisor executive],” Spandorf said.

“If you have to pull out the franchise agreement, then you're doing something wrong,” said Joyce. “Stronger, better lawyers talk to us about fixing issues, not about what the contract allows us to do.”

Leadership transcends the legal issues that arise in the franchise contract, added Blackwell. “I've been through three ownership groups in 10 years,” she said. “I've seen a direct correlation between success and in the ability to lead franchisees, as well as listening to them. We get lost in thinking that we know more than the franchisees, but they're the ones who are where the cash register rings.”

Papa Murphy's works closely with its franchisee advisory board and utilizes online communications to quickly reach out to franchisees. “If we make a mistake, such as a promotion that isn't successful, we apologize to our franchisees, and we communicate about how we are trying to make it up to them,” she said.

Sometimes, an e-mail isn't enough. “When things get hot, I tell our CEO that you need to get out and see our franchisees ' this is your hour to be a leader ' and it works. We have not had litigation in a long time,” Blackwell said.

Kevin Adler is associate editor of LJN's Franchising Business & Law Alert. He can be contacted at [email protected].