Rapid Refill boss ‘unfranchises’ system
Lori Kiser-Block spent years feeling sick to her stomach most days, trying to figure out a way to fix her declining franchise system. Rapid Refill, the ink-and-toner retailer based in Minneapolis, had shrunk from 120 locations in 2009 to 80 in 2014, with the bottom of the sinkhole nowhere in sight.
“It has not been easy. In fact it’s been friggin’ hard and scary,” she says, in her characteristic straightforward style, about trying to right a broken brand. I reached her by phone in her new home in Atlanta, where she is ramping up a consulting business called The Decide Group to help other desperate franchisors execute the solution she ultimately engineered. She calls it “unfranchising,” but I’ll get to that in a bit.
Her unconventional essay had just landed in my inbox, and it caught my attention by speaking the truth. “Here’s a news flash: not all franchisors succeed!” she writes. “I’m not usually naïve, but this well-known truth came as a stunner when I realized that my franchise system wasn’t progressing at quite the speed, monetary return and pleasure…that I had been dreaming about for years.”
I spend most days listening to franchise execs tell me the opposite: that their pipeline is full, that their food is the best, that multi-unit operators are lining up to buy their franchise. What does every “emerging” franchisor reveal as its growth plan, and I mean nearly every single one? They’ll all hit 100 units in three to five years, never mind that they have only eight units now and that only a fraction of brands actually make it to a hundred or beyond.
So what about all the franchise systems that are struggling, like Rapid Refill was? Kiser-Block spent five years trying to figure out the alternatives. She could:
1. Reinvent the brand by expanding into new products and services. “This would require time, investment and considerable risk,” she writes. “Only one-third of the franchisees could afford or accept this idea.”
2. Search for a strategic buyer. “This made a lot of sense and I loved the idea and its potential for the largest return. But, it had a greater risk for the franchisee,” she writes.
3. Risk the future of the system by remaining with the status quo. “This would be the slowest and most painful form of death as the franchisees dropped off one by one, filing bankruptcies, closing their doors or just disappearing into the night,” she writes.
4. File for bankruptcy protection. In the realm of franchise disclosure, bankruptcy comes with a trail of legal discomfort that never seems to go away or be erased. “That option was clearly not for me,” she writes.
5. Develop and implement a radically different approach. “The question was, How do I unwind with any grace or chance of equity preservation for both me and the franchisees?” she writes.
“When we realized that options one through four were not going to work, over and over and over we kept saying, Why can’t we just end it? Why not?”
Her solution was to unwind the entire system, or in the term she coined, “un-franchise” it, something no one had successfully done before, according to everyone she talked to.
At first her attorneys at Gray Plant Mooty in Minneapolis rejected the plan. “They said it’s never been done. We had them tell us you’ve got less than a 50-50 chance that you can pull this off, because you’re going to have to get every single franchisee to agree, when you can’t get them to agree on simple marketing tactics.”
Every franchisor can relate to that last statement, I’m sure—think about getting all 65 franchisees, the number that Rapid Refill still had, to agree to pay the franchisor a sum of money to exit the system it was dissolving, and execute the exits all on the same day. “There’s so many pieces that it’s overwhelming. But piece by piece we went through each one,” she says.
Kiser-Block enlisted an unlikely ally in her quest to unfranchise: She went to Dady & Gardner law firm in Minneapolis, the well-known franchisee attorneys who spend most of their time suing franchisors. In fact, one of Rapid Refill’s franchisees had gone there, to try to sue their way out of the system. However, Dady & Gardner “couldn’t find a reason to sue because we hadn’t done anything wrong.”
So she said: “We have an idea of an all-franchisee termination. Would you be willing to work with these franchisees to make sure they get an agreement suitable to them?”
At the end of December 2014, all franchisees accepted the arrangement and exited, and none has filed a lawsuit since, she says, and they are all operating as independent businesses. The Rapid Refill model works when it’s an independent business, because royalties no longer have to be paid, and owners can add whatever products and services they wish, something not possible with a franchise.
Ron Gardner, partner at Dady & Gardner, said he’s done three “unfranchisings” in all, one for Checkcare in the early 2000s and another this past year for Lillian’s. At Rapid Refill, “the franchisees were extraordinarily unhappy,” he says. “There was widespread unrest.”
They all had noncompetes, so Gardner’s job was to explain it might take up to $40,000 to get a 50-50 chance to convince a judge to let them out of their agreements. Moreover, buying out the franchisor made sense if they had, say, three years left on their contract and owed $35,000 a year in royalties, or $105,000 total. “Anything under that, and you’re playing with house money,” he says.
Kiser-Block says trust is mandatory. “If you have gotten to the point where your franchisees no longer trust you or believe in you, this will not work, because this was a win for both sides,” she says.
The unfortunate truth, she says, is plenty of franchisors are in same boat, and likely have the same mindset that she had for years. “When I talk about this to franchisors, they are where I was. ‘We can still make this work. We still have options,’” they all think, and that might be the case. But if not, Kiser-Block offers an alternative.
“There are a lot of franchise systems out there that are below 80 units and are at a place where they need to decide what their future looks like,” she says. “I know how they feel.”
Beth Ewen is editor-in-chief of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to firstname.lastname@example.org.