Open dialogue helps emerging brands avoid the courtroom
As a system grows in size, litigation is inevitable, or at least that’s a default comment from many in franchising. And while it’s not uncommon for a larger franchise to have a handful of cases listed in Item 3 of its franchise disclosure document, there’s plenty a franchisor can do to avoid the courtroom, starting with an emphasis on communication with franchisees, setting realistic expectations and providing proper support.
For a young brand, supporting that first group of franchisees “will pay dividends many, many years down the road,” says Lynne Hanson, an attorney at Denver law firm Moye White who works often with emerging franchisors. “They’ll be able to validate the brand and that relationship with the brand.” And conversely, “if you’re not supporting them and you have a handful of them fail, that can be damaging for years.”
Though Hanson agrees a franchise typically will have litigation at some point, for a young brand a lawsuit can not only stress the system by tying up resources but also impact its reputation and ability to attract operators. “Frankly, it just doesn’t look good,” says Hanson, particularly to candidates evaluating the concept. “That’s a big red flag, potentially, whether it’s the franchisee suing the franchisor or vice versa.”
Cookie Cutters had 26 locations when Neal Courtney, above left, and his wife acquired it. Now it has 110 salons.
Neal Courtney dealt with litigation when he was COO and later CEO of Famous Brands, parent of Mrs. Fields and TCBY, and those experiences now inform his approach to working with franchisees since acquiring Cookie Cutters Haircuts for Kids from its founders in 2014.
“In litigation, nobody wins. It’s lose-lose, and it’s a waste of resources,” said Courtney, himself a franchisee of Salt Lake City-based Cookie Cutters with his wife, Alexis, before the pair bought the brand. “So I try to navigate away from that and be proactive.”
Cookie Cutters holds quarterly calls to discuss performance and franchisees have a direct line of communication to Courtney, who notes his approach is to “extend a longer hand” to those who are struggling and focus on coaching, not policing. “It’s not just about compliance,” he says of support functions such as field visits. “It’s an actual sit-down and coaching. Our focus is to get franchisees as profitable as possible as quick as possible.”
It’s also incumbent upon franchisors to recognize the various outside pressures facing franchisees, with Courtney ticking off challenges such as a tight labor market, high occupancy rates and low availability of real estate. “There has to be an understanding on the part of franchisors that things are tough,” he says, a consideration that comes into play when dealing with franchisees who are behind in their development schedules. “You may have signed a three-store development deal, but that was four years ago.”
“Is it the appropriate time, do they have the appropriate capital and is there an appropriate location” are all factors Courtney takes into account. It’s better to make adjustments to the schedule instead of sending a default letter, “especially when they’re good operators.”
Cookie Cutters, which had 26 locations when the Courtneys acquired it, has expanded to 110 salons, largely thanks to a formalized development program.
At Ziggi’s Coffee, the co-founder says an experienced attorney is a must.
“At the time of takeover there hadn’t been a filed FDD in three years, the previous franchisor had let that lapse,” says Courtney, adding there was also no strategy for franchise development and lead generation, “one of the reasons the founder wanted to get out of it” and also why existing franchisees were “very excited” about the Courtneys stepping in.
The franchise sales process can prove tricky for emerging brands as they learn what can and can’t be discussed, particularly when it comes to questions about franchisee profitability, notes Hanson, who’s gone so far as to create a sales person training program for new franchisors. In franchise sales, discussing earnings potential is off limits, “unless it’s in writing in the FDD. And you can only talk about what’s in writing in the FDD,” says Hanson. “Those sales people really need to be cautioned and educated on what they can and can’t say. No back-of-the-napkin projections.”
Invest in expertise
As emerging franchises get into growth mode there’s no shortage of areas to spend money. While some people try to price shop their legal advice, Brandon Knudsen, co-founder and CEO of Ziggi’s Coffee, stresses the need for “an incredibly experienced franchise attorney.”
“They don’t just write an FDD for you, they really coach you,” says Knudsen, whose Longmont, Colorado-based coffee shop concept has grown to 21 locations in three states since he and wife Camrin began franchising in 2016. Especially helpful is the coaching on how to present information to franchisees “so they really understand what they’re getting into.”
“If you’re not fully transparent, it will come out at some point,” say Knudsen, adding a quality franchise attorney is “very expensive, but it’s worth it.”
The Knudsens opened the first Ziggi’s in Longmont in 2004 and expanded to six company shops before delving into franchising, giving them plenty of experience that’s translated into credibility with franchisees.
“We know what kinds of challenges you’re going to be faced with and we get out ahead,” says Knudsen. While there’s been “nothing contentious” so far, he notes some franchisees began adding items to their menus without approval. Instead of triggering a compliance letter, however, the company created a process for owners to submit such requests.
“If you approach it from it’s us versus them, you’re going to be miserable,” says Knudsen.