Don’t let legal disputes slow down growth, in Living Large
There’s no substitute for a strong franchisor-franchisee relationship. It’s a maxim repeated often enough in this industry to border on the cliché, but in practice it can ultimately help brands stay out of the courtroom.
I’ve never interviewed a franchise executive who said open communication with and support of franchisees wasn’t crucial to overall success, but the actual level of execution can vary widely from system to system. Smart emerging brands will build communication touchpoints into their operations and provide a clear explanation of support throughout the life of the franchise agreement, not just in the first six months. They’ll also steer clear of undocumented promises and adhere to strict franchise sales compliance procedures, including the retention of extensive records of pre-sale communications with prospects.
Our three brands all tout the comprehensive nature of their sales processes as one way of avoiding legal issues down the road, and they’re right to make that a focus because sloppy franchisee selection is a sure way to invite lawsuits later on, whether warranted or not. A franchisee who is not the right fit (see the expert sidebar for some red flags) is more likely to prove problematic—and blame the franchisor for any failures. Though disagreements are inevitable, litigation doesn’t have to be, at least not for brands that can fall back on the strong relationships they’ve built.
“Before we address an issue, we first look in the mirror and ask are our corporate stores up on this and are we giving the franchisee the right tools.” — Rob Flanagan, Wag N’ Wash
Educate up front
Rob Flanagan tells new Wag N’ Wash franchisees that once the franchise agreement is reviewed and signed, he puts it in a drawer, locks it, “but I don’t throw away the key.”
“Ninety-nine percent of the time, with open communication and a strong relationship” you can handle issues without resorting to legal action, says Flanagan, Wag N’ Wash’s president. “But this is franchising and that’s why there is a franchise agreement.”
Though Wag N’ Wash doesn’t have any litigation to disclose, Flanagan’s experience with other concepts has shown franchisees typically point to Item 7 (estimated initial investment) or Item 19 (financial performance representations) when they’re unhappy.
“They feel what it would cost to build out was misrepresented or what they could make was misrepresented,” he says, which is why managing expectations is crucial.
“I’ll be very up front that we’re a young brand,” he continues. “As an example, we haven’t opened a store in Miami, Florida,” so he’ll say, “I think this is what it will cost, but it can vary.”
Wag N’ Wash runs background and credit checks on all its candidates, and keeps an eye out for any litigation a candidate has initiated in the past. “If I saw three or four or five” legal disputes, “that would be a pretty big red flag to me,” says Flanagan.
When the enforcement of brand standards comes up, Flanagan stresses it’s the duty of the franchisor to step in, but not be purely reactionary.
“Before we address an issue, we first look in the mirror and ask are our corporate stores up on this and are we giving the franchisee the right tools,” he explains, adding to minimize contentious enforcement issues the franchisor should “be up front from day one and not let things slide early on.”
Wag N’ Wash also wants its franchisees to feel as comfortable as possible before signing the agreement and recommends candidates have a franchise attorney review the document and a CPA check the financials. When it’s time to select a location, “they have to have a real estate attorney review their lease, that’s written into our agreement,” says Flanagan.
“We do everything we can to go above and beyond what you’d typically expect.”
“You’ve gotta be thoughtful about the franchisees you bring on board, especially because we’re so young and don’t have proven corporate locations.”— Dan Henry, Tough Mudder Bootcamp
Keep everyone accountable
As the startup fitness studio arm of a mega endurance competition brand, Tough Mudder Bootcamp aims to head off any compliance questions before they become bigger issues. “We focus on our communicating and training,” says Dan Henry, director of franchise sales for the Bootcamp brand. “We’re really listening to this group we’ve brought on,” hosting open forums to jumpstart discussions between ‘zor and ‘zee as opposed to franchisees only talking amongst themselves.
Tough Mudder Bootcamp’s position as a young concept with just three open locations means these initial franchisees will have an impact on the system for years to come, Henry continues, which is why he’s focused on careful selection and setting appropriate expectations.
“You’ve gotta be thoughtful about the franchisees you bring on board, especially because we’re so young and don’t have proven corporate locations,” he says.
Every franchisee goes through a franchise disclosure document review process, where “we walk them through every single item and force them to ask questions,” explains Henry, which spurs a lot of conversations. Like Wag N’ Wash, Tough Mudder Bootcamp prospects are encouraged to engage their own franchise attorney.
Once an agreement is signed, it’s up to each side to ensure obligations are met. “Franchisors and franchisees, you don’t have to be best friends,” says Henry, but each has to hold the other accountable.
Henry says Tough Mudder Bootcamp isn’t making “major structural changes” when it files its 2019 FDD, but Item 2 will be amended following the departure of Cathrin Bowtell as senior vice president. A new hire hadn’t been made as of press time, but Henry says it’s been a smooth transition with “no hiccups.” Another piece of news: Tough Mudder is no longer spinning off the Bootcamp franchise into a separate enterprise, deciding to keep it within Tough Mudder Inc.
“There’s too much observed value in the Bootcamp brand” remaining with Tough Mudder, says Henry. “At the end of the day, it ends up being a much simpler, less turbulent situation for our franchisees.”
Let reason reign
The strong culture and franchisee relationships at Delta Disaster Services are part of what attracted HRI Holdings to the commercial and residential restoration business, says Dan Tarantin, and he expects they’ll help the brand remain free of litigation now that it’s part of the same franchisor behind Chem-Dry and N-Hance Wood Refinishing. No disputes arose as part of last year’s acquisition, says Tarantin, CEO of HRI, and just one Delta Disaster franchisee whose contract was expiring elected not to renew.
“You never want to have to get in a legal dispute, you want to avoid that at all costs,” says Tarantin, who believes listening and managing relationships makes for an effective strategy.
New franchisees especially benefit from an “operational leeway period,” and Tarantin notes if the franchisor is requiring an update or instructing a franchisee that’s strayed from brand standards to make a change, “we give people time to manage that within their business.”
“Being reasonable and communicating is the best way to start, and then if you’re not getting results you can get a little firmer,” he says. The franchisor must also “live up to their end of the bargain” and make sure franchisees have the tools they need to be successful.
Following the acquisition Tarantin says HRI completely redid Delta Disaster Services’ FDD, not because there was anything inherently wrong but in an effort to make it as clear and straightforward as possible.
“We tore it apart and put it back together, so our franchise team got to know it really well,” says Tarantin, adding that familiarity with the document is crucial when talking with prospective ‘zees.
Editor Laura Michaels follows three emerging brands through a year’s worth of challenges in Living Large. Reach her at firstname.lastname@example.org.
What the experts say
Start strong. Dave Hood, president of consulting firm iFranchise Group, spent 10 years with Auntie Anne’s and said even as the brand “grew very fast,” strong relationships with franchisees were the priority. “I’m a big believer if you set up your franchise system right, with a focus on franchisee relationships, you can avoid litigation,” he said. Franchisees sue largely because if they fail, they blame the franchisor, he continued, especially when they feel there’s a lack of honesty and transparency or support isn’t offered at a high level.
Focus on franchisee selection. “Be very careful about who you select as your initial franchisees,” said Susan Grueneberg, an attorney at Cozen O’Connor. “And don’t be afraid to turn people away.” To spot an unqualified ‘zee or one who simply isn’t the right fit for your system, Grueneberg offered some signs to watch for: undercapitalization, lack of experience related to the business, and unrealistic expectations, usually related to how much money they can make.
Franchisors must also continue to look closely at the financial performance representations included in their FDD, says Grueneberg. “That’s a pendulum, too, and it’s swinging more toward the regulatory scrutiny side.”
Limit liability. Franchise attorney Harold Kestenbaum noted while litigation is expensive, it’s also demoralizing for the organization, “and it further damages franchise relationships and can harm your future development.” To limit liability as a franchisor, keep your FDD current and “make sure anything that’s sent out to a prospective franchisee is reviewed by your franchise attorney,” said Kestenbaum. “And train your sales staff” by bringing in an attorney to provide an annual review of best practices.
Be careful with real estate. Franchise agreements, said Hood, must be clear that site selection is the responsibility of the franchisee, and sites are “accepted,” not “approved,” to avoid a misconception of guaranteed success on the part of the ‘zee.
Join the conversation in the Franchise Times Insights group on LinkedIn. Upcoming topics include: site selection/real estate and building field staff.