Multi-Unit Franchisee Magazine Issue II, 2015 | Page 78

A QUESTION OF BALANCE
up—in particular around the higher-level
support multi-unit franchisees expect as
they grow, and the involvement and participation the franchisor expects from its
multi-unit operators.”
“Over time, I have structured our agreement to the point that the content serves
us well,” says Don Fox, CEO of Firehouse
of America. “But if I were to really think
outside of the box, I would do a fundamental restructuring of the way franchise
agreements are typically constructed. I
would change the architecture of the
document so that it clearly delineates the
franchisee’s obligations and the franchisor’s obligations (actually present them
in separate sections of the agreements, as
opposed to intermingling the two parties’
obligations). I think this would lead to a
much clearer and concise discussion and
understanding of the respective roles and
responsibilities.”
“I think that it’s not really what specific
items need to change, but an attitudinal
transformation in how franchise agreements treat franchisees,” says Keith Miller,
a multi-unit Subway franchisee in Grass
Valley and Auburn, Calif., and chair of
the Coalition of Franchisee Associations.
Much of today’s imbalance, he says,
has been created by contracts that have
grown from 5 to 50 pages, defining what
the franchisee must do or can’t do, while
continuing to diminish any responsibility or liability for the franchisor. “When
you see contracts attempting to void the
implied covenant of good faith, you really
see that this imbalance has gone too far.
Unless the imbalance that Aziz mentions
is changed, and the pendulum swings back
to a more balanced state, the industry is
at risk long term. If Aziz and his investors
are successful with their fund, that could
help drive—and lead the way to—the
change that will strengthen franchising
in the long term.”
Rocco Fiorentino has been a multi-unit
franchisee and a franchisor. Today, as CEO
of Benetrends, he reviews franchise agreements as part of his company’s financing
due diligence. “I’ve negotiated agreements
from both sides of the fence, and always
try to do the right thing. I’m not a big fan
of changing agreements, I’m a bigger fan
of franchisors putting together franchise
agreements that are fair and equitable to
the brand, and don’t have to be negotiated
because you’ve taken into consideration
certain things,” he says.
“If a franchisee asks me to make a
change, if it’s a reasonable change I should

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make it a change for everyone, so they’re
consistent. If it’s not a reasonable change, I
should say, ‘I’m sorry my franchise agreement doesn’t work for you,’ and move on.
But you shouldn’t have different deals with
different people—that is not good management for a brand.”
It’s all about the “how”
“You can have two franchise systems with
exactly the same agreement, and one system can have all sorts of relationship issues,
and in the other system the relationships
can be at the top of the game—the exact
same agreement,” says Schnell. “And that’s
why it’s not just about the agreement.
That’s why it is how the franchisor and
the franchisee relate to one other. What’s
the culture of the system? What’s the relationship between the franchisor and the
franchisees? A big part of this is beyond
the franchise agreement.”
So how should the franchise agreement
play a role in the culture of the franchise
system and how franchisees and their franchisors relate to one another? In Schnell’s
view, the franchise agreement plays a big
role in the ongoing relationship, but not
the leading role.
“If franchisors and franchisees are trying to continue to improve the business
model and the system, and do what they
need to do to remain competitive in the
marketplace, the linchpin can’t be, ‘What
does the franchise agreement say?’ The
linchpin has to be, ‘What do we need to
do to stay ahead of the competition, respond to the ever-changing demands of
customers, and how do we do that collaboratively?’ Because if it’s not that way
an d the franchisor is saying, ‘Well, I’ll tell
you what and when we’re going to do it,’
that is going to be a much tougher way to
get business done.”
What about tomorrow?
“Franchisees need to understand that
the agreement matters,” says Hashim. “It
may not matter today, because the management team you’re meeting with may
be very nice and you may trust them and
they may have a fantastic reputation. But
you’re entering into a 20-year marriage
with this company, and the management
team is going to change hands many times.”
Problems can arise down the road if
subsequent management teams interpret
the franchise agreement differently, says
Hashim. “They’ll say, ‘This is what you
signed. It doesn’t matter what was told
to you before. This is what you signed

and we’re going to enforce this franchise
agreement to the letter.’”
He says that’s where a lot of the disconnect is happening with franchise relations
today. “Franchisees are told, ‘Don’t worry
about the franchise agreement, we don’t
really enforce that provision,’” he says.
“Really, then why is this restrictive provision in there if they never enforce it? And
even if they don’t enforce it, who’s to say
that their successor will not enforce it?”
Greg Cutchall, a multi-brand franchisee
in Omaha with about 10 restaurant brands
and 50 units (it keeps changing), provides
two examples:
1) Closing locations before the end of the
franchise term and being liable for royalties
for the balance of the agreement—something no one seems to like, yet it remains
part of many franchise agreements. “In
fairness, I will say the franchisor companies
I have partnered with have never enforced
these clauses, but they should be removed
or revised in the agreements.”
2) Not opening a unit by the dates
specified in a multi-unit or territory deal.
“I understand they have the right to seek
someone else to develop a market if the
franchisee does not meet development
timelines and risks losing pre-paid territory
fees. But to charge you royalties for a location not open I would classify as cruel and
unusual punishment. For most franchisees
the reasons they fall behind are not securing acceptable sites and underperformance
of existing locations.”
Clarity, not lawsuits
“Often, franchise agreements lack clarity,”
says Schnell. “We lawyers tend to write in
legalese, and often legalese can be interpreted in different ways. Clarity is important.” For example, if a franchisee is not
playing by the rules, he says, the franchise
agreement should allow the franchisor to
deal with that in a way that protects the
brand. But agreements that lack precise
language can be expensive.
“If the franchise agreement is not clear,
that requires the franchisor to spend hundreds of thousands of dollars in litigation
or in disputes with the franchisee. That
doesn’t benefit anybody,” he says. “Franchisees and franchisors shouldn’t want a
court or an arbitrator to be second-guessing
every decision that’s made. That’s not what
this is all about.”
“Although I’m not a licensed attorney
and don’t practice law, I certainly have a
strong feeling about default provisions,”
says Fiorentino. Too frequently, he says,

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