Making the Most of Changes in the Traditional Franchise Relationship

Franchise Relationship

The traditional franchise relationship drew a fairly bright line between the rights and responsibilities of franchisors and franchisees. In general, the franchisor was solely responsible for the development, management and enforcement of its proprietary assets, while the franchisee was required to operate within the system for everyone’s mutual benefit. One of the main aspects of the relationship was the almost total control franchisors maintained in making system decisions, effectuated in large part by the development and enforcement of meticulously detailed franchise documents.

Under the traditional relationship, the investments and expectations of each party were different and often counterproductive in both their design and operation. The problems inherent in this approach have become increasingly apparent in the harsh light of stiff competition, maturing industries and an economy that continues to be impacted, if not shaped, by ever-changing technology.

Over the past several years, franchisors have found it harder to develop franchise opportunities. The difficulties include the need to search for a broader base of potential franchisees, as well as the pressure to try non-traditional approaches to growing franchise concepts. One result of these challenges has been that franchisors have moved toward being more flexible in connection with their relationship with franchisees. The traditional balance weighted heavily in favor of the franchisor and its regimented documents has somewhat shifted. As employers have found it helpful and sometimes necessary to listen to employees and consider them partners in the business enterprise, so franchisors have seen the need and advantage in giving franchisees more opportunity to discuss their relationship with the franchisor, as well as contribute to the management and enhancement of proprietary marks, procedures and other proprietary franchised assets. While franchisees have always been a source of information and suggestions, their views and needs have not always been well received or seriously considered by franchisors. This movement toward a more balanced relationship is proving to offer new opportunities to both franchisors and franchisees. Now, more than ever, parties to the franchise relationship and their advisors should seek ways to make this new perspective productive and beneficial to their franchise system and its participants. For the creative, these opportunities can be found in almost every aspect of the franchise relationship.

Documentation of the franchise relationship has always been one of the more obvious manifestations of the traditional one-sided relationship, and one that could provide a significant opportunity for change. An informed prospective franchisee should consider his/her strengths and weaknesses and attempt to obtain from a franchise system those benefits that can support the franchisee’s weaknesses and enhance his/her strengths. In connection with the new franchisor/franchisee relationship, a prospective franchisee should consider negotiating franchise documents and not simply accept the documents proffered by the franchisor without thorough review and discussion. All of the typical business points should be reviewed to see if the documents fit the prospective franchisee’s needs and desires. While regulatory and common law factors still place some constraints on a franchisor’s ability to modify franchise documents, gradual and positive changes can be accomplished with thought and cooperation. Franchisors and franchisees should seek advice and counsel regarding basic franchise documents, consider modifications that will provide more protection for the parties and negotiate in good faith.

The parties should also look to the future of the relationship. Long term stability is essential to a franchise system, and in today’s world stability can often mean informed change. The traditional approaches of having the franchisor make all system modification decisions and requiring the franchisee to follow with blind faith seem to be fading. In no aspect of franchising will this be more important than handling the ever increasing impact of technology and the Internet. For the foreseeable future franchisors and franchisees will need to continue to develop their relationship and documentation to adapt to these changes. Questions such as whether the franchisee’s protection includes Internet sales to customers within the franchisee’s protected territory will need to be addressed and resolved in a mutually satisfactory fashion.

Text Box: New opportunities
are available for
those willing to
“break the mold.”

Another aspect of franchising that can benefit from the evolving more flexible relationship is the use of non-traditional locations and multi-branding. Franchise concepts are appearing in many locations and combinations never before considered. Especially in mature franchise industries, franchisors and franchisees are having to try to operate differently to prosper. Good new ideas and alternatives to traditional franchising methods are at a premium and should be shared and seriously considered by franchisors and franchisees. These actions will require both sides to be creative and flexible. New opportunities are available for those willing to “break the mold.”

The termination of franchises may also benefit from the changing relationship. For any number of reasons, a franchise relationship may sour, but there still may be valuable assets or operations, and flexibility and creativity may again prove useful. When terminating a franchise relationship, consideration is generally given to issues such as whether the parties have fulfilled their respective obligations, what assets are controlled by the franchisor and what activities the soon to be ex-franchisee can pursue. The parties, however, should not overlook the advantages that may result from terminating the franchise relationship. A disgruntled franchisee may not be actively pursuing the growth of a franchise in a particular area and/or may be providing negative public relations. Turning the franchise territory over to another franchisee may benefit the franchisor by enabling a more active and cooperative franchisee. Termination of the franchise also may give the franchisor the opportunity to change the concept at the terminated location, or to change the location itself. Franchisees wishing to exit a franchise system may find franchisors today more willing to negotiate out of the franchise agreements, permit the retention of operational assets and not pursue the enforcement of non-competition covenants. Creativity may again prove advantageous to both sides and can turn an otherwise negative set of circumstances into a positive result. In any event, it is extremely important to provide for the eventual termination and unwinding of the franchise relationship at its very outset.

On a broader scope, franchisee associations and other groups continue to be formed to provide input and negotiate from collective strength. A group of franchisees will have more input and negotiating leverage when dealing with a franchisor than any individual franchisee standing alone. Franchisees may also be able to exchange valuable information that will assist in day-to-day operations, as well as enhance the franchise system. These concepts were at one time merely tolerated by franchisors, but now seem to be providing welcome input and assistance to both sides. In addition, contracts among franchisors and frachisees providing for joint decisions and fair dealing commitments continue to be developed to provide more balance in the franchise relationship, as well as tap the franchisee pool for ideas and sound business decisions.

As the traditional balance between franchisors and franchisees continues to change, opportunities for both sides continue to grow. Both should look on this trend as a positive force and one which should be handled in ways mutually beneficial. Franchisees should be particularly mindful that, now more than ever, they have the opportunity to both shape their relationship with franchisors and have input into the maintenance and enhancement of proprietary assets and franchise systems. Correspondingly, franchisors should listen to franchisees and consider them as partners in their business enterprises. Both sides should be flexible, while remaining mindful that consistency and uniformity are hallmarks of an effective franchise. Helping to develop and change the parameters of the franchise system in a constructive fashion should stimulate innovation and enhance the value of everyone’s franchise investment.

This bulletin is published by Poyner & Spruill L.L.P. to provide general information about significant legal developments. Because the facts in each situation vary, the legal precedents noted herein may not be applicable to individual circumstances. Copyright 2001.