Key steps to ensuring a profitable relationship.

By David Holmes

Most professionals in franchising would agree that trust is a vital element in a successful relationship between a franchise system and its franchisees, whether on an individual level or between the franchisor and its franchisees as a whole. But past this general observation, so common that it’s almost a cliché, some more difficult questions lie waiting: 

How is franchising different from any other form of doing business, so far as trust is concerned? How does trust provide direct business benefits or is it merely a “feel-good” aspect of the business relationship that fails to deliver real economic benefits? If trust is important, how can it be established, nurtured and, if needed, repaired? What are the respective roles of the franchisor and the franchisees in building trust?

How is franchising different?
On one level, almost all business relationships require trust. When the first two cavemen advanced toward each other with the idea of exchanging a freshly killed antelope for a fine-looking basket, each one had to trust that the other would not simply hit him over the head with a club and take what he desired, at least if they wanted to have any future dealings. So trust is hardly new in business relationships, not just in franchising, and is probably necessary in all voluntary economic exchanges. So, some observers might conclude that franchising is no different in this regard that any other business relationship.

And, some might argue that where a business relationship is highly legalistic, such as in franchising, with its 60-page franchise agreements and extensive federal and state laws regulating franchising, trust is less significant than in less formal relationships.
But they would be seriously wrong, for a number of reasons.

First, franchise relationships are generally structured to extend over a long period of time, with 10 years being typical and up to 20 or more years not being unusual. In any relationship, more (and more significant) issues will develop as the relationship extends over time and a “bank account” of trust that has been established will allow the participants in the relationship to successfully navigate those issues, while maintaining the relationship.

Second, the franchise relationship is inherently founded on some degree of independence on the part of the franchisee. After all, the franchisee owns his or her franchised business and understandably has an emotional, as well as economic, attachment to that ownership.

Therefore, both legally and as a practical matter, the franchisor cannot adopt a purely “top-down” management model for requiring the franchisee to follow the franchisor’s wishes or resort to “firing” the franchisee for anything other than a breach of the agreement. A relationship based on trust allows mutual accommodation and a highly-useful alternative to a legalistic approach to strategic planning and day-to-day management.

Third, while a top-down management model or resorting to a legalistic approach may sometimes work or be needed in franchising, using either on a daily basis is generally unsuccessful, highly expensive (both economically and in terms of management time and other resources) or both. Trust builds cooperation and avoids the need for more costly alternatives.

Fourth, franchising, by its very nature, involves the owner of a brand (the franchisor) allowing someone else (the franchisee) to use the brand, and includes the potential for that person possibly misusing the brand and thereby generating negative brand equity, impacting both the franchisor and other franchisees. Similarly, the potential exists for the franchisor to fail to adequately protect and enhance that brand equity, adversely affecting each of the franchisees who have made an investment in it, an investment which may, collectively, exceed that of the franchise system.

So, the relationship necessarily includes the potential for each party to seriously and negatively affect the other’s investment, over an extended period of time. Understanding that, it’s obvious that enhanced trust will make the mutual protection and growth in that brand equity far easier to achieve.

Fifth, we know from sports that teams can generally achieve more than single players, and that unified teams with a common goal, and working together, achieve more than teams without those qualities. The same is true in business, and particularly in franchising, and few things build unity in pursuit of a common goal more than a solid foundation of trust. 

Since the business world is largely a competitive one, “teams” that are unified and trust one another are simply more likely to succeed in that competitive environment. This reason alone provides a hard-headed business reason for building and maintaining trust.

How can the franchisor enhance trust?
If trust in franchising is a good thing, how can it be enhanced? A number of steps are practical and include the following:

  • Nothing builds trust more than actions; anything else is simply words. Therefore, make it clear that the long-term objective of the system is the financial and personal success of all participants. Then follow through with actions that demonstrate that commitment. As actions are accomplished, communicate to franchisees that the franchise system has diligently fulfilled its commitments, moral as well as legal. It’s okay to remind people that you’ve kept your promises.
  • Under-promise and over-deliver, and never fail to deliver on a promise made without an awfully good explanation.
  • Ruthlessly correct any signs of an “us vs. them” attitude developing among franchisor staff (whether in the field or at headquarters) toward franchisees. There is probably nothing more destructive of trust in a franchise relationship. If the franchisor’s staff cannot manage the franchise relationship with emotional intelligence and maturity, they need to be re-trained, reassigned or moved out of the organization.
  • Proactively create a culture in which franchisees and all franchise-system staff personnel feel free to bring concerns regarding the “health” of the franchisee network directly and/or privately to any member of the management team, including the CEO.
  • None of this means that the unhappy franchisee or franchisees are always right; often they’re not. What it does mean is that a system-wide culture is created that:
    • Listens to complaints;
    • Identifies which ones are of legitimate concern;
    • Communicates with all franchisees (including those who may not have valid complaints or who suggest inappropriate actions); and
    • Takes appropriate action with respect to legitimate concerns, without ever actually, or being perceived as, “punishing the messenger.”
  • If not already in place, establish and fund a franchisee advisory council, and listen closely to it, without surrendering ultimate control of the brand.
  • Make sure that top- and mid-level management is effectively listening to franchisees, without “filtration” by personnel who do not understand the importance of good franchise relations, and without the “noise” created by franchisee advocates with personal agendas. Here’s where a franchisee advisory council, either elected or appointed, is particularly useful.
  • As a practical matter, trust is allied with good communication and few things do that better than CEOs and divisional VPs getting out from behind their desks and into the field, and into franchisee’s stores.

How can the franchisee enhance trust?
If trust is a two-way street, then either party in a relationship can build or destroy it. 

While the franchisor may need to take the lead in establishing and maintaining trust, it’s clear that the franchisee has an important role to play too, so let’s look at some of the things that franchisees, individually or in concert with his or her fellow franchisees, can do to build trust.

First of all, the franchisee needs to perform the two core tasks that a franchisor expects from a franchisee; paying his or her bills and following the system. 

In essence, that’s the bare minimum that any franchisor expects from a franchisee, as well as what’s expected by fellow franchisees who are “playing the game by the rules.” If the franchisee fails to do either of those two things, then not only may there be legal or other repercussions, the franchisee will have seriously damaged any trust relationship that’s being built and should not expect to be trusted in return.

Second, the franchisee needs to demonstrate that he/she has a broader view of their eventual success than short-term benefits for their particular unit. For example, will a system-wide unit upgrade cost the franchisee money? Absolutely. Are there any guarantees that the investment involved will generate a reasonable return? No. If the system fails to maintain a competitive edge through upgrades, along with a unified retail presentation to customers and common marketing programs, will the investment of all participants in the system be damaged? Very likely. So, participation in those common programs will seriously build trust from the franchisor.

What can the franchisor do to re-establish trust, if it’s been lost?
Admit any mistakes, including any failure to successfully communicate with franchisees. Few things rebuild credibility faster than sincerely admitting where one has gone wrong in the past, and then demonstrating that those particular mistakes are not repeated and that a sincere effort is made to fix any problems that resulted from those mistakes.

Then go out and implement the steps discussed above.

David Holmes is a partner at Holmes & Lofstrom, LLP. He can be reached at d.holmes@holmeslofstrom.com or 805-547-0697. 

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