Franchisee Associations: Nothing to Fear but Fear Itself, Usually

Franchise Relations

With the right attitude from both sides, a franchisee association can be an effective instrument in providing a better future for a franchise system.

By Rupert M. Barkoff

Twenty-five years ago, “franchisee associations” was an unpopular phrase. This phrase put fear into the minds of franchisors. A franchisee association was tantamount to unionism. It signified a breakdown of the working relationship between the franchise system and franchisees and a vote of no confidence. The association was generally hostile to the franchise system in both word and deed.

The world is different place today. Most franchise systems would prefer that franchisees participate in the franchise system through a franchisor advisory council rather than through an independent franchisee association. FACs are usually formed by the franchise organization and, in large measure, under the control of the franchisor. FAC meetings are usually called at the convenience of the franchise system. The system sets the meeting agenda, and most importantly, but often overlooked, the minutes of the FAC meetings are drafted by the company, although sometimes vetted by the FAC before publication. The franchise organization typically pays for the expenses of the FAC meeting. An FAC usually does not have independent legal counsel, and by definition, serves only as an advisor to the franchise system. In contrast, an independent franchisee association is typically formed by franchisees, created for the benefit of franchisees, financed by franchisees and controlled by franchisees.

Why Franchisee Associations Were Created

Historically, franchisee associations were formed in times of crisis. For example, changes in management of the franchise organization, the system’s bankruptcy or significant changes in the franchise system, as well as a perceived breach in the franchisor’s performance of its obligations to franchisees, were all reasons that resulted in the formation of an independent franchisee association in one chain or another. While this may or may not still be the case today, the bottom line is that franchisee associations are much more prevalent on the franchise scene today, and that trend is not likely to reverse. Moreover, although many of the more powerful franchisee associations in today’s milieu may have been creatures of controversy, they have managed to find ways to have harmonious relationships with their franchisors—usually.

If a franchise system finds that franchisees have “unionized” (a very offensive word to franchisees, who are typically pro-small business, independent and pro-management in their thinking), the last thing for the company to do is panic. Having to deal with an independent franchisee association is not the end of the world, but it does mean that if the group successfully organizes, the franchise system will be operating in a new environment. It also means that future decisions relating to the franchise system are less likely to be made unilaterally. Even though the franchisees or the association may not have any legal decision-making or, for that matter veto, power, the franchise company must expect decisions made by the system to be reviewed with greater scrutiny and challenged more frequently.

Working with Independent Franchisee Associations

The first step in dealing with an independent franchisee association is to make sure that it truly represents a significant percentage of the franchisee community. There is no magic number, but often such an association may only have the following of several dissatisfied franchisees. On the other hand, to draw the battle line at how many franchisees are supporting it can be a very bad decision, showing an adversarial approach, making a deteriorating situation go from bad to worse. Perhaps a better focus is to determine which franchisees are supporting the movement? Are they franchisees who are poor operators, behind on their royalty and other payments due to the franchise system? How many units do they own? Are they well-respected by other franchisees? If the answers to these questions suggest that the franchisees spearheading the movement are bad citizens, the franchise company’s decision to oppose the movement will be more justifiable than if these franchisees are model citizens. In the former case, the franchise system is more likely to find sympathetic franchisees who will come to its support. Where respected franchisees are behind the movement, an adversarial approach will tend to drive fence-sitters into the association’s camp.

Whether or not the supporters are good citizens or bad citizens, the franchise company must also internally consider why the movement to form an association has developed. Has the franchise system done anything wrong? What are the franchisees’ concerns? Are they legitimate? Why did the franchisees choose this path, rather than using the FAC, if there is one? Where did the breakdown in communications between the franchisee community and the franchisor’s management and staff representatives occur?

The answers to these questions, and how the franchise organization consequently responds, will be critical to how the story turns out. If there are only isolated pockets of problems, prompt but solid fixes will enhance the possibility that the momentum for an independent franchisee association will either never gain momentum, or if it does, the relationship between the franchisor and the association may end up very positive. There are different philosophies on this point. There is a school of hard-liners that believe that any concession to a franchisee association—recognition, responding to a demand or suggestion, or whatever—will be viewed as a sign of weakness and only lead to further demands. The more enlightened approach is to think beyond self-interest; more specifically, what action or decision is in the best interests of the system, as opposed to either the franchise system, on the one hand, or the franchisees collectively? This approach has been advocated for years by author Roger Fisher, a Samuel Williston Professor of Law Emeritus, Harvard Law School, of “Getting to Yes: Negotiating Without Giving In,” in which he suggests moving away from so-called positional bargaining in favor of common-interest identification and responding to that challenge. If the franchise system selects this approach, it should make sure the franchisees realize that the franchise organization is doing “what is right” rather than making a concession as such. Otherwise, the differences between the parties continue in the “we-they” mode.

Independent associations that are succeeding

As noted earlier, the presence of an independent association is not necessarily bad news. If I wear a “franchisee lawyer” hat for a moment, let me note that there are many franchise systems in which an independent association has made significant positive contributions from the system viewpoint. In the Burger King system, the franchisee association’s decision to put on its own convention many years ago when the company canceled its convocation has led to successful conventions for more than a decade, with the franchise system now having once again taken control over the convention sponsorships. In the Sylvan Learning franchise system, for years there was considerable opposition to national advertising. The system solution to this problem, worked out between the franchise system and its independent association, was to form a separate entity, jointly-controlled by the company and the franchisee association that would make decisions regarding funding requirements as well as the expenditure of such funds. It works like a three-legged race in that both sides have to be comfortable with the advertising strategy in order for the system to move forward.

In the area of purchasing, two systems that have interesting models, where independent franchisee associations made positive contributions, are Burger King and YUM! Brands. Historians suggest that the Burger King model developed from the fact that the purchasing problems in that system were spotlighted by the franchisee association, and ultimately acknowledged by Burger King Corporation to exist, and that this ultimately morphed into a franchisee-controlled and franchisor-supported purchasing cooperative, in which virtually all domestic franchised and corporate units participate. The result has been millions of dollars of savings for all of the units in the Burger King system. The YUM! Brands purchasing cooperative, which is a descendent of the original Kentucky Fried Chicken purchasing cooperative, was initially spear-headed by a collaborative effort between the franchisees and the franchise organization of the KFC system. Like the Burger King purchasing co-op, it, too, has made YUM! franchisees better able to compete, and more profitable, by procuring lower food costs for the co-op’s participants. The descendent of the KFC purchasing co-op now acts on behalf of all of the YUM! Brands signature brands.

In addition to these high-visibility success stories, there are many other successful franchise associations that have established excellent, although less publicized, relationships with their franchisors. The association representing Holiday Inns franchisees was formed at the recommendation of the franchise system, and has been granted a commitment by the company that material changes to the system’s operations will be vetted by the association before implementation. A similar story exists with respect to the franchisee association formed by Aaron Rents, Inc.

To be sure, examples abound of distrust and combativeness between franchise systems and independent franchisee associations. However, there are many success stories, as described above. In large measure, the framework for the relationship will be established by the culture of the franchise system toward franchisee participation in decision-making as well as the attitudes of the franchise organization and the leadership of the franchisee community. Will the parties act out of fear and self-centeredness, crafting tools of destruction? Or will they approach their challenges in a spirit of hope and possibility, building bridges to draw the parties together. With the right attitude from both sides, a franchisee association can be an effective instrument in providing a better future for a franchise system.

Rupert Barkoff is a partner in Kilpatrick Stockton’s Atlanta office where he heads his firm’s franchise practice.