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HOW TO SURVIVE THE CREDIT CRUNCH!
Whilst there may be a debate as to how serious the economic situation is for franchisors there can be no debate that there is an economic downturn and a credit crunch! How will this affect franchising? Previously during economic downturns franchisors received smaller continuing fees from their franchisees but were able to recruit more new franchisees who had been made redundant. What is unusual about this downturn is that the lack of available credit makes it much less likely that franchisors will be able to compensate for the reduction in continuing fees with increased recruitment income. This makes it essential that franchisors take all necessary steps to protect their own financial position – they owe it to their franchisees to do so.
The evidence is that franchisees are:-
- delaying in making payment to their franchisor;
- looking for “self help” remedies such as under declaring their income;
- blaming the franchisor for the poor performance of their business;
- looking to legal remedies such as breach of contract or misrepresentation claims in order to avoid their own obligations.
In order to counter the above, franchisors need to adopt the following strategies:-
Payment
- Never allow franchisees to delay payment of fees (even if you are prepared to allow this) without making it clear that they are required to pay fees on time and any failure to do so amounts to a breach of their franchise agreement. If you do not do this you may be treated as having waived your right to take action against a franchisee for failure to pay or for paying late.
- Before allowing late payment establish whether it really is necessary to do so. If your franchisee prefers to pay the lease payments on his Porsche than to pay or if the franchisee’s business is failing and giving the franchisee time to pay will not resolve the issue why agree any concession?
- If you do allow franchisees extra time to make payment then you must set out very clearly how long the arrangement is to last, that it is conditional upon full compliance with the other provisions of the franchise agreement and the concession will be withdrawn if payment is not received.
- If you are to grant any concessions then only grant them in return for a benefit to you such as a modification to the franchise agreement or trading terms which you want to put through. In this context review all of your franchise agreements to ensure that they have been executed properly. A staggeringly high percentage of franchise agreements are not which causes all sorts of problems when taking legal action against a franchisee. The most common mistake is that the individual guarantor has not executed the agreement in his own name. Concessionary terms can be granted in return for correcting such mistakes although, of course, care needs to be taken that you are not alerting a franchisee to a potential difficulty of which the franchisee was previously unaware.
Disputes
- Avoid litigation if you possibly can! It is eye wateringly expensive, takes up a great deal of management time, is hugely stressful and the outcome (whatever your lawyer may say at the out set) is never certain. Remember that every pound you spend with a lawyer is a pound that you cannot spend within your business to support franchisees. That having been said franchisors sometimes have no choice but to take action against a franchisee because a failure to do so opens the floodgates with other franchisees similarly breaching their contractual obligations so ensure that you have a “fighting fund” available so that you are able to obtain legal advice should you have to threaten litigation.
- Work with lawyers who are fully familiar with franchising and the issues that arise in franchising, give clear cost indications and stick to them and who you are comfortable working with. Never instruct lawyers who do not give and stick to clear costs indications.
- Just because the franchisee who is in breach of the franchise agreement is your best performing franchisee, does not mean that you should not take any action – the opposite is true. A star performing franchisee will owe you much more than a poor performing franchisee and taking action against a star performer certainly sends out a powerful message to the network.
- Consider alternatives to litigation when trying to resolve disputes. Mediation really is a good way of solving disputes with franchisees and maintaining the relationship. In mediation mediators simply encourages resolution of the dispute but do not actually resolve the dispute themselves. The cost of a mediation is likely to be a few thousand pounds and not tens or even hundreds of thousand pounds which can be the cost of litigation.
- Never turn a blind eye or take no action to investigate breaches by your franchisees – if you do they will think you don’t care and this will simply encourage them. Investigate, report your findings and set out the steps that need to be taken to remedy the situation.
Franchise Support
- Don’t try to save costs on support staff. In times of economic difficulty this will simply encourage franchisees to argue that they are not receiving value for money from the franchisor.
- Try to obtain comparative information about the performance of other businesses in your sector which (hopefully!) will show that even if times are hard they are much less hard for your franchisees than for non franchised businesses.