SURVIVING AND THRIVING IN TOUGHER ECONOMIC TIMES PART 2 : SELLING FRANCHISES - COMMUNICATION
FranchisingAuthor :
Direct Sellers Association 
Since 1954, the DSA has been our nation's trade association for direct selling companies that manufacture and distribute goods and services away from a fixed retail location – through independent sales contractors (ISCs).
SALES AND RE-SALES
Sometimes, franchisors try to sell their way out of difficult times. When cash is tight, initial franchise fees look very attractive. However, sound franchise theory dictates that the initial franchise fee be set at a level which compensates the franchisor only for its true costs and expenses to find the franchisee, the location or territory and in helping the franchisee establish the business. So, it is unlikely that initial franchise fees will do much to alleviate the franchisor’s financial challenges, as least not in the long run. It is mostly an act of cannibalism of the franchise system to sell franchises without devoting the necessary resources to ensure quality in such things as franchisee selection, site selection, training, etc.
On the other hand, having the ability to assist the troubled franchisee to resell its franchise to a better or better financed operator is a sound strategy in troubled times. In fact, a franchisor will often realize a faster net benefit to its cash flow by such a resale than by selling a new franchise. Good franchisees, who are well enough financed and already in the system may see this as a unique opportunity to grow. Re-sales to existing franchisees has the lowest cost to the franchisor of all franchise sales, because the selling costs and training costs can be very little or nothing at all.
DISCLOSURE
There is a very good chance that a resale of a troubled franchise will involve some efforts and resources of the franchisor. It will be a question of fact whether or not those efforts and resources were sufficient to lead to a conclusion that the re-sale was done "by or through the franchisor”. If this is the case, then there will be no exemption from disclosure requirements of the existing provincial franchise statutes (Alberta, Ontario, PEI and (soon) New Brunswick) afforded to franchisees who resell their own franchises.
Disclosure, during more difficult economic times, whether for sales of new franchises, corporate units or re-sales of existing franchises presents its own unique challenges. While a conservative approach to disclosure issues, i.e. "when in doubt disclose”, is well advised at all times, the hard reality is that during economic downturns, the franchisor needs to be even more candid and more accurate. Trouble is lurking, however, when this need for greater candor in disclosure runs head on into the need to sell franchises to survive.
MATERIAL FACTS. This is one of the most difficult concepts in franchise disclosure at any time. The definition of material fact under Ontario’s Arthur Wishart Act uses the word "includes” rather than "means” as is the case in the other provinces with franchise statutes. This is commonly understood to throw the net of disclosure even wider in Ontario. In any event, during difficult economies, one could easily argue that softening sales figures, economic trends, franchisor’s plans to cutback expenses, diminished franchisor revenues, capital and financial restructurings by the franchisor and a host of other realities in a soft economy "would reasonably be expected to have a significant effect on the value of price of the franchise to be granted or the decision to acquire the franchise”.
OPERATING COST PROJECTIONS AND EARNINGS CLAIMS. Another hallmark of a weak or weakening economy is the unpredictability of revenues and costs or even the availability of necessary inventories, supplies and materials. As a result, the risky business of projecting revenues, costs and profits becomes even more risky. While classic exculpatory language may help, it is no assurance of succeeding in a defense from a claim brought by a disgruntled franchisee.
MATERIAL CHANGE STATEMENTS. During normal economic climates, "material changes”, i.e. negative changes in the business, operations, capital or control of the franchisor or franchisor’s associate or the system would be fairly obvious and occur infrequently. This is not the case in the rapidly changing landscape of a softening economy or recession. Sometimes the time span from disclosure to signing of the franchise agreement can be considerable and even take longer in difficult times. So, the franchisor, especially one that has a larger organization, needs to be very, very, vigilante in monitoring internal and external circumstances for the existence of material changes and then be prompt and accurate in disclosing them to prospective franchisees.
COMMUNICATIONS
Many difficulties in troubled franchise systems and with specific franchisees can be traced to poor communications. Effective communication is needed in franchising in so many ways; to sell franchises, to effect changes in the system and to resolve disputes. This need is greatest during a poor economy.
When approached by a new franchisor client who is experiencing serious challenges with their system, which is occurring more frequently for me these days, I often find that the problems are more about communications than legal issues. Not surprisingly, my initial work will focus on improving the communication style and efforts of the client when dealing with their franchisees.
For certain, for the survivors in franchising, there is always a cornucopia of opportunities as the economy bottoms out and growth begins anew.
Sometimes, franchisors try to sell their way out of difficult times. When cash is tight, initial franchise fees look very attractive. However, sound franchise theory dictates that the initial franchise fee be set at a level which compensates the franchisor only for its true costs and expenses to find the franchisee, the location or territory and in helping the franchisee establish the business. So, it is unlikely that initial franchise fees will do much to alleviate the franchisor’s financial challenges, as least not in the long run. It is mostly an act of cannibalism of the franchise system to sell franchises without devoting the necessary resources to ensure quality in such things as franchisee selection, site selection, training, etc.
On the other hand, having the ability to assist the troubled franchisee to resell its franchise to a better or better financed operator is a sound strategy in troubled times. In fact, a franchisor will often realize a faster net benefit to its cash flow by such a resale than by selling a new franchise. Good franchisees, who are well enough financed and already in the system may see this as a unique opportunity to grow. Re-sales to existing franchisees has the lowest cost to the franchisor of all franchise sales, because the selling costs and training costs can be very little or nothing at all.
DISCLOSURE
There is a very good chance that a resale of a troubled franchise will involve some efforts and resources of the franchisor. It will be a question of fact whether or not those efforts and resources were sufficient to lead to a conclusion that the re-sale was done "by or through the franchisor”. If this is the case, then there will be no exemption from disclosure requirements of the existing provincial franchise statutes (Alberta, Ontario, PEI and (soon) New Brunswick) afforded to franchisees who resell their own franchises.
Disclosure, during more difficult economic times, whether for sales of new franchises, corporate units or re-sales of existing franchises presents its own unique challenges. While a conservative approach to disclosure issues, i.e. "when in doubt disclose”, is well advised at all times, the hard reality is that during economic downturns, the franchisor needs to be even more candid and more accurate. Trouble is lurking, however, when this need for greater candor in disclosure runs head on into the need to sell franchises to survive.
MATERIAL FACTS. This is one of the most difficult concepts in franchise disclosure at any time. The definition of material fact under Ontario’s Arthur Wishart Act uses the word "includes” rather than "means” as is the case in the other provinces with franchise statutes. This is commonly understood to throw the net of disclosure even wider in Ontario. In any event, during difficult economies, one could easily argue that softening sales figures, economic trends, franchisor’s plans to cutback expenses, diminished franchisor revenues, capital and financial restructurings by the franchisor and a host of other realities in a soft economy "would reasonably be expected to have a significant effect on the value of price of the franchise to be granted or the decision to acquire the franchise”.
OPERATING COST PROJECTIONS AND EARNINGS CLAIMS. Another hallmark of a weak or weakening economy is the unpredictability of revenues and costs or even the availability of necessary inventories, supplies and materials. As a result, the risky business of projecting revenues, costs and profits becomes even more risky. While classic exculpatory language may help, it is no assurance of succeeding in a defense from a claim brought by a disgruntled franchisee.
MATERIAL CHANGE STATEMENTS. During normal economic climates, "material changes”, i.e. negative changes in the business, operations, capital or control of the franchisor or franchisor’s associate or the system would be fairly obvious and occur infrequently. This is not the case in the rapidly changing landscape of a softening economy or recession. Sometimes the time span from disclosure to signing of the franchise agreement can be considerable and even take longer in difficult times. So, the franchisor, especially one that has a larger organization, needs to be very, very, vigilante in monitoring internal and external circumstances for the existence of material changes and then be prompt and accurate in disclosing them to prospective franchisees.
COMMUNICATIONS
Many difficulties in troubled franchise systems and with specific franchisees can be traced to poor communications. Effective communication is needed in franchising in so many ways; to sell franchises, to effect changes in the system and to resolve disputes. This need is greatest during a poor economy.
When approached by a new franchisor client who is experiencing serious challenges with their system, which is occurring more frequently for me these days, I often find that the problems are more about communications than legal issues. Not surprisingly, my initial work will focus on improving the communication style and efforts of the client when dealing with their franchisees.
For certain, for the survivors in franchising, there is always a cornucopia of opportunities as the economy bottoms out and growth begins anew.