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A Good Franchise
By Ronald K. Gardner
Published: November 9th, 2009
For more than 15 years, I have limited my practice to the representation of franchisees, dealers and distributors. Because of the extremely narrow nature of my practice, I am frequently traveling throughout the United States and, as one might expect, meeting new people. As is often the case in new situations when people are making small talk, someone always asks me what I do for a living. After I explain the nature of my work, I usually get this follow-up question: “What makes a good franchise?”
To answer, I generally begin by joking that I can’t possibly know the answer, as franchisees that are in a “good” system never come to see me. Indeed, I have been known to tell people that I am “somewhat like a mortician—no one ever calls when there is good news.” And while this statement is predominantly true, because I have seen firsthand what makes a bad franchise, I have some strong opinions about what makes a good franchise.
1) First, a good franchise is one with a widely recognizable trademark. It is stunning to me to see the amount of royalties many franchisors charge when all they really provide to the franchisee is the opportunity to use a trademark. While a well-established franchisor may be well within its rights to ask for 6 to 8 percent of gross sales in royalties, in my opinion, a newly established franchisor or one that is moving into a new area has no such right. In short, if the trademark is not widely recognized, the franchisor has no business asking for a significant portion of the franchisee’s gross sales as royalty. A good franchise relationship recognizes this fact and makes adjustments to the royalty expectations accordingly.
2) Even more importantly, a good franchise is one in which the franchisor listens to the needs and the concerns of both its existing franchisees as well as its prospective franchisees. As a counselor of franchisees, there is nothing more frustrating to me than a franchisor that is intransigent about the need to be flexible in individual situations. While it is certainly true that a franchise system needs to be uniform in general, I reject the proposition that a business should so strictly adhere to the idea of uniformity from location to location as to be willing to lose economic opportunity. While I often hear franchisors and their lawyers complain that they need the unilateral ability to change the franchise agreement and/or the operations manual in order to be “flexible” and to adjust to a changing business climate, I find it rather hypocritical that they reject this same argument when it comes to the needs of a particular franchisee or group of franchisees in a specific geographic area. If one accepts (as I do), that businesses need to be able to change in order to adapt, I believe one must also accept the idea that such flexibility should extend down to the most local level. This is also true for the needs of prospective franchisees, to whom I often say: If a franchisor will not listen to your individual concerns, refuses to negotiate any provisions of the franchise agreement and essentially presents the opportunity on a take it or leave it basis, you should decline the alleged opportunity. I am not suggesting here that franchisors do not need uniformity and may have a solid reason to ultimately refuse to change any part of the franchise agreement. I am suggesting that if a franchisor refuses to listen to a prospective franchisee’s concerns, convinced without ever hearing the franchisee’s needs that the franchisor’s demand for uniformity is more important than any such needs, then prospective franchisee would be well-served to go do something else with his or her money. The “my way or the highway” attitude that many franchisors take with prospective franchisees is, in my mind, a sure sign of a bad franchise system.
3) Lastly, a good franchise system is one in which the franchise agreement is not completely one-sided. Franchise agreements are long, complicated, technical legal documents. The franchisor lawyers who draft these documents have a multitude of opportunities to choose to be fair and even-handed in the terms of that agreement or to write those agreements in such a way that protects the franchisor at the expense of the franchisee. A good franchise system recognizes that this important legal document should not be so one-sided that someone who signs the document to become a franchisee loses all rights under the law. Particularly offensive provisions seek to waive the otherwise applicable covenant of good faith and fair dealing, to strip franchisees of the protections of state laws, to insulate franchisors from liability for wrongful conduct and/or to shield franchisors from the consequences of intentional fraud.
In the end, what makes a good franchise is largely dependent on the needs and expectations of both the franchisor and the franchisee. However, prospective franchisees and their lawyers need to become intimately familiar with the franchisor’s nature and daily practices to determine whether the marriage is worth the financial and emotional risk involved. If a franchisor is unyielding in its positions, untrustworthy because it does not deliver on its promises or overbearing in its demands regarding legal documentation between parties, I seriously question whether that franchise relationship can ever be called “a good franchise.”
Ron Gardner is the managing partner of the law firm of Dady & Gardner, P.A. in Minneapolis, Minnesota. Dady & Gardner has, since 1994, limited its practice to the representation of franchisees, dealers and distributors.