Business Inspections: Preparing for Franchise Store Inspections

clipboard-smallBusiness Inspections: Preparing for Franchise Store Inspections

The purpose of this article is to provide a recommended “step-by-step” protocol for franchisees to follow upon receiving notice that their franchisor intends to inspect their store.

At the outset, it is important for franchisees to understand that, since franchisors and franchisees have certain inherent economic conflicts of interest — e.g., franchisors are interested in increasing top-line revenues since the royalties they receive are based on revenues, whereas franchisees are interested in bottom-line profitability — it is not a good idea for franchisees to rely on franchisors, including the franchisor’s lawyers and field staff, for legal advice.

Secondly, it is important that franchisees understand that while franchisors have a right to enforce standards, those rights are typically subject to a “reasonableness” limitation. Accordingly, the answer we most frequently give to franchisees when they ask whether a franchisor may lawfully impose a particular standard (e.g., replace the flooring in the backroom), is to say, “It depends on the terms of your franchise agreement, and if it would be reasonable to do so”.

The issue of reasonableness, however, is rather subjective, and, in that regard, we do not want to see franchisees “bet the franchise” on uncertain outcomes.

Although a franchisee’s right to contest a deficiency notice from an inspection will depend on the parties’ respective rights under the applicable franchise agreement, we recommend that franchisees take the following steps for every inspection:

Step 1: Prepare for the Store Inspection

The best way to avoid receiving a deficiency notice is for a franchisee to operate its store(s) in compliance with reasonable operating standards pertaining to cleanliness and facility maintenance. If you receive notice of an upcoming inspection, you should do everything within your power to prepare the store for the inspection. And, if the applicable franchise agreement authorizes your franchisor to provide unannounced inspections, you should train your staff to be prepared for such inspections at any time and to make sure to take the following steps and immediately notify the appropriate person within your business to have that person attend the inspection.

Step 2: Monitor and Record the Store Inspection

To the extent possible, it is critical for the franchisee or the store manager to accompany the franchisor field representative during any inspection. In cases where the franchisor actually makes an appointment with the franchisee, it is critical for the franchisee to keep the appointment, since a failure to keep the appointment could have an adverse effect on the ultimate outcome. Moreover, it is extremely important for the franchisee, or the franchisee’s manager on duty at the time, to accompany the inspector during the inspection. The purpose of this is twofold: (1) it will allow the franchisee to identify in detail those issues with which the franchisor is concerned; and (2) it will allow the franchisee to make a photographic record of each and every item inspected so that the franchisee will have his or her own visual record of those items that the franchisor found satisfactory and those items that franchisor found unsatisfactory.

Step 3: Act Immediately

The only instance in which you need not take any immediate action following an inspection is when the report includes no deficiencies; that is the report includes no negative findings. In every other instance, even those in which the inspection provides you with a passing grade but includes one or more negative findings, you will want to take some kind of immediate action.

act-immediatelyWhen a franchisee receives a demand related to his or her alleged failure to comply with some type of standard (be it cleanliness, food safety, facilities or some other standard), the franchisee’s first inquiry should be directed to its local franchisor representative, asking (1) what, specifically, is the concern, and (2) how the franchisor believes the franchisee can most effectively and efficiently (and cheaply) resolve the deficiency. For example, a “parking lot” deficiency could be interpreted to mean that the franchisee has to rip up and replace the entire parking lot, or it could simply mean that the franchisee has to fill in a few cracks. The franchisee should do what can be done right away to determine what a reasonable cure would be. Franchisees should request that the franchisor field representative provide written answers to these two questions. If the franchisor field representative refuses to provide answers in writing, the franchisee should send the franchisor field representative a written recap of his or her notes of what the franchisor field person said (or refused to say).

If a franchisee’s negotiations with respect to the demand leads to a reasonable, efficient and economical solution, with the franchisor providing the franchisee with a realistic timeframe for effecting the solution, that should be the end of the matter, although the franchisee should be sure and get a letter from the franchisor acknowledging the fact that the franchise has satisfactorily cured the deficiency.

If, on the other hand, the communication with the franchisor field representative is unsatisfactory, and, in the opinion of the franchisee, the proposed “fix” is unreasonably expensive and/or unnecessary, or if the stated time limit for the fix is unreasonably short, it may then be appropriate for the franchisee to get an attorney involved to try and negotiate with the franchisor’s in-house legal counsel to get to a solution that is, in fact, reasonable and doable within a reasonable timeframe. Failing that, the franchisee next would want his or her legal counsel to try and negotiate with the franchisor to get a dispute-resolution mechanism in place that does not “bet the franchise” on the outcome.

Another option franchisees might consider even if the franchisor’s proposed “fix” is unreasonably expensive and/or unnecessary, or if the stated time limit for the fix is unreasonably short, and the franchisee is not interested at the time in challenging the franchisor’s “fix” or timetable, is for the franchisee to advise the franchisor in writing that the franchisee has agreed to comply with the franchisor’s demand, but that the franchisee is not waiving his or her right to later argue that the franchisor’s demand was unreasonable and/or unauthorized by the applicable franchise agreement. In the event a franchisee chooses this option, the franchisee may want assistance from his or her legal counsel in wording the notice to the franchisor.

Step 4: Determine Legitimacy of Each Deficiency

As referenced above, a failure of an inspection likely will constitute a default and start the “clock ticking” to the time when the franchisor eventually will attempt to terminate the franchise. Thus it is critical for the franchisee to address each deficiency individually, and to quickly determine whether the deficiency is valid (that is, the franchisor was correct in noting the deficiency). If the noted deficiency is not valid, the franchisee should immediately tell the franchisor in writing that the specific deficiency is not valid, provide an explanation why the deficiency is not valid, and then request a visit from the franchisor field representative as soon as reasonably possible to get written confirmation from the franchisor that the deficiency is not valid. If the franchisor is unwilling to give the franchisee such written confirmation, then the franchisee must decide whether to timely correct the deficiency anyway, or fight the deficiency through legal channels. If the franchisee desires to fight the deficiency through legal channels, the franchisee should give serious consideration to retaining experienced legal counsel.

Step 5: Correct the Legitimate Deficiencies

If the franchisee agrees with the franchisor’s assessment that action is warranted and can correct the alleged deficiency within the time the franchisor has stipulated to avoid a formal default notice and/or threat of termination of the franchise, then it is strongly recommended that the franchisee notify the franchisor in writing that he or she will correct the alleged deficiency within the time allotted. It also is recommended that the franchisee invite the franchisor’s representative to the store prior to the deadline to inspect the correction; that way, if the franchisor representative does not agree that the franchisee’s action has corrected the deficiency, the franchisee will have additional time to effect the necessary additional corrections.

Step 6: Request Additional Time When Needed

If the franchisee has determined that a deficiency needs correction, but the franchisee cannot complete the correction in the allotted time, the franchisee must seek and secure, in writing, an extension from the franchisor prior to the passing of the deadline. The best practice is for the franchisee to advise the franchisor in writing that the franchisee will correct the deficiency by a certain date. The franchisee should request a written response from the franchisor confirming that the franchisee can have the requested additional time. If the franchisor does not grant the additional time, the franchisee must either correct the deficiency in the required time or seek legal assistance to secure additional time.

Step 7: Seek Experienced Legal Counsel

If, after employing each of the aforementioned “Steps” deficiencies remain, and you have not yet procured legal counsel, it is absolutely essential that you employ legal counsel to assist you, hopefully, in negotiating a resolution with your franchisor prior to the passing of the applicable deadline. Failure to respond in a timely fashion to a failed inspection will lead to default, and, ultimately, if alleged deficiencies are not cured, then termination.

Summary

We hope this step-by-step protocol will help each of you have a more meaningful and less stressful experience upon your franchisor’s inspection of your store or stores.

We also hope that this article will convince every franchisee not only to prepare for inspections, but to act immediately upon the receipt of any negative communication from your franchisor. We cannot stress this enough: THE EARLIER A FRANCHISEE ACTS TO RECTIFY (OR, IF APPROPRIATE, TO FORMALLY CHALLENGE) ANY AND ALL DEFICIENCIES NOTED BY ITS FRANCHISOR, THE GREATER CHANCE THE FRANCHISEE WILL HAVE TO CORRECT OR REMOVE THE ALLEGED DEFICIENCIES WITHOUT FACING A DEFAULT AND/OR TERMINATION NOTICE. It bears repeating that a franchisee’s ability to avoid a default notice (and, ultimately, a termination notice) is significantly greater if the franchisee deals with each and every alleged negative item before the deadline identified in the franchisor’s communication.

– SEK

Contact an attorney at Dady & Gardner.