Why the “Family Feel,” or “Oral Contracts” in Franchising is a False Hope
May 23, 2017
Many franchisees purchase a particular franchise because they believe that the people working at the franchisor’s office and the franchise system’s founders are “good people,” and have a “family feel” in how they run the business. The problem, however, is that franchisors, like any other business, may be bought and sold. For example, the jovial franchise owner willing to work out problems with franchisees or “handshake agreements” may someday be replaced by a private equity firm that buys out the previous owner.
This can result in a number of problems for franchisees. First, deals that may have once been agreed to with a phone call and an oral contract may no longer be honored by the new owner. Second, a new owner – particularly a private equity firm – is often in the business of flipping the company for a short term profit. Third, a new owner will often bring in new management and sometimes even new lower level employees. Fourth, a new owner may purchase a franchisor to convert the system to a competitive company that the new owner also owns.
Franchisees often come to our office and say that the previous owner had agreed to treat them a certain way (e.g., accepting late payment without issue, reducing royalties, protecting territories even if not exclusive), but a new owner comes in and refuses to honor those previous arrangements. In other words, what was once a “family,” is now strictly business. Therefore, it is imperative that franchisees that have special deals with franchisors get those agreements in writing so that they have something to enforce if the franchisor that granted the deal eventually sells to another business. Prior oral contracts in a franchise by a previous owner are, at best, very difficult to enforce, but if you have a written agreement you may be protected. Thus, even when the “family feel” is gone, you may be able to protect your business.
While the founder of a franchise system may be in business for long term growth of the brand and his or her vision of a well-run business, if he or she sells the business, a new owner may be in it strictly for the profit. In these cases, franchisors (often owned by private equity firms) will do what it takes to turn a quick profit and this frequently involves, increasing fees (both in terms of the number of fees charged and the amount of each fee) and reducing costs often in the form of cutting services to franchisees. Therefore, you should not purchase a franchise because you like or trust the owner or believe the owner to be a good person – tomorrow, he or she may no longer be the owner.
Managers and other employees that a franchisee likes and trusts may also be removed when a new owner takes over and wants to install their own team. In these cases, franchisees may face difficulties dealing with a new franchisor’s employees that do not understand the industry or business in which the franchisees are engaged. For example, a private equity buyer that owns or previously owned a food based franchise may install managers from that same food based franchise to a cleaning service franchise. Meaning that certain managers or employees may have experience in the franchise system, but not as much experience in the particular industry. While the owner may see this as a benefit because of relationships they have built with the managers, it may not bode well for franchisees on the ground.
In some instances, a buyer will purchase a franchise system to convert franchisees in that system to another system that the buyer already owns. For example, Mail Boxes Etc. – a franchise system – was purchased by UPS – a competitive franchise system. This resulted in Mail Boxes Etc. franchisees having to convert their businesses to UPS franchises or risk losing their investments in their franchises entirely. While the franchisees in the Mail Boxes Etc. system may have had relationships with franchisor-management, that did not matter once UPS took over.
The important thing to remember is that no matter who your franchisor is and how much you trust it, its owners, and employees, it may be under new ownership tomorrow. You need to take steps to ensure your rights are protected in good times so that when bad times come, you have some leverage with which to work.