A Fresh Start

By Eric H. Karp, ESQ., General Counsel To NCASEF

When I humbly accepted the position of General Counsel to the National Coalition nearly eight years ago, I made three very simple promises. First, I would always tell the truth, never mincing words, no matter the consequence. Second, my client would always be the National Coalition and not any particular leader or group of leaders within the organization. Third, I would, to borrow a baseball metaphor, call them as I see them. I believe the record reflects that all of these promises have been kept.

The single disappointment that I have to date is that the relationship I had hoped for and initially worked very hard at establishing, between the in-house and outside lawyers of SEI and my law firm, would be marked by collaboration, transparency and mutual respect. For reasons that I do not wish to recount in this space, that relationship began in a very promising fashion but went off the rails.

As we look toward 2022, I want to set out my goals for a new beginning in the management of the relationship between SEI and its franchisees. As it happens, my philosophy on this subject is set out in great detail in a book published by the ABA Forum on Franchising entitled Franchise Law Compliance Manual, Third Edition, 2021. Chapter 4, “Franchise Relationship Management,” describes my opinion, grounded in more than four decades of representing independent franchisee associations, that both parties to the franchise agreement have a vested interest in pursuing mutual goals, cooperation and a shared sense of responsibility. The book is available on Amazon at https://www.amazon.com/s?k=The+Franchise+Law+Compliance+Manual&ref=nb_sb_noss.

On more or less the first day of my first-year law school class on contracts, the learned professor told us that the relationship between two parties to a contract is governed by that contract. But over time the validity of that statement has become less and less apparent to me. In fact, in my experience, the day-to-day relationship between a franchisor and its franchisees is defined by the unique culture in the system, which is typically driven by the franchisor.

Greg Nathan, a corporate psychologist and founder of the Franchise Relationships Institute, whose career involves both having been a franchisee and a senior executive for a franchisor, summarizes this elementary principle as follows:

“Cooperation, commitment and communication are the real building blocks of success in a franchise chain. These largely come, not from legal agreements, but from ethical dealings, strong leadership and the mutual respect of each party for the goals of the other.”

Mr. Nathan describes two franchise systems he has studied. Company A’s franchisees make up on average 30 percent more in profit than those of Company B. Company A is marked by authoritarian and confrontational leadership obsessed with control. Company B has leadership committed to collaboration, resolution of conflict through open discussion, positive two-way communication, and rewarding franchisees for good performance. Despite making less money, the franchisees of Company B were significantly more satisfied on a whole range of measures studied by Mr. Nathan. He concludes, “the point is that the corporate culture of a franchise network will have a significant impact on franchisee satisfaction. In some cases, culture will be an even more important determinant of franchisee satisfaction than financial performance.”

The sense that there are more ways in which a franchisor and franchisee can be aligned rather than in conflict is bolstered by the published writings of Cheryl Bachelder, the highly successful CEO of Popeyes from 2007 to 2017. Her mission was to turn around a company which was then in disarray, losing money and market share. Having decided that part of the solution was to shift from local to national advertising, she requested that franchisees increase their advertising contribution from 3 percent to 4 percent. The franchisees responded by saying that they would pay that increase, but only if the franchisor invested $6 million of its own money in advertising and marketing. Ms. Bachelder and her Board agreed. While this had the effect of lowering earnings and disappointing Wall Street, the long-term dividends were exponential.

Ms. Bachelder came to the conclusion that her company must acknowledge the sizable investment that franchisees make by purchasing the franchise and agreeing to a long-term contract. She correctly concluded that if franchisees did not prosper at the unit level, there was no chance that the franchisor’s revenue would go up or that new locations would be developed. As she stated, “Either franchise owners would succeed or Popeyes would fail.”

I was fortunate to have a ringside seat to these developments, as I have been counsel to the Popeyes International Franchisee Association since 2010. Not incidentally, my first undertaking in that capacity was to negotiate the renewals of the two major national beverage contracts for the franchise system shoulder to shoulder with in-house counsel for Popeyes.

The benefits of this collaborative approach were truly remarkable. From 2011 to 2015, Popeyes’ revenue grew from $154 million to $259 million and its net income from $24 million to $44 million.  By 2014, average restaurant sales were up 25 percent. The result was that franchisees voted with their checkbooks by reinvesting in the brand, remodeling restaurants, and building new units.

There is no denying that the short-term goals of a franchisor and a franchisee can be, and frequently are, at odds. In the 7-Eleven system these include the fact that although the franchisor owns the equipment and decides when worn out equipment should be replaced, franchisees shoulder the cost of maintenance, which escalates as the equipment ages. SEI’s gasoline consignment structure incentivizes profit over gasoline volume. And the 2019 form of agreement has seriously undercut franchisee profitability and value. But these built-in conflicts of interest can be accommodated with leaders on both sides who value a long-term relationship over short-term gain. SEI would do well to acknowledge that in these and other areas, it has simply gone too far. But for SEI and the remaining franchisees in the system, the effects are not irreversible.

A constructive and collaborative relationship between SEI and its franchisees, marked by transparency and mutual respect is not an end in itself. Rather it is a pathway to a partnership which can meet internal and external challenges, adapt to evolving consumer preferences, find innovative responses to employee shortages and rising wages, and where both parties can achieve long term and sustainable financial returns.

Here’s to a fresh start.