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Franchisees invest in franchise systems for many different reasons. One reason franchisees universally share is that they are joining something so they will not be alone to solve the myriad of business challenges they will face.
A business owner today needs to understand and deal with issues that just didn’t exist 25 years ago. From complicated tax issues, to complicated labor laws and insurance needs. In marketing alone: advertising, online, social media and public relations have all drastically changed the marketing dynamics.
Many feel franchise systems can provide assistance in these complicated areas. The reality is most franchisors are in a very different business than their franchisees are in. The business of running a franchised unit is extremely different that running a franchise system. Many of the franchisor’s employees including the C-Suite level have never operated a franchised unit. Most C-Suite’s change every 5-7 years. The institutional memory is lost to the franchisor but remains with the franchisees that tend to be in the system longer that many of the employees of the franchisor.
The reality is franchisors are in a different business and have a totally different set of challenges that are not a part of running a franchised unit.
Independent Franchisee Associations (IndFA) typically form from the imbalance in the relationship. A single unit franchisee may have a difficult time changing the status quo on their own. Many of the multi-unit franchisees feels they have different needs yet they also have the same serious concerns for their investment because of the way onerous franchise agreements are.
Most IndFA’s talk about creating one voice, creating more leverage in negotiations, developing resources to defend franchisee from predatory franchisor practices. Franchisees typically don’t have the knowledge on how to set-up an IndFA. Some franchisees were members of a union so they understand that 1+1=3, and the unions empower workers to act as one they could do the same for franchisees. But most franchisees come from the corporate world and have little experience running a small business.
Franchisees run a business and as stakeholders they are directly affected by how the brand is perceived by its customers. Although many of the reasons listed above are all good reasons to form an IndFA. The most important reason to create a franchisee association is the need and power of creating a shared knowledge base of the branded business from the franchisee perspective. That is something very hard to obtain other than forming an IndFA. Most Franchisee Advisory Councils don’t even let franchisees take notes, never mind discussing the matter in full.
Forming an IndFA is easier said than done, but the benefits of Independent Branded Trade Association can help the stakeholders in the brand improve product, profitability, market share and brand recognition.
Branded Trade Associations can help foster collaboration seek transparency and empower franchisees to have a positive impact on the brand they have chosen and have dedicated their money, heart and soul.
When I run into a franchisee, and they ask me why they should form a franchisee association my typical answer today is “if you want to succeed, decades to come, you don’t have a choice. You must unite franchisees as an essential part of the successful franchise systems to ensure that the franchisees have as much knowledge of the business and the future risks of running the franchised units.” Otherwise, you are putting your business lifeline in the hands of someone that is in a different business and possess a onerous franchise agreement that offers you nothing more than my way or the highway.
Forming an Independent Franchisee Trade Association will not solve all issues, there are multiple sides in the franchise relationship, vendors, franchisees, franchisor, customers, employees and vendors. What matters is the Association will be able to share similar experiences from other franchisees. Independent Franchisee Trade Associations will provide you access to information to help you have a say in the direction the brand and company may take.
Nicole Smith is a Kuman Franchisee and she is president of the International Association of Kumon Franchisees (IAKF). She is a passionate franchisee advocate and her list of benefits for joining an Independent Franchisee Association are worthy reading for any franchisee.
1. Independent franchisee associations are communities of like minded individuals who develop mentoring, best practices, and support for their business. The discussions amongst members should be your “morning newspaper”, helping you move your business (and instruction) forward.
2. There is power in numbers. I heard it 20 times at the Coalition of Franchisee Associations (Burger King, Subway, Supercuts, Dunkin, 7-Eleven and more) Forum. Being in Washington D.C. year after year and talking with politicians about issues impacting our businesses and families makes a difference. They need our engagement to educate themselves on important issues in small business and franchising.
This is also true within Kumon. In the last month, through the concerted efforts of several franchisees working together, we helped Kumon North America see the value of placing ads in ethnic publications (not in English) and applying a subsidy to these ads. Additionally we were able to negotiate a steep discount and get more value for our money.
3. While franchisors were not in Washington arguing for small business issues (healthcare, taxes, minimum wage, 40 hour work week), franchise associations were! Why? Because we have different priorities. Franchisors go there to talk about issues important to them, as they have the right to do and should do! But we have to work to help ourselves.
The work the International Association of Kumon Franchisees (IAKF) is doing in this political arena is imperative. Through the association you have more power and influence than most people realize. We attended a “Coffee with Corey” Booker at the end of the day for fun. He quoted one of our coalition franchisee reps in his speech from a quick discussion earlier in the day. He did not know anyone from the association was in the audience. We made an impression and he tweeted pictures with us in it!
4. A Congressman who was a former franchisee of a different brand expressed the importance of being in a franchisee association very eloquently. He told us franchisee associations are important because he gets two feet of paper a day to read. He cannot catch the bad legislation that will put us out of business. Franchisee associations have to tell him and other politicians what will hurt their members so they can address it.
This is what IAKF’s being a member of CFA does for us as small business owners. Together with other franchisee association leaders, on an ongoing basis, CFA identifies what will negatively impact our business and advocates for us.
Politicians (and probably the general public) do not understand the franchisor/franchisee relationship. They imagine franchisees are part of the 1 percent with DEEP pockets. Raising wages only impacts corporations, right? since that money will come right from their pockets? We help them understand just because we use a large brand name we don’t necessarily have a lot of money.
As uninformed as this sounds, it is the opinion of many politicians who have never made a payroll, paid rent or Aroyalty. We spent 15 minutes of every meeting with our representatives explaining we are really small local business owners making a difference in our community (Little League, jobs, PTAs). We really can lose our savings and homes when either a franchise business model is bad or the franchisor makes poor decisions, as well as when politicians make poor decisions that impact our business environment. We, franchisees from all brands, need to educate these people that we are the small guy.
As one politician put it, “If you don’t share your voice up here, trust us, someone else’s voice will be heard.”
5. Economies of Scale: Vendors want to work with us as a group to reduce our costs (and increase their business).
Kumon corporate focuses on how to make themselves profitable – quite naturally! – not their franchisees. This is a typical franchise model. Interestingly, other franchise owners confirmed no franchisor wants one franchisee to be too big and powerful. It is something inherent in the system. When was the last policy given that they made us more profitable? In fact some franchise systems do not allow franchisees to set prices. PAKCO (the franchise association before IAKF) negotiated that right for all of us years ago.
Nicole goes on to list some of the common reasons or excuses that franchise owners give for not joining the IAKF: Read the excuses here…
No relationship is perfect, it doesn’t matter whether the relationship is personal, business or institutional there are always going to be both good things and bad things about any relationship. One of the keys to a long and prosperous relationship is balance. Mutual advantage is the key to sustaining the relationship. Relationships prosper when each party derives worthwhile benefits and subsequent returns. Often this requires a give and take.
Complicated institutional relationships such as labor, government, and business like franchising often require independent organization of the parties involved to insure that each stakeholder has the resources to obtain proper representation.
In our government the US Constitution utilizes “checks and balances” to protect US citizens. The key objective for the drafters of the constitution was to ensure that no one branch became too powerful. Each branch “checks” the power of the other branches to make sure that the power is balanced between them, and ultimately the United States is stronger for it.
One of the keys to a successful franchise system is one in which stakeholders share mutually in the rewards and are mutually involved in the process. That way all parties benefit from a stronger brand and share in the success. Franchise systems require checks and balances to ensure the growth of the brand for all stakeholders.
Each party to a franchise has several interests to protect. The franchisor is most involved in securing protection for his trademark, controlling the business concept and securing his know-how. The franchisee often has significant capital and family resources invested in the system.
As a result of the inherent differences between a franchisee and its franchisor with respect to negotiating power, resources and access to information pertinent to the operation of the franchise system, many franchise systems look to independent franchisee associations, advisory boards and supply chain organizations as a means to address these inequities for the inevitable evolution of the franchise system.
Independent Franchisee Associations (IFA) provide franchisees, a needed check to the balance of power in the franchise relationship. By franchisees organizing their own independent trade organization they are acquiring the power and resources, to defend, protect and guard against imbalance in the relationship.
Franchisors may be resistant to the formation of a franchisee association. In some cases, franchisors may refuse to deal with the association or to recognize the association as a representative entity of the franchisees. In other situations, franchisors may be more aggressive in promoting the use of the advisory council in an effort to dispel the belief that another avenue of communication between the franchisor and its franchisees is required. These institutions are fine. The other opportunities franchisees and franchisors have to discuss different scenarios and business cases the better is is for all stakeholders.
As franchising continues to evolve, the power of franchisees, as well as their financial means, continues to grow. In many systems franchisees own multiple units and the franchisor is a corporation with other holdings. This change in the balance of power between franchisors and franchisees makes franchisee participation in an Independent franchisee association, inevitable and vitally important for all parties.
Each franchise system should have an independent franchisee IFA to defend the interests of the franchisees and provide balance in the relationship for long term viability and success of the brand and the entire franchise system.
It’s up to the franchisees to make that happen.
Franchise Perfection specializes in helping independent franchisee associations to organize, gain members and establish an infrastructure that sustain the organization for years to come.
This article was also posted at Blue Maumau.
The equity extraction scheme that was exposed by 7-11 Employee Kurt McCord brings back painful memories for me.
The scheme is eerily similar to what was perpetrated against Dunkin’ Donuts franchisees from 1998 thru 2008. In that period it is estimated that Dunkin’ Brands extracted over $100 million dollars of franchisee equity using similar tactics described by Kurt McCord.
The biggest difference in the two brands, is that in Dunkin’s the franchisees made money and were afraid to speak out against what most franchisees knew what was going on. Some franchisees benefited at Dunkin’ because they were able to purchase the shops, but they paid top dollar for that privilege. I’ve been told by franchisees that purchased some of those shops that they were very surprised when at closing that Dunkin’s would walk away with the biggest check and even sometimes the franchise got nothing.
Unfortunately 7-11 franchisees do not make as much money as Dunkin’s franchisees do. 7-11 takes over 50% of any profit the store generates, it truly is a gloried manager’s job that may pay better than minimum wage, but not much more.
Onerous franchise agreements create the tool, greedy investors set the stage, failure to meet development goals cause the C-Suite level management to look for other means to generate cash flow and bingo the franchisee equity extraction scheme is launched.
Michael Seid and the IFA lobbyists scoffed at the suggestion that franchisee equity extraction is a problem in franchising. In Maine the IFA and franchisor lobbyists said that “there isn’t a problem in franchising, just with Dunkin’ Donuts franchisees, it’s an isolated incident”, well it looks like the quarantine is over and the equity extraction scheme is no longer isolated.
I will admit that blatant franchisee equity extraction schemes perpetrated by one brand against its franchisee are not common at let’s say bullying franchisees is. Bullying franchisees is not new to franchising, it happens in many systems, every single day. In Maine the IFA refused to accept any attempt to diminish franchisors ability to extract equity from franchisees, they even opposed “Freedom of Association” or termination with only with good cause, which is central to the effort of stopping equity extraction schemes in their tracks.
Thankfully, 7-11 has a national franchisee association. There is no doubt that they are discussing Kurt McCord’s revelations as I write this. 7-11 franchisees have been complaining about the bullying and equity extraction scheme for years now.
There is a need for pro-franchisee legislation to protect and defend the equity that franchisees invest in each state in the US. By the way 7-11 endorsed the IFA’s position against pro-franchisee legislation in Maine and New Hampshire. What a surprise?
Franchisees, wake-up! Most of the franchise agreements you signed can and will be used against you if and when the franchisor needs cash and is so incompetent they can’t figure out productive ways to generate that cash. Your franchise agreement is the tool that makes franchisee equity extraction possible. That tool may not be utilized as of yet in your system, but don’t kid yourself, it lies dormant in the franchise agreement you signed, and it can be utilized against you unless you live is a state with pro-franchisee legislation or unless you have a competent independent franchisee association working to protect your ability to protect, defend and enhance your equity as a franchisee.