From the May 1997 issue of Entrepreneur

Last month, Edward Kushell, president of The Franchise Consulting Group in Los Angeles and a former franchisor, offered solutions to disputes that often plague franchisor-franchisee relationships. Here, Kushell offers more insights.

Advertising Strategies

Franchisor says: "I've collected money from franchisees through an advertising fund, and I'd like to use some of that money to build business in certain regions of the country."

Franchisee says: "I am contributing money to an advertising fund, and I expect that fund to be used for advertising and marketing in direct proportion to the stores in my given area."

Solution: "It's important that franchisors look upon this fund not as a way to make money but as a way to promote the trademark," says Kushell, who recommends franchisors use at least 80 percent of the advertising fund for direct advertising and promotional purposes.

Kushell warns franchisors against pulling money out of the fund for reasons that benefit them but cheat franchisees out of the full value of their advertising dollar. "Once you start using that money to pay [staff] salaries or, worse, to reduce the expense of selling new franchises, that's going to cause a lot of acrimony," he cautions.

Kushell has also noticed conflict about the types of ads that are run. To avoid headaches, franchisors can encourage franchisees to submit ideas and input on the advertising process.

Modifying The System

Franchisor says: "I don't know what's going to happen in five or 10 years, so I need the right to be able to change certain things, whether that's increasing advertising fees or upgrading the units."

Franchisee says: "You can't just arbitrarily increase fees."

Solution: This should be addressed in the franchise agreement, with the key word being "reasonable," says Kushell. For example, if franchisors want to include a modification to the arrangement, they could specify a cap or some percentage, something that doesn't just give them a blank check.

For franchisors who have the right to modify, Kushell recommends they still discuss issues with franchisees before making final decisions. From the franchisees' point of view, "it's very important when they sign this agreement that they [read] through all these things," says Kushell. "If there are any red flags, that ought to be dealt with in the beginning."

Exclusive Territories

Franchisor says: "We have to keep expanding to grow this territory. Even though I put a location three blocks away from your franchise, it won't compete with you because it's a different type of location. And if I put a unit in an airport, a football stadium or a mall, people will see the company name, so it will help all franchisees."

Franchisee says: "You're taking away my market. I don't want to have to compete with my own franchisor."

Solution: This conflict is worsened when the franchisor opens a company-owned store rather than selling a franchise to an existing or new franchisee--it gives the appearance the franchisor is directly competing with the franchisee and arouses a sense of betrayal. When possible, franchisors should try to expand using existing franchisees. "The [franchisees] know the area and have built a local reputation," says Kushell. "It just makes more sense."

Franchisors can also ease franchisees' worries by hiring outside firms to do impact studies before opening a location. These studies show the impact a new location will have on an existing store. If nearby franchisees' revenues will drop by a certain percentage, say 10 percent or 15 percent, the franchisor is well advised not to open the location.

In the case of alternative locations, such as airports, franchisors can enlist existing franchisees either to operate the store or to deliver products there. "The bottom line is that, yes, franchisors should expand as much as is reasonable, but they should also not be greedy or expand arbitrarily," says Kushell. "A franchisee shouldn't wake up one morning and see a new unit two blocks away. [Both sides] need to communicate upfront."

Contact Sources

The Franchise Consulting Group, 1888 Century Park E., #1900, Los Angeles, CA 90067, (310) 552-2901.