Point Of View

This story appears in the April 1997 issue of Entrepreneur. Subscribe »

Most industries have their "You say tomato, I say tomahto" scenarios. Franchising is no exception. When a franchisor has one expectation for a situation and a franchisee has another, it creates a gray area in which conflicts arise. This month, in the first of a two-part series, Edward Kushell, president of The Franchise Consulting Group in Los Angeles and a former franchisor, addresses some age-old franchise disputes and offers solutions.

Income and Expenses

Franchisor says: "Legally, we're not allowed to tell prospects how much they're going to spend or make."

Franchisee says: "How do you expect me to invest in a franchise if I don't know the expected revenues or
expenses?"

Solution: Though franchisors can't project earnings claims, they can release information about earnings of existing franchisees. Still, most franchisors don't. "Part of me says they don't want the numbers to be seen because they're not that good," says Kushell. "It would seem to me that if someone had a system where franchisees were in fact profiting, then it would be to their advantage to release earnings claims to interest [prospects]."

Whether or not the franchisor provides the information, Kushell feels the burden should fall on the prospective franchisee, who must do some homework rather than taking any claims at face value. "There are lots of ways you can obtain or verify certain earnings information," he says. "The obvious way is [to ask] existing franchisees. Another way is to look at the disclosure documents of competitive companies and compare their earnings claims with what you receive from this company. Even though it won't be precisely the same, there shouldn't be dramatic swings on certain basic cost and revenue items."

Diversification of Products and Services

Franchisor says: "We have a concept that works. Adding products and services is not something we want to put our money into."

Franchisee says: "I expect you will continually come up with new ideas and products for me. I bought this franchise thinking it would stay on the cutting edge."

Solution: Kushell feels part of the franchisor's role is, in fact, to look ahead and develop new products and ideas. "Enlightened franchisors will do this," he says. "Unfortunately, many will just go along with what exists."

These franchisors, Kushell believes, should rethink their attitudes and see innovation as an opportunity to provide extra service to franchisees and assure them they're getting value for their royalties. And logically, increasing franchisees' revenues boosts revenues for franchisors as well.

Kushell recommends that franchisors involve franchisees in this process. "One of the most significant benefits of the franchise relationship is what I call the feedback mechanism. Franchisees are one of the best, if not the best, source of new ideas and products," he says. "Franchisors have a built-in R&D system all over the country--they just have to know how to engender [creative] spirit."

Alternative Retail Methods

Franchisor says: "I want to grow my own business, and I'm looking for new things to do. Promoting my product in, say, a supermarket will bring me more revenue and will promote the name among consumers, which is good for everybody."

Franchisee says: "All of a sudden, instead of coming here and picking up the product in my store, my customers can get it at the supermarket. That's taking business away from me."

Solution: Kushell believes tensions over alternative retail methods can be lessened if the franchisor addresses them upfront in the franchise agreement. However, just because a franchisor has the legal right to do something if it's stated in the agreement "doesn't mean it'll be smooth," says Kushell. "Franchisees could still be unhappy and could still litigate against [the franchisor]."

Again, he suggests franchisors work in concert with franchisees. "If [a franchisor tests a method] in a small area, and finds out during that test there was no loss on the part of the existing franchisees or the loss was minimal, or if they even had an increase in business, that makes it easier for the franchisor to [use that method] elsewhere," he says. "But gaining more business at the expense of existing franchisees is not a good idea."

Contact Sources

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