Options for Dissatisfied Franchisees

If the rosy picture you had of owning a franchise has a little tarnish on it now, this franchise company CEO has some words of advice for you.

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Let's say you bought a franchise outlet a few years ago. You were only too happy to shell out the $10,000 to $30,000 upfront franchising fee, because you knew you didn't know enough to get the business up and running yourself. You felt it was worth it to have the franchise "hold your hands" during the critical first year of operations. And they did help . . . in finding your store location, training your employees, setting up your account books, and figuring out the best places to advertise locally.

Now, it's two years later. The business is going great, and you haven't asked the franchise company for help in a while because, frankly, you haven't needed it. Still, you're writing checks to the franchisor each month for 10 to 15 percent of your gross sales; they're advertising everywhere in the United States except where you are; they haven't added any new products in a while; they want you to spend a small fortune to change your entire store layout without any assurance you'll get a dime more in revenue; and there's 13 years left to go on your franchise agreement. How do you feel about your franchise opportunity now?

Dick Palfreyman, CEO of Relax The Back, a retail franchise chain that specializes in ergonomic office furniture, feels your pain. A former executive of the now-defunct Computerland franchise, Palfreyman has seen firsthand what happens when a franchise lavishes attention on its new franchisees but fails to keep its older franchisees happy, challenged and motivated. It ain't pretty.

According to Palfreyman, a successful franchise always has to stay one step ahead of its franchisees' learning curve, and demonstrate that it's working just as hard as the franchisees to help them succeed because "if you don't, then two or three years into the cycle, your franchisees will think they know as much about the business as you do and they'll want to know every month what you did to earn that month's royalty check." In Palfreyman's view, while franchisees can't be allowed such leeway that "you end up with a chain of independent stores where everyone's doing their own thing," they must be taken seriously and listened to, especially when several of them express concern about the same thing "because, let's face it, it's a partnership, and you need their expertise as much as they need yours."

For example, Palfreyman wants every Relax The Back store around the country to look basically the same, but "maybe they don't have to carry all the same products. I'm sure I can sell $2,500 mattresses all day long in a wealthy community like Greenwich, Connecticut, but I don't think that strategy will work in the rural South. I'd better have less-expensive products that will satisfy the local conditions there without waiting for my franchisees to tell me they're needed."

Palfreyman also points out that communication is a two-way street, and that sometimes franchisees need to manage their expectations. Sometimes the things a franchise does that franchisees view as a "burr under the saddle" can actually make a franchise stronger. For example, of Relax The Back's 80 stores nationwide, 13 are company owned; the company tests new products, policies and procedures in its own stores before making them available to its franchisees. "A lot of franchisees don't like the idea of company-owned stores because they're afraid the franchise will use them to compete with its own franchisees," says Palfreyman, "but a franchise that doesn't own at least some stores itself has no way of knowing if new products, policies and procedures will work before requiring its franchisees to adopt them. That's not going to build up the franchisees' confidence one bit."

Palfreyman disagrees strongly with the notion that franchisees should be lieutenants (executing orders) rather than generals (plotting strategy). "We get a lot of doctors and chiropractors who want to buy Relax The Back franchises and then hire managers to run the store. I'm not interested in that. I want 'take charge' people who want to become intimately involved with the business, who want to expand it and take it to the next level. Nothing pleases me more than when a franchisee wants to buy additional stores in his or her area. That tells me I'm doing what I should be doing."

One more thing (actually, three things): If you're thinking about buying into a franchise, here are three tough questions you should ask the franchise people (or their lawyers): (1) "I see you have a Web site for the franchise. Tell me, if people in my franchise territory want to order products or services from your Web site, will you refer them to me or will you sell to them directly?"; (2) "Has your franchise filed all necessary paperwork with the consumer protection department in my state? If not, is that something you're expecting me to do at my expense?"; and (3) "If I'm following your franchise program to the letter and somebody sues me because my franchise business is harming them in some way, will you indemnify me and pay my expenses in the lawsuit?"

Cliff Ennico is host of the PBS television series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on the Small Business Television Network at www.sbtv.com. E-mail him at cennico@legalcareer.com.

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