Mediation|systems design

ADR and Franchising: A Marriage Made at the Bank

If ever there were a “poster child” for commercial dispute resolution on the basis of shared interest, it is in the ongoing relationship between franchisors and franchisees.  The franchisor makes money only if the franchisee sells, and the franchisee sells only if the franchisor supports.  What better example of the mutual benefits of conflict management?

We’re dealing here only with what most of us would regard as legitimate businesses.  Very few franchise operations make their money by selling franchises.  Instead, successful franchise systems are ongoing operations — and can be viewed either as modified distribution arrangements, or as licenses of brands and processes. 

Looked at one way, instead of a donut company having distribution centers and retail shops to get the product to the customer, it enters into arrangements with local entrepreneurs to sell the donuts and receive a cut of the revenue.

Looked at the other way, the franchisor devises a unique method of making sandwiches and invests in marketing to “brand” that method.  In return for a fee, the holder of the brand licenses the use of the brand — and the unique method —  to a local entrepreneur, thus increasing sales and further fortifying the value of the brand.

Either way you look at it, franchising is a phenomenal idea.  In the United States alone, it is estimated that there are over 900,000 franchise establishments, responsible for over 11,000,000 jobs and an annual payroll of $278.6 billion, or 5.3 percent of all private-sector payrolls in the the country.

Disputes that arise from franchise relationships are almost always contractual and almost always comprehensible.  Franchisees claim a lack of support from the company, unfair pricing of required purchases, encroachment upon promised exclusive geographic areas, and so on.  The companies claim failure to make prompt payments, failure to maintain quality, or other business-related issues.

Frequently these disputes become complicated through external factors.  Many franchisees don’t have access to competent legal counsel and are slow to appreciate the business arrangements at the time of contracting, or the consequences of a notice from the franchisor at the time of the event.  Franchisors have varying degrees of flexibility and varying skills of communication. 

Matters can become more complex — and heated — as news of a discontented franchisee spreads to other franchisees in the system.  Franchisees have a stake in the brand and react negatively to a franchisee whose operations sully the brand.  On the other hand, they seek a collective voice in influencing the company in matters such as required introduction of new products or other initiatives that mean initial outlays for the franchisee.

In all cases, however, people are on staff at these operations to make donuts, market transmissions, get suppliers for paper wrapping, or vacuum hotel rooms — not to concentrate on disputes between the partners.

Here is the “beauty part” of mediation in franchising:  It is a proven method of identifying a potential business problem and focussing on fixing that problem or, if the problem can’t be fixed, terminating the relationship rationally and with minimal transaction costs of time, uncertainty or dollars.

Two resources are available for franchise businesses and for those who counsel them.  The first is the Franchise Mediation Program, established in 1993 and administered by the CPR Institute.  The Program advocates the use of mediation by providing leadership among the franchisor, franchisee and legal communities, and by promulgating mediation rules that are specifically-suited for franchise problems.  The Program has lots of information and resources on its website, including a list of mediators who are particularly experienced in handling franchise disputes.  The names on the list are linked to their bios and their contact information — what could be easier?

A second resource is a recently published book that I edited (blush!) titled Managing Franchise Relationships Through Mediation.  The volume  collects essays by many of the leading figures in the franchise community — franshisees, franchisors, attorneys and mediators — describing how their organizations manage franchise conflicts or lessons they have learned over the years on what works and what doesn’t.  Contributors include people from McDonalds, Dairy Queen, JAMS, Dady & Garner, Wyndham Worldwide, the International Franchise Association, the Asian American Hotel Owners Association, DLA Piper, and the American Association of Franchisees & Dealers.  The volume, just by being on the shelf at all, is pretty persuasive testimony that the prophets were spot on in Isaiah 11:6.

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