Your franchise agreement – is it all encompassing?

 Of course it is. Between you, your franchise advisor’s and your franchise solicitor, you have this covered. In  every single way, if your franchisee contravenes the agreement, you have the power (should you choose to use  it) to apply sanctions, remedies or even void the agreement for gross breach of contract.

From my perspective, I am not qualified to comment on the legal minefield that is the franchise agreement. If  instructed to carry out a franchise audit, I will do so on the basis of my client’s instructions and under the  governance of specific terms in the franchise agreement. If I find areas of non-compliance, I will report these  on the basis that their disclosure will allow you to act on any relevant breached terms within the agreement.

Of course, this can be looked at another way… from the franchisee’s perspective.  What if you are a franchisee…

If you are a franchisee and don’t want to lose everything, you need to read, understand and follow the principles outlined below.

Your franchise agreement contains many provisions in addition to those requiring you to do what you are told and pay money to your franchisor on time. You probably never read them, and if you did, you didn’t appreciate what they mean. There are many “boilerplate” (contained in every franchise agreement) provisions that deal with financial transactions, intellectual property protection, ownership and transfer, consents and rights of refusal.

If you forget about these and do certain things that seem perfectly normal in any non-franchise business context, without following the requirements of the contract, your franchisor may declare you in default, and the default will in some instances not have a cure opportunity. You could simply be terminated and lose everything.

You may have done whatever you did that failed to comply with your obligations under these provisions many years ago. They didn’t affect the day to day operations of your franchise or relate to your normal monthly reporting routines. The fact that the franchisor failed to discover the failure to comply until many years later may not excuse what you did or failed to do.

This is an extract from an article written and first published by Richard Solomon on his website: www.franchiseremedies.com. Richard, who is a Franchise Lawyer based in Texas where of course litigation stemming from breaches of franchise agreements is commonplace, (within a franchise market which is considerably more mature than our own), feels very strongly that the interplay of clauses within an agreement should be considered much as one might write a song with various contrapuntal rhythms. The more complete the agreement, the better it is for both Franchise and Franchisor alike. Indeed, Oddly enough it is often franchisor conduct that, notwithstanding the contract language, gives the franchisee an avenue to outmanoeuvre a breach they are purported to have made. Curiously then, if they are aware of their obligations under the agreement and do manage to find a way to contravene it without prejudicing their position, the clauses within the agreement may be worthless. Which conveniently brings me back to my opening salvo: Your Franchise Agreement- Is it all encompassing?

Of course going to the effort and cost of generating full-proof and all encompassing franchise agreements is pretty pointless if you do not know that an agreement is being breached. Suspicions are one thing and within a network of franchisees, there will be those you suspect of breach and those who you do not. Sending in a franchise auditor to look at potential areas of non-compliance need not be costly, particularly if you generate revenue from that disclosed as a result of the process. Indeed, if your franchise agreement, includes terms where on exceeding certain levels of undisclosed revenue determined, this will make the franchisee liable for the auditor costs.

Deploying an external auditor, can also send a message your network, clean up your sales submissions and your working practices or else and with current research from the other side of the pond suggesting that 15% to 20% of franchisees are under-reporting sales by 15% or more. As a result, locating and correcting under-reporting behaviour can increase royalty revenues by up to 4% annually.

There are therefore two messages from this:

• Make sure the franchise agreement is all encompassing
• Follow through with regular auditing inspections to highlight that you are looking and locate  much needed missing revenue from your network

But I am sure you are all doing this already…

Chris Burton

11^th September, 2014

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What is Business Turnaround?

If your business is in trouble, you will know it already and so will your management and probably your staff. They will all be aware that the business needs something to stop it from spiralling out of control. Of course it may be too late. It may be that you consider that there is no way back and therefore some form of corporate recovery or as a last resort insolvency proceedings are appropriate. If recovery or turning the business around is still an option, it may be appropriate to engage a recovery specialist to assist you. This process is colloquially known as Business Turnaround.

A Turnaround specialist, will look at a business from an outsiders perspective, a fresh eye, with the knowledge and skills to provide complete objectivity. They are able to identify problems and recommend solutions that may not be visible to the company’s management and staff simply because they are too close to the subject. In addition, experience within a particular industry may mean little when a company is in severe difficulty. A turnaround specialist/ consultant brings objectivity and experience in crisis situations; the ability to make critical judgements quickly in order for the business to have the best chance at recovery. Operating in the eye of the storm, the consultant must deal equitably with angry creditors, scared employees, wary customers and a nervous board of directors. With the highest stakes on the table, clearly this is no assignment for the faint-hearted.

Signs of a Troubled Business

A company may require the services of a turnaround specialist for many reasons. Here are the most common signs of trouble. In most cases a troubled business will display more than one of these signs:

Behind the Market  Changes in the marketplace can leave a company lagging behind, with depressed sales and lost market share. For some, the deficiency is technology, for others, the problem lies in sales and marketing; their products or services slide into obsolescence because the company hasn’t kept pace with the needs of the marketplace.

Insufficient controls and reporting Managing a company without adequate procedural and reporting mechanisms is a bit like flying an air plane without an instrument control panel. If management is making decisions on old or inaccurate information, the company can easily head in the wrong direction.

Over diversification Many businesses feel the pressure to diversify in order to reduce risk and increase sales. However, too much diversification may cause them to spread themselves too thin. As a result, they become even more vulnerable to the competition.

Explosive growth Companies are sometimes tempted to add value by engineering a growth spurt. However, a company cannot expand its way out of trouble. Growth often carries a very high price tag and leveraging a company to such a degree means that management must operate with little or no margin for error.

Operating without a business plan Surprisingly, a number of growing companies operate without a coherent and regularly updated business plan. Management decisions can change the direction of a business overnight because it is based on their own “feel” for the market. In other cases the business plan exists in everyone’s head rather than in writing. The result is that plans are carried out according to individual interpretation.

Ineffective management style Senior Managers and company founders may find it difficult to delegate authority. No decision, big or small, can be made without their blessing. As a result, the rest of the management staff is without solid experience or any feeling of ownership. If the founder suddenly dies or becomes incapacitated, the whole company is in danger of collapse.

A precarious customer base Few businesses have the luxury of determining the exact proportions of their customer base. Nonetheless, some companies do put too many eggs in one basket. If a manufacturer selling to large retail chains has two customers who represent 60 percent of the business, the company is obviously vulnerable. The loss of just one customer could put a significant proportion of the workforce out of work or worse still make the business insolvent.

5 Steps to Business Turnaround:

Step 1: Checking the business vital signs Before a consultant recommends any major changes they must obviously determine where the big issues are. This means the first day or so is spent gathering information and measuring the scope and depth of the company’s ills.Key questions to be answered are:

a)     Just how sick is the company?

b)    Is financial CPR required or a milder form of treatment?

c)     Is the business beyond rescue or would a form of formal administration or Corporate Voluntary Arrangement be more appropriate In the meantime, there are various groups that must be dealt with. The first is creditors who may have been kept in the dark and are angry. Employees are confused and concerned about the security of their jobs and customers may be wary about the future of the firm. The Consultant and the business managers will need to pacify these audiences until an action plan is agreed.

Step 2: The plan Once the major issues are identified, an action plan can be formulated. The plan must then be sold to all key parties, including the directors, management team, and relevant employees. If appropriate, confidence must also be instilled in the bankers, supplier’s major creditors, and vendors.

Step 3: Actioning the plan. If the company really is in critical condition, the action plan may be simple but drastic. Emergency surgery needs to be performed to stop the haemorrhaging. There may be a whole range of measures which are appropriate, including widespread redundancy, a reduction in employee’s wages or a temporary freeze on all accounts payable. The goal is to halt the bleeding immediately. At this time emotions can run high especially if employees have to be made redundant and the role of the consultant can be two-fold, acting as a bridge between employer and employee.

Step 4: Surviving the crisis In many ways surviving is the most difficult step of all. Eliminating losses is one thing, but achieving an acceptable return on the firm’s investment is quite another. Once the haemorrhaging is over and the administrative costs are cut, one crucial issue remains: Are the anticipated revenues enough to keep the company’s doors open? What is the long-term outlook? Of particular concern is the state of the core business of the company. If the core business is irretrievably damaged, then the outlook could be bleak. Management must decide if the company is capable of long-term survival. If it is, the company must now concentrate on sustained profitability and the smooth operation of existing facilities. During the turnaround, the product mix may have changed, requiring the company to do some repositioning. Core products may have been neglected and require immediate attention to remain competitive. In the new, leaner company some facilities might be closed simply because they are no longer needed. The company may even withdraw from certain markets or move its products into a different niche. Survival, not tradition, determines the new shape of the business.

Step 5: Returning to profitability In the final step of the turnaround, the company slowly returns to normal. This time period is the longest, lasting for up to five years for smaller companies. While earlier steps concentrated on correcting problems, this focuses on internal and external development. New marketing initiatives are encouraged to broaden the business base and to increase market penetration. To facilitate revenue growth, new products are sought and customer service improved. Financially, the shift is from cash flow concerns to a strong balance sheet and return on investment.

The turnaround has now completed and the business returned to health.