There is no doubt that COVID-19 is one of the greatest challenges the world has faced. The risks to health are immense and has resulted in the introduction of extraordinary measures across all levels of government to help limit the spread of the virus, and to save lives. However, these measures have necessarily brought with them increasingly severe restrictions on business operations. These included government directions for the blanket closure of certain business types, as is the case with fitness and health and beauty business, and serious limitations on others, as is the case with the hospitality industry.
As the food and hospitality industry, and health and fitness industry are particular suited to a franchise model, it is no coincidence that franchised business represent a large proportion of businesses impacted by COVID-19 restrictions. While the challenges for these businesses are significant (and will be dealt with separately), franchisors operating franchise networks impacted by COVID-19 face the same, and additional, challenges.
In this article we will give 3 key tips for franchisors looking for answers to how to manage the current crisis.
1. COMMUNICATION IS KEY
A key factor in any successful franchise network is communication between franchisees and the franchisor. Now more than ever, franchisees are looking to their franchisor for guidance and support.
It is an operational reality that even in the best times 20% of franchisees often occupy 80% of a franchisor’s time and attention. Whether due to issues between the franchisee and franchisor, or simple personality issues, this is often the reality. With entire franchise networks being shutdown with little or no notice due to the COVID-19 restrictions, many franchisors are now spending their day dealing with franchisees in crisis. This is completely understandable. Franchisees whose doors have just closed their doors are unlikely to understand or appreciated that franchisors are themselves severely impacted by those closures as their revenue, derived from those businesses, also falls. The potential for conflict in these situations is obvious.
To help alleviate this, franchisors need to engage with their franchisees regularly and effectively. This is not the time for franchisors to disseminate vague motherhood statements to their franchisees with assurances that ‘everything will be ok’, or ‘we are in this together’. This is the time for authenticity. Franchisees want to be updated with the latest information specific to their business. What the franchisor is doing, and what instructions/guidance the franchisors have for their network.
What information franchisors convey to their franchise network depends on the industry they operate in. Some examples could include:
a. advice specific to franchise operations, including advice on insurance, leasing and human resources;
b. directions and guidance on dealing with the franchisees suppliers, lessors and customers (including refund rights and other contractual issues)
c. direction and guidance on accessing and applying for the various Government support measures introduced to address the financial impacts on business caused by the COVID-19 restrictions
d. information on any financial assistance, or relaxation of contractual obligations the franchisor is proposing to introduce to the franchise network for the period of the restrictions.
These examples are non-exhaustive. The crucial point is that franchisors need to engage regularly with their network to give concrete advice and guidance. This information should also be updated regularly given the rapidly changing business environment.
2. DOCUMENT AND RECORD
In a fast paced environment where crisis management is often the primary goal, documenting and recording everything is even more critical.
This tip is related to the first and is often overlooked in circumstances where communication is put together quickly and franchisor staff are constantly communicating with franchisees. We acknowledge that these current circumstances mean that franchisor staff are constantly communicating with franchisees on a range of matters, however it is CRUCIAL that ANY communications with franchisees during this time be properly documented and recorded. We have already seen in our practice a significant increase in threats of legal action and general dispute activity between franchisees and franchisors. While much of this can be put down to a sense of (understandable) panic within many franchise businesses, franchisors need to be conscious of the potential for anything they do or say during this time to be used against them once the ‘dust settles’.
It is likely that many franchisees will lose significant sums of money due to restrictions on their operations and while franchisors can do what the reasonable can to assist to limit impact, they simply cannot do everything. Franchisees confronted with these losses may seek to blame franchisors for their situation and look to take whatever action is available to them. In these situations, it is critical that franchisors have a concrete record of all communications with franchisees upon which they can rely on to address any subsequent allegations. As a minimum, franchisors should:
a. ensure all head office and/or franchise support staff are aware that anything they say, in any forum, could be relied up by franchisees
b. seek to develop a set of FAQs, appropriately vetted and approved, to disseminate to the franchise network
c. seek to develop a set of consistent responses and policies to be made available to head office and franchise support staff so that all franchisees are given the same answers to common questions
d. where a staff member engages with a franchisee on an issues beyond the authority or experience of that staff members, they should be encouraged to seek appropriate guidance
e. ensure all staff members document and record any conversation they have with franchisees, including at minimum the date, time, participants and any matter discussed. Similarly, email correspondence should be appropriately recorded and centrally stored
f. any information provided to a franchisee via telephone conversation should be followed up in an email to that franchisee including a summary of what was discussed, any information that was conveyed and any agreement (or disagreement). The purpose of this is to both record the contents of the conversation, and provide an opportunity for the recipient (the franchisee or representative) with an opportunity to question what was discussed, or tacitly approve.
3. LOOK TO THE FRANCHISE AGREEMENT
Flexibility is key now more than ever, but the franchise agreement needs to be respected.
One of the first things that happens in any business crisis is for people to look to the contracts that apply to them, often for the first time. Whether they be leases, employment contracts or supply contracts, people are looking to establish exactly their contractual positions. It is almost certain that both franchisors and franchisees of all impacted franchise systems have had cause to dig out their franchise agreement to assess exactly where they stand.
Properly prepared franchise agreements have a degree of flexibility to address unforeseeable circumstances, however they are unlikely to specifically address what confronts us with COVID-19. Much has been written about the applicability of what is known as ‘force-majeure’ clauses, that at first glance often appear to be an ‘out’ for parties seeking to avoid contractual obligations. We don’t propose to enter the debate over the applicability (or otherwise) of such clauses, except to say that their relevance depends entirely on the specific wording of those clauses and there is no ‘one size fits all answer’ as to whether they apply to a particular situation or not. Similarly, much has been written regarding the term ‘frustration’ in the contract law context. While such concepts do indeed exist in contract law, raising them early in any discussion between the parties can often result in a dispute or negotiation ‘going legal’, which can be unhelpful in achieving an early and mutually acceptable way forward where survival is at stake.
Our advice to clients to date has, and will remain, that maintenance of the franchise agreement should remain of paramount importance. While this may sound harsh on the face of it, it really isn’t. The value of a particular franchisee’s business is in the rights provided to it by the franchisor, as outlined in the franchise agreement. Similarly, the value of a franchisor’s business is fundamentally derived from the amount of franchisees engaged within the network on active franchise agreements. As such, it is of fundamental importance to all parties that the franchise agreement remains on foot for as long as practicably possible.
In stating the above, we are not suggesting in any way that all the existing rights and obligations under the franchise agreement be strictly applied and enforced by the parties. Instead, we suggest that specific obligations which are, in the current environment, simply impossible to satisfy be discussed between the parties with the goal of coming to an agreed position which can then be documented as a temporary variation to the franchise agreement. These agreements can cover anything relevant to the continued operation of the franchise business and may include:
a. temporary variation to opening hours and staffing level obligations under the operations manual
b. temporary waiver or deferral of royalty and/or other payments due to the franchisor
c. any loan or financial support arrangement introduced by the franchisor
d. temporary variation to reporting requirements
e. variation to the term of the franchise agreement (for example extending it for the period of reduced operations)
f. variation to normal operating requirements
The list of items that can be negotiated between the parties is endless, but should be based on a realistic outlook. There is little value in negotiating and agreeing to measures where compliance would be remain impossible. It is important therefore to ensure that any agreed position is for a set, and preferably short, period and open to review and extension if required. At the end of the variation period, the terms of the existing franchise agreement would be reinstated.
It’s important in these unprecedented times that everyone works together to maintain relationships and make concerted efforts to protect their franchise networks. Fear, anger and frustration are common and understandably reactions to business threats wherever they may originate from. Franchisor’s should be empathetic to the plight and pressures on franchisee’s, while ensuring that their networks and business model are maintained to the best of their ability. It’s difficult, we know, but hopefully by taking on board the tips in this article some of the potential for damage can be avoided, or at least minimise.
If you have any questions on any of the above tips and strategies please get in touch.