Multi-Unit Franchisee Magazine Issue II, 2015 | Page 76

BY EDDY GOLDBERG

A QUESTION OF

Balance

IMPROVING FRANCHISE AGREEMENTS FOR A NEW ERA

F

ranchise agreements: can’t live
without ’em, can’t kill ’em. However, there is a major effort under
way—by franchisors and franchisees alike—to cure what ails them.
One big goal is to make them more
balanced, to shift the preponderance of
power from franchisors to create a more
equitable document. This doesn’t mean
weakening brand standards: the brand and
its intellectual property must be protected,
or the entire system will suffer. However,
it does mean things like greater franchisee
participation, collaboration, transparency,
and clarity written into the agreements.
The list of complaints about onerous or
restrictive terms is well known: liquidated
damages, personal guarantees, transfer
rights, binding arbitration, default provisions, system changes, and more. The
challenge is how to improve franchise
agreements in a franchising world that’s
changed considerably since the days of
handshakes and single-page agreements
(see chart).
In fact, many argue, an overly restrictive franchise agreement not only can drive
sophisticated multi-unit operators to the
competition, it also can attract the interest
of state and federal regulators and officials,
elected or appointed (see NLRB, page 84).
Franchising is changing, and franchisors
had better change along with it, or fall by
the wayside.
“With the sophistication of franchisees,
the investment levels that are required today, and the competitiveness of the business
marketplace today, it is an absolute strategic
advantage for a franchisor to have a better
franchise agreement than a competitor,”
says Aziz Hashim, general partner of NRD
Partners, the investment fund he created
last year to allow multi-unit franchisees to
own or invest in franchise brands.
“It is an immense benefit to a franchi-

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see to sign up only with brands that have
franchise agreements that I would term to
be superior or reasonable,” he says. “And
for the franchisor, it’s important to note
that the franchise agreement is becoming a
competitive issue. You can’t have the most
restrictive franchise agreement out there
and expect to attract high-quality franchisees. They will not come.”
Hashim and Brian Schnell, an attorney
with Faegre Baker Daniels, have been working together on a series of articles for the
IFA on franchise agreements, franchisorfranchisee relations, and related topics.
“One of the roles of the franchise
agreement is to allow the franchisor to
grow, protect, and evolve the brand and the
brand’s stakeholders,” says Schnell. “If you
have an agreement that’s so airtight as to
win every franchise dispute, I think you’re
going to get more and more franchisees,
especially multi-unit franchisees, saying,
‘I’m not going to sign this.’”
Says Hashim, “We’ve been trying to
educate franchisors to not think of the
franchise agreement as their way to set
the ground rules. It’s really a competitive
document.”
Never equal
Balance is the keyword here, or perhaps
more accurately imbalance, in addressing the
problems caused by franchise agreements
tipping steadily in favor of the franchisor
in recent years. For Schnell, a key question is, How do you find the right balance
between the interests of the franchisor and
its franchisees?
In a franchise agreement, balance will
mean different things to different people,
depending on where their interests lie.
“Balance doesn’t mean mutual provisions.
It doesn’t mean a democracy. It doesn’t
mean that a franchisor in evaluating a
system change is going to take a vote.

That’s not balance,” says Schnell. “It is, in
my perspective, finding that balance that
allows the franchisor to do what it needs
to do, and that allows the franchisee to do
what it wants to do—within the context
of being part of the brand and the system.
And that