Effective System Change

Franchise systems must stay dynamic, not static. Reduced recessionary spending demands introduction of new product assortments and pricing programs. Decreases in franchisees' financial performance mandates a product line adjustment. Whether driven by external or internal forces, every franchise system must be prepared to adapt to remain relevant, viable, and competitive.

Once a franchisor determines that change is necessary, it faces the challenge of implementing that change throughout the system. How it approaches such change could determine whether the franchisor wins or loses that challenge.

• Franchise agreement. Before formulating a plan to implement a change, a franchisor should review its existing franchise agreements to determine whether they expressly allow the franchisor to mandate the change. A mature franchise system may have multiple forms of agreements, some of which may not expressly authorize the franchisor to require the change being contemplated. Where the expressed authority does not exist, but the franchise agreement grants the franchisor the general right to make changes to system standards, the franchisor should review the relevant state relationship statutes and case law to determine whether it can require the change without violating applicable laws. Without expressed authorization in the franchise agreement, a court might determine that the implementation of a change that requires a substantial economic investment is really a unilateral revision of the contract, rather than a revision of the system standards.
• Franchisee participation. Franchisees who feel like partners in the process are more likely to buy in to the change. There are different ways to involve franchisees. For example, a franchisor might involve franchisees in pilot tests of new products or services or of new equipment. Not only will these franchisees be able to provide invaluable, in-the-trenches feedback on the proposed change, but if they see positive results will likely become advocates to help gain system-wide acceptance. Similarly, franchisee advisory boards convinced that a proposed change is positive will likely push the system to adopt the change.
• Communicate. Once a franchisor completes its testing and decides to implement the change, how it communicates the change could be determinative of the outcome. Before sending out any written communication, the franchisor might consider "floating the balloon" at a face-to-face meeting with the franchisees, for example, at its annual convention or regional franchisee meetings. Announcing the change with a letter from the legal department demanding implementation by a certain date in accordance with the franchise agreement is a sure way to kill any successful implementation. However, a franchisor should consult its counsel in the preparation of all written communications regarding the change. These communications could have harmful legal implications to the franchisor if it becomes necessary to enforce the terms of the franchise agreement. In that event, all communications relating to the change will be viewed under a microscope.
• Do your homework. It is critical for a franchisor to identify and understand both the positive and negative aspects of any proposed change. Even if a proposed change demonstrates a positive return for the system as a whole, it may have a short-term negative impact on individual franchisees. To address the franchisees' concerns, a franchisor must do its homework and be prepared to address those concerns with facts.
• Plan ahead. Allow plenty of time for franchisees to implement the change, especially if the change requires a significant financial commitment. If possible, allow the franchisees to take baby steps. For example, if the change involves rebranding the entire store, a franchisor may want to consider giving franchisees a timeline within which certain changes must occur. Instead of requiring that all supplies, exterior signs, and menu boards be replaced all at once, allow franchisees to phase in the changes over a reasonable (but specified) period.
• Incentive to make the change. A franchisor might consider giving franchisees certain incentives to implement the change or to do it more quickly. Incentives could be anything from free trips to annual meetings, financial assistance to implement the change, to royalty rebates.

Following these tips will hopefully improve a franchisor's success in implementing a change throughout its system. However, even a franchisor that has perfectly planned the implementation of a change will likely have hold-out franchisees who refuse to adopt it. At some point, a franchisor must take steps to address these hold-outs. Simply sitting back and allowing these franchisees to refuse implementation sends the wrong message and negatively affects the franchise system and the franchisor.

Amy Cheng combines her corporate and franchise experience to provide start-up and seasoned franchisors with comprehensive legal services to expand their systems. She is a member of the IFA's Women's Franchise Committee and is a Topic and Article Editor for the ABA's Franchise Law Journal. She also is an instructor in the "Franchise Mini MBA" program at the H. Wayne Huizenga School of Business and Entrepreneurship. Before forming Cheng Cohen, she was a partner with DLA Piper US. Contact her at amy.cheng@chengcohen.com or 312-243-1716.