Franchise Relationships Strained By The Pandemic

August 25, 2020by Brian Walsh

First and foremost, franchising is a business relationship. Simply put, the franchisor owns the underlying system and the franchisee purchases / rents a license to operate that system. The relationship between the two is primarily governed by the franchise agreement. That agreement outlines the rights and responsibilities and obligations of both parties.

As with any relationship there is often tension between franchors and franchisees related to fulfilling those responsibilities and obligations. This is only natural as both parties are looking to maximize their profits. Moreover, it is almost always in the best interest of both parties to see the other party succeed. So, this natural tension, as long as it remains in check, can be viewed as healthy for the relationship more so than unhealthy.

However, the Coronavirus pandemic has changed the dynamics a bit, placing an inordinate strain on the franchise business relationship. As the pandemic has gone on the relationship between franchisor and franchisee has become more and more frayed; with disputes arising over brand protection issues, strained and lagging supply chains, payment shortfalls, and even the reevaluation of the franchise agreement itself.

Franchisors and franchisees will need to thoughtfully work through these issues so that they can both weather this storm as-well-as put themselves in the position to thrive when the pandemic ends and our lives return to some semblance of normalcy.

Disputes Over Brand Protection

Brand reputation is the most valuable asset the franchisor owns. Franchisees benefit from a positive brand reputation, but the continuing existence of the franchisor’s business depends on a positive brand reputation. Often this means that franchisors are instructing franchisees to be much more cautious with their operations than franchisees feel is warranted.

Many franchisees resent receiving instructions from what they see as distant executives who don’t understand the local situation the same way they do. Some franchisors tend to believe that franchisees are too shortsighted. Many franchisors would rather be overly cautious now so that they are in the position to profit when things return to normal.

Strained Supply Chain

The novel coronavirus continues to disrupt supply chains. Most franchisees are dependent upon regular shipments managed by the franchisor. When supplies are late, franchisees bear the brunt of the economic losses and customer anger. Franchisees often feel helpless because they are not allowed to source supplies outside of the franchisor’s supply chain.

While franchisors are also frustrated with the increased delays and costs associated with supply chain disruptions, they are removed from the direct impact of these issues.  Franchisors want stability and are more likely to exercise patience in the face of systemic supply chain issues.

In contrast, franchisees want franchisors to take a more active approach to finding new suppliers and creative workarounds to supply problems that are sometimes crippling for individual franchises.

Payment Issues

Disputes over payments are one of the most significant areas of strain in the relationships between franchisors and franchisees. Franchisees are having difficulty making all of their contractual payments.

Because many franchisees face record low revenues, they are reluctant to pay both the fixed fees and the fees that are calculated based on revenues. Marketing fees are among the most contentions fees as many franchisees don’t believe they will see any return on national or regional marketing while the pandemic continues to get worse.

While franchisors want to do everything possible to help their struggling franchisees survive the pandemic, the franchisors won’t be able to stay afloat without the various fees. Franchisors are dependent on franchise fees, and other payments to fund operations and grow the business.

No franchisee will benefit from the franchisor becoming insolvent.

As the pandemic continues, franchisors and franchisees will need to find ways to be creative and flexible with the payment of contractual obligations.

Reexamination of the Franchise Agreement

The most long-lasting impact the pandemic will have on the franchisor-franchisee relationship is how the parties view the franchise agreement. Even though franchise agreements are well regulated, and carefully drafted, the pandemic has shown that some franchise agreements are not suited for a world where a pandemic lasts for an extended period of time, and where the effects are spread across the country.

Everyone is now awake to the risks of future pandemics, and attorneys for both franchisors and franchisees are considering ways franchise agreements can be altered in the future to better prepare for a pandemic. Because the franchise agreement is the foundation of the entire franchise business model, any changes to this document will have a major impact on the franchisor-franchisee relationship.

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