Franchising's Sinister Side: Vanishing Ad Dollars

Franchisers may fear associations because of their similarity to unions, and lawyers often advise executives against too much franchisee involvement, Seldon says. Make it clear to the franchiser that communication and friendly suggestions are your only goals.

Thestreet.com
November 30, 2007

Franchising's Sinister Side: Vanishing Ad Dollars
Annika Mengisen

On the surface, franchise expansion means it's time to pop the champagne.

But this is often when things turn ugly for the company's frachisees.

Franchisers love their national advertising funds. In theory, each franchisee pays about 2% of gross revenue to this national pool with the assurance that they will reap the benefits.

In a perfect world, this means equal and effective marketing for all.

In reality, you sometimes get sticky scenarios. The money might be funneled toward new franchisees rather than to those who contributed to the ad budget in the first place.

Richard Solomon has seen this repeatedly in his 45 years as a franchise attorney.

Growing Pains
Usually, says Solomon, franchisees don't have a contract specifying how an advertising fund should be managed, leaving it up to the franchiser. When expansion happens, allocation issues may arise.

A franchiser may, in some cases, use ad resources — already paid for by existing franchisees — to support new or potential franchisees. This happened with Jiffy Lube when its franchisees claimed their resources were being used by parent company Pennzoil to support new business-expansion projects such as Wal-Mart's Tire & Lube Express.

In extreme cases, franchisers have been accused of using part of the advertising fund for management perks.

In both scenarios, franchisees fail to see a return, and suspicion sets in.

Foul Play?
"One franchisee never recognizes [misallocated funding]," says Solomon. "But when they get together, they talk." Common indicators of misallocated funds include slower-than-expected store sales, geographically unbalanced sales figures or shoddy ad programs.

Before approaching the franchiser, Solomon says, franchisees should collectively determine whether their suspicions are correct. Then the group can ask the franchiser: "Where's the marketing we're providing the funding for?"

Whatever you do, experts say, don't hope the issue just goes away.

"General Patton himself couldn't have galvanized franchisees to deal with abuses," Solomon says. Most are afraid to speak up for fear of retribution, but waiting it out never helped the franchisee, he says.

Safety in Numbers
"There's a huge temptation for [the franchiser] to use marketing money for other — but not necessarily malicious — business goals," says Andrew Seldon, a franchise attorney with Briggs and Morgan in Minneapolis. But when franchisees have an active role in the allocation of the marketing fund, there's little chance for misuse, he says.

The franchisee's limited role has been changing since the 1970s, when Pizza Hut and KFC realized the value of franchisee input.

The Gold's Gym franchisee association was started eight years ago because of the growing brand's need for a marketing fund.

Its franchisees didn't feel the effects of their marketing contributions, says Blair McHaney, president of the association. Today, every corner of the franchise system has a good idea of where the money goes, he says. "Now franchisees can focus more on their daily operations and know that someone's got their back."

Put Up Your Diplomatic Dukes
"Appeasement never works," says Seldon. "But don't pick a fight." Once you have a strong group built up, find out what rules in the contract govern the marketing fund. Then — first politely, then forcefully — ask the franchiser for an accounting of all funds.

Don't settle for an audit, which doesn't tell you what money is going in and out, says Seldon, who recommends utilizing a jointly sponsored third party through the process. "If franchisers don't have anything to hide, they'll let you take a look," he says.

Franchisers have no obligation to deal with an association, so a good strategy is to appeal to their self-interest.

"If you walk up with a franchise agreement in one hand and a fist in the other, you're not getting anywhere," McHaney says.

Most franchisers realize that involving franchisees in the decision-making mitigates blame for themselves if something goes wrong, says Seldon. They are also willing to offer transparency to gain access to valuable tactical information only local franchisees can provide.

Franchisers may fear associations because of their similarity to unions, and lawyers often advise executives against too much franchisee involvement, Seldon says. Make it clear to the franchiser that communication and friendly suggestions are your only goals.

If all else fails, hire a recognized and objective industry expert to assess the situation. It's more difficult for a franchiser to ignore professional advice, says Seldon.

Generally, avoid the courts at all costs. Litigation may bring the whole company down or prove fruitless, as was the case in 1997, when antitrust claims brought by Domino's Pizza franchisees were dismissed in court.


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Risks: Advertising fund put into general franchisor's coffers, Advertising fund use disagreements, Advertising fund buys franchisor’s assets, Independent franchisee association, Futility of taking legal action, United States, 20071130 Franchising’s Sinister

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