Franchise Development and Legal Steps Franchisors Should Take to Recover from the Coronavirus Pandemic
In our article “What Coronavirus Means for Franchise Brands and a Roadmap for Franchise Recovery” and part 1 of our three-part webinar “What Coronavirus (COVID-19) will Mean for Franchise Brands”, we outlined a recovery framework focused on strategic planning during the following three stages of this pandemic: (a) short-term phase, as the pandemic escalates to peak levels in the United States now and over the next 1, 2, 3, (?) weeks, (b) intermediate-phase, once the pandemic peaks and we enter a de-escalation phase where new infections start going down from their peak levels, and (c) the Recovery and Growth Phase, once the virus is deemed contained and markets normalize.
The biggest variable is timing, and, at this stage, we just don’t know how long “short-term” is, but what we do know is that, as with all historical challenges, we will (eventually) enter a recovery and growth phase. For franchisors and franchise brands, the primary question right now is what steps should brands take now during the short-term and intermediate-term to protect their franchise systems and recover and grow.
Below are some of the tactical steps that we recommend and have discussed during our webinar
Short-Term: Brace for Impact, Defensive Measures, Legal Adjustments
During this short-term period – from right now until peak infections are reached, stabilize and start to decline – we recommend that franchisors focus on:
Cash Flow – Depending on the size of your systems, the impact on your industry, and the health of your franchisees, now is the time to prioritize cash flow and evaluate reserve capital. Focus should not only be on your cash flow but also on the cash flow of your franchisees, including assistance they may need in securing SBA funding, accessing personal savings, requesting rent abatements and landlord concessions and, potentially, an adjustment of their royalty and brand development fund obligations.
Adjustments to System Standards, Services and Products – During times of “social-distancing,” mandatory closures, and quarantines, franchisors need to evaluate their products and services and, if possible, develop alternative methods for offering products and services, such as online and web-driven platforms. For industries where this is not possible, adjustments may need to be made to approved suppliers and other system standards.
Franchisee and Team Communications – Franchisee communication is critical – now is the time to over-communicate and assist. It’s times like these when franchisees and your internal team members need to hear from you and follow your leadership.
Re-Evaluate Franchisee Legal Obligations – Even if your franchise agreement requires payment of minimum royalty obligations, now is probably not the time to enforce these obligations. Re-evaluate and consider potential deferral of royalty and advertising fund obligations, minimum royalty obligations, and multi-unit development agreement obligations. Also, speak with your franchise lawyer about potential franchise exemptions such as the “Large Franchisee Exemptions,” “Large Franchise Investment Exemptions,” and “Fractional Franchise Exemptions.” These exemptions are not available in every state and while their application is limited, if they apply, they could help you close deals with large, well-capitalized and sophisticated franchisees. In certain states, you may even be permitted to provide disclosures that go beyond your Item 19 financial performance representations. Always be sure to check with your franchise lawyer before relying on any exemptions or disclosing information that goes beyond the disclosures contained in your FDD.
Re-Evaluate your Marketing Strategy – Whether you are an emerging franchise brand or an established brand, now is the time to re-evaluate your marketing strategy. During difficult times like these, there may be good reason to pull marketing dollars away from your franchise sales efforts. However, if you are well-positioned, now may be the time to press forward and build a bigger funnel of potential franchisee candidates. Before you spend more marketing dollars, you first must reassess and re-evaluate – in the wake of this pandemic and the challenges and questions that prospective franchisees will have:
Your products / services and how well they are positioned in the market;
Your leadership and how you are helping and supporting your franchisees during this crisis;
The Return on Investment (ROI) that your franchise opportunity offers relative to competitors and the market;
The availability of territory; and
Franchisee validation and satisfaction.
Right now, during this short-term “brace for impact” period, you should be evaluating all of these factors. If you can’t tell a compelling story as to each and every point (a) through (e), then now is the time to potentially pause your marketing dollars and make adjustments to improve the value proposition of your system. Most important will be franchisee validation. Once we enter a recovery, every franchisor will be judged by how well they supported and stood beside their franchisees during this crisis.
Intermediate-Term: Offensive Recovery, Redefine Your Brand, Legal Adjustments
Since we don’t know when we will reach peak infections, we don’t know when we will enter this intermediate, pre-recovery phase. Our hope is that it will be 2 to 4 weeks away – at least, that is our hope. During this intermediate phase, we recommend that franchise brands start positioning for an offensive recovery. Waiting until we reach a recovery phase will be too late and too expensive. During this period, we recommend that franchisors focus on:
Focus on Capital – Continue to focus on your capital and franchisee capital. Assist franchisees in negotiating rent reductions and abatement, guide franchisees with access to SBA loans and other forms of capital.
Reassess Budgeting – For 2020, now is the time to reassess your annual budget. Now is also the time to discuss with your management team a twenty-four (24) month plan and budget – a twelve-month plan will not be sufficient.
Build Your Validation Story – While a major part of the franchise sales will always be focused on how much a franchisee can potentially make, now, more than ever, franchise sales will be driven by franchisee validation, and a brand story built around how, as a franchisor, you brand was a leader and how you acted to protect and support your franchisees. Your validation story will set the trajectory of your recovery story.
Re-Evaluate Your Real Estate Strategy – Post-pandemic, the retail landscape will be altered. There will be opportunities and values that will change, so now is the time to re-evaluate your footprint and potentially innovate.
Continue to Re-Evaluate Franchisee Legal Obligations – Consider continued temporary modifications of franchisee obligations under franchise and development agreements. Consider long-term modifications that will build better win-win franchisor-franchisee relationships.
Redefine Your Digital Marketing Strategy – For the vast majority of franchises, your digital marketing strategy may not be as good as you thought it was. Even if it was, the market is changing and while there will be significant opportunity ahead, the brand story that franchisees will value tomorrow will be very different from what it was today. Adjust your digital marketing materials to “ownable content” that you control and that tells the story of your franchisees, your franchise brand, and leadership during this crisis. Will future franchise sale’s pages have a “Coronavirus” tab telling prospective franchisees what you did during this crisis?
If we take care of the short-term and intermediate planning and actions, long-term recovery will be at hand. A shake-out is coming, but so is opportunity.
Watch the full webinar below.
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