By Mark Nichols
A franchisee is afraid to tell their field support representative that they are struggling to pay the bills. The franchisor is afraid to tell the franchisee they’re in breach of their franchise agreement. Mediation serves as a safe place for both parties to come to the table, work through the dispute, and resume their amicable partnership, so this kind of breakdown doesn’t occur in the future.
While “virtual” mediations have become popular, I will always advocate for in-person mediations. There is something cathartic about knowing that, in a mediation, you will have the other party’s undivided attention for multiple hours. Agreements are rarely settled to everyone’s satisfaction with a hastily fired-off email or a pre-scheduled 30-minute Zoom call that one side has to cut short because they have a “hard stop.”
When Disagreements Become Disputes
Change is always hard, but in a system that depends on standardization, it can be especially challenging. Successful franchisees tend to get comfortable with the day-to-day look, feel, and operation of the business, and when the franchisor steps in and tries to exercise its reasonable business judgment in making improvements, franchisees can be strongly averse to that change. Most often, however, franchisees initiate disputes when they feel there’s been some pre-sale misrepresentations or other violations of state or federal franchise laws.
Franchisor-initiated disputes, meanwhile, tend to involve payment disputes and unit closures prior to the expiration of the term.
Most will try to settle the issue between themselves, but there are two signs that indicate the parties are unable to do so and need help.
When one side hires an attorney, the other knows they feel particularly aggrieved – and as legal costs mount, they’re less and less likely to give anything; it feels like wasting money to compromise rather than take the whole win.
The other sign comes when some or all of the franchise system knows about the dispute and is watching the outcome. As the franchisor, you worry about copycats. If the franchisee is defending in a way that you think might cause others to follow suit, initiating a mediation can show you’re serious about resolving the dispute and will sometimes discourage others from following the same approach.
Time to Work It Out
When the dispute goes to mediation, the mediator will explain the process in an opening statement, including the requirement for confidentiality. Nothing said in the negotiations can be used against the other party at a later date.
Both sides speak through counsel, who give brief position statements about the dispute and what they think a settlement would look like. The parties will generally go into different rooms, and the mediator will spend one hour with one party and then one hour with the second party, to clarify understanding of their positions and get additional information.
The mediator goes back and forth with offers, trying to narrow the disputed issues into undisputed points of agreement, until it ends with an impasse for a final mediated settlement agreement. Most mediators will not want the parties to leave until the attorneys actually draft the final settlement agreement, with all parties’ signatures.
What Success Looks Like
No one gets everything they want in a disagreement; a good result is one where both parties feel some pain. Compromises are key. That’s how one of our mediations succeeded – and how another failed without it.
The first case began because a franchisee bought a second business, which he didn’t think was competitive. The franchisor insisted it was and sent a cease-and-desist order demanding the two businesses be combined so that gross revenues from both stores would go through the franchise business. The franchisee refused, saying he would lose all the goodwill the second business had built up over many years. In mediation, each side gave a little and got a little: The franchisee got to keep the appearance of two stores but agreed to run all sales through the franchisor’s point of sale and to pay new flat fees for the remainder of the franchise agreement term.
In the second case, a franchisee bought a second location and stopped making fee payments to the franchisor after a few months. Default letters were ignored, and the franchisee was subsequently terminated. The franchisee then hired counsel and initiated mediation, requesting a return of all franchise fees and arguing she had failed because the franchisor gave no support. The franchisor provided significant proof of support but offered a partial refund. The franchisee rejected the offer and wouldn’t budge from her numbers. The mediation ended in an impasse, and the franchisee never brought a lawsuit.
Another mark of success is a resolution that solves the problem at hand and doesn’t try to tackle non-existent issues. When there’s a loss of trust, you’ll see negotiations move from “How do we fix this?” to “How do we prevent this from happening again?” Starting to negotiate a resolution for a problem that does not yet exist is a lesson in futility; both sides can come up with ridiculous hypotheticals about new iterations of new problems, and you run the risk of not settling what’s actually going on.
Communicate Before You Mediate
The ideal mediation is the one you never had to go to in the first place. Proactive communication, on both sides, is critical in resolving franchise disagreements or misunderstandings.
Most franchisors allocate resources to franchisees who are vocal about discontent, so silence is interpreted as contentment. If you’re a struggling franchisee and you feel you need support, speak up.
Franchisors should not assume that “silence is golden,” however. Don’t wait to be asked for help; do a profit & loss review with every franchisee, give sales and marketing assistance at every location, and take other steps to identify issues before they blow up into real problems. If you do a full compliance review and support checklist with every franchise owner, you may catch problems the franchisee doesn’t know about or is uncomfortable sharing with you.
If you do go to mediation, take the process seriously. If one party shows up with no intention of coming to a resolution or being so rigid that the prospect of a resolution is low, they’ve wasted everyone’s time and money, and more likely than not taking a bad problem and making it worse.
Understand that there is no winning the mediation. The odds of one party even getting 60 percent of their “best day” outcome are highly unlikely.
Finally, realize that successful mediation takes multiple hours of the parties sitting together, in the same location, with the same goal: coming to a resolution that isn’t perfect but is something both sides can live with.
Mark Nichols is General Counsel at United Franchise Group, a globally recognized leader in franchising and home to an award-winning family of brands and franchise consulting services with over 1,600 franchises across more than 60 countries.