Turning the Franchise Business Back On — Leading Your System out of Coronavirus

Webinar Summary –

In this webinar, franchise consultants from MSA Worldwide discussed the changed and changing landscape that franchises will face as they work to re-open their businesses amid the COVID-19 pandemic. The panelists detailed the “how” of what will be the economy’s re-opening, as well as possible regulatory, disclosure, and day-to-day changes that will affect franchise businesses. The panelists also discussed good policies and procedures for franchisors to adopt toward their franchisees, suppliers, and customers.

Key Bullets –

• Unit sustainability is critical
• Foster trust with your franchisees by focusing on good and open communication
• Bear in mind possible regulatory changes (like spacing inside locations) and disclosure changes, in FDDs and particularly with regard to Item 19
• Begin now to plan for changes to consumer habits and attitudes; lay the groundwork now for attracting new customers through community engagement and good neigborliness

Full Bullets –

While the closure has been relatively short, Franchising will be smaller when it reopens:

• Some locations will not reopen
• Some locations will open and then soon close (capital/customer/supplier based closures)
• Some locations under development will not open as planned
• Some franchise systems will not survive – sale of systems
• Multi-unit franchise roll up with incentives

How the Economy will reopen

• Once rapid tests become readily available
  • Rolling by regions impacted
  • Depends on governors
  • Small, more rural, less dense markets
  • Middle of the country first

Regulatory changes

• Disclosure document changes, including item 19
• State registration and capitalization requirements
• Proposed state relationship laws
• Income recognition revisited by FASB
• Covid-19 recommendations become regulations
  • Capacity control – limits on number of people in restaurants, for instance
  • Delivery and pick-up – changing dynamics with consumer

Possible Revised FDD Proposal

• “Event impact”
• Royalty repayments
• Franchised Outlets
• Operational changes
• Regulatory changes (cleaning, uniforms)
• Suspension of Development & Training
• Notice of Event End Date
• Item 7 estimates – new capital requirements due to regulations possible
• Item 19 disclosure – financial performance representation i.e. the performance of 2019 will not take place in 2020
  • Factual, historic, accurate
• Good faith disclosure

Recovery demand curve

• Consumer habits and preferences have changed
  • Staycation industries may surge
  • Gatherings in close contact industries will not
  • Virtual interaction will impact travel
• Speed, depth, uniformity of recovery not uniform
• Supply chain, staffing, standards impact

Short duration but lasting impact on policies

• Inability to sustain short closure
  • Franchisee qualifications
  • Franchisee financing and cap requirements (i.e. should there be mandatory financial capital requirements?)
  • Classes of franchisees to be targeted
  • Use of brokers – virtual recruitment/sales by franchisor
  • Use of 401k plans by franchisees

Rethinking growth and support

• Virtual discovery days
• Training and opening support
• Field support delivery
• Field support decision making
• Ability to support – geographic growth – critical mass

Thinking through planning and execution

• Franchising is diverse – even in the same industry
  • Size, resources, leadership, maturity, customers, economics, franchisee relations
  • Best practices vs. contextual practices
  • Execution needs to be nimble with local field decision making in several areas
  • Will require franchisee involvement and trust à bring your franchisees into a dialogue, and where their advice is necessary

Legal counsel’s role is important but not definitive

• Legal counsel must help in identifying risk
• Management’s role is to make business decisions
  • Risk is unavoidable
  • Franchise agreements are not a good management tool – put them aside
  • Trust, moral suasions, communications, franchisee involvement

Sustainability –

• Franchisee sustainability is critical target
• So is franchisor sustainability – run the numbers for both sides
  • Reopening costs not budgeted for and will be high
  • Reopening royalties will be lower than before
  • Initial franchise fees will be slow to recover
• Be aware of financial capabilities before making economic changes

Franchisee staff retention

• Even with PPP, staff may not return due to generous UI
• Competitive market may increase payroll costs
• Franchisees need to communicate with staff now
• Determine replacement staffing needs – gauge where you are; whether your employees are coming back
• Factor in expected demand curve

Training

• Training infrastructure may be insufficient to directly train
• Approaches considered
  • Soft opening
  • Virtual training
  • Train the trainer

Supply Chain

• Disrupted back to farmer and manufacturer
• Anticipate alternatives
  • Products
  • Local sourcing alternatives
  • Limited or alternative menu items
  • Discussion with suppliers – pre-order requirements from franchisees

Brand Standards

• Short term flexibility will be needed
  • Allowing field staff some authority may limit stress
  • Communications to consumers
  • Ensure that everyone knows flexibility is temporary
  • Develop temporary manuals – signifies intent to return to standards
  • In this period, look for ways that you can do things better

Re-opening tips

• Communicate (communicate, communicate) will all audiences – employees, consumers, franchisees
• Evaluate temporary measures for long-term usage
• Renegotiate where possible with suppliers – what your plans are, what products are needed
• Work to regain past customers and retain new customers
  • Community support opportunities to draw in new customers who will continue to want to patronize your brand when things go back to relative normal
• Redeploy corporate resources

Wrap-up

• Unit sustainability is critical target
• Franchisee involvement will garner trust when things don’t go as planned
• Field staff authority will allow local flexibility
• Keep communications factual but upbeat
• Don’t expect every consumer, franchisee or employee to understand

For a company that is downsizing, which departments are essential vs. nonessential?

            Depends on company and industry; look for areas that can be outsourced