Looking Forward: Franchise Development in an Ever-Changing Business Climate

By Kent Franchise Law Group

Changing focus from the deluge of information regarding COVID-19 and its negative effect on businesses, franchisors have already begun to adapt, adjust and yes, pivot, in order to continue to develop their systems during 2020.

In order to stay on top of franchise development, there are three key considerations: 1) enforcing system standards in your existing system, even with operational changes; 2) using technology to meet prospective franchisees; and 3) keeping up with state and regulatory compliance issues.

1. Enforcing Standards in the System Along With Operational Changes

First, before attempting to grow the system (during this year or any other) franchisors need to make sure their current system of franchisees is compliant and successful. Taking focus from existing franchisees may lead them astray, which may also mean non-compliant franchisees. Even more so than in any other year, it is important for franchisors to ensure that their franchisees are complying with all system standards and have the support they need to grow their own businesses. After all, the system standards are what led the franchisor to success in the first place.

However, COVID-19 brings on a new set of challenges, including possible adjustments to the nuts and bolts of the franchise operation and therefore, the system standards. For example, many employees are working remotely, brick-and-mortar locations have had to close temporarily or permanently, restaurants have increased delivery capabilities, dining al-fresco has become a new normal, masks and hand-washing are required, curb-side pickup of retail items exists, social distancing keeps employees and customers separated, etc. In an effort to respond to these changes, and the new expectations of customers, franchisors need to revisit their system standards, dig up the operations manual, and get to work adjusting the system. Then, franchisees need to be instructed and trained on those changes. Once the existing system is operating like the pre-COVID-well-oiled-machine that it was, then the franchisor can focus on onboarding new franchisees.

2. Use Technology with Prospective Franchisees

Second, the traditional way of franchise recruitment for many systems, which previously involved attending conferences or conventions of thousands of people, has been taken off the table. And, as everyone knows, the options in 2020 are limited to video chatting and smaller in-person meetings (and for some, only the former is available). Some extroverted sales people are panicking. But, some are making the most of what technology has to offer.

To that end, franchisors have jumped at the chance to hold virtual discovery days where the prospective franchisee still has the opportunity to “meet” the high-level executives at the franchisor company because, while an in-person meeting is preferred, setting up time for a video call can be much easier to coordinate than an in-person meeting and more prospects can attend at one time without any added costs. And, let’s face it, there isn’t a much better option available right now.

In order to make these virtual meetings efficient and effective, franchisors should still prepare as much as they normally would and limit the virtual meetings to those candidates that have been fully vetted. Also, franchisors should advertise and market the existence of the virtual discovery days, rehearse the video sessions, and provide a “tour” of a facility/store/restaurant/office, as appropriate. Take full advantage of technology by pre-recording certain sessions, reaching more potential candidates more easily, and using the technology as another test of the prospective franchisee. If the prospective franchisee can’t figure out how to unmute themselves, can they really operate a franchise?

3. Keep Up With State and Regulatory Compliance

Lastly, as all franchisors are (or should be) aware, they are required to update their Franchise Disclosure Documents (“FDDs”) in the event of a material change to their system. Of course, as with all legal terms, there is no uniform definition of “material change.” This year, however, the franchise examiners of certain registration states (such as California, Maryland and Washington), have provided some help by focusing mainly on three issues with respect to “material changes” to the system resulting from COVID-19. First, whether franchisees have permanently or temporarily closed their doors as a result of the pandemic. Second, whether franchisees have had to make substantial operational changes (such as a restaurant switching to delivery only or a gym switching to online-only classes). Third, whether franchisee revenues have materially decreased in 2020 as compared to the same time period in 2019.

If any of the above issues apply to a franchisor’s system, then it would be prudent to amend the FDD and file amendments in the required registration states. Further, now that the third quarter of 2020 has begun, regardless of the states where a franchisor may be registered, if any (and, accordingly, the examiners involved) a franchisor should review its quarterly financials and compare them not only to the earlier part of 2020, but also to the third quarter of 2019. If there is a material difference during those comparisons, then a franchisor should consider amending its FDD and making the appropriate state filings.