Winds of Change âTried Techniques for ...
Winds of Change Tried Techniques for Effectively Managing Risk when Implementing System-Wide Changes
Panel Jonathan Koudelka Dwyer Group Gillian Scott Osler, Hoskin & Harcourt LLP Brenda Trickey Popeyes Louisiana Kitchen, Inc. Alexander Tuneski DLP Piper LLP
Primary Drivers of Change 1. 2. 3. 4.
System improvement Brand image / recognition / evolution Brand protection Financial benefits
Enforce existing provisions
New form of franchise agreement
TOOLS OF CHANGE
Negotiate amendments or restatements
Modify operations manuals
Popeyes Turn-Around Story 2008 - 2015
Increased Transfer Fees
2008
2015
Same-Store Sales Growth
Average Domestic Unit Volume
Average 5.7% Same-Store Sales Growth over the last 4 years 6.9%
2.6%
6.2%
5.9%
2014
2015
3.7%
3.1%
0.7%
2008
2010
2011
2012
2013
-1.7%
In Thousands
Domestic Chicken-QSR Market Share Growth*
Domestic Franchise Restaurant Profitability 24.0%
$400 $340 K
23.0%
$308 K $279 K
22.0%
$251 K
21.0% $177 K
$192 K
$208 K
$211 K
23.0%
22.4%
$150
19.5%
18.0%
$100 18.7%
18.5%
$50
17.7%
2008
$300 $250
21.6% 20.4%
19.0%
$350
$200
20.0%
17.0%
2009
$-
2009
2010
2011
2012
2013
2014
2015
* The growth rates in the graph above are according to independent data
Popeyes Stock Performance December 30, 2008 $4.42/share
December 30, 2015 $58.89/share
Reported EPS Has More Than Doubled
$1.91 $1.60
$1.24 $0.76
YOY %
$0.74
(3)%
2008
2009
$0.90
+22%
2010
$1.41
$0.97
+8%
2011
+28%
+14%
+13%
+19%
2012
2013
2014
2015
Market Cap Has Grown Eleven Fold
$1,302
$1,315
$1,400 $1,200
$916
$1,000 $800
$625
$600 $357 $119
$358
$400
$208
$200 $-
2008
2009
2010
2011
2012
2013
2014
2015
Using All of the Tools in your Toolbox - Two Brands – One System • The Acquisition • The Challenges
Using All of the Tools in your Toolbox - Two Brands – One System • The Drivers of Change • The Tools – Restated Contracts – New Contract/FDD – Special Addenda – Manuals • The Result: Two Brands, One Great System
Building Franchisee Support for System-Wide Change
Building Franchisee Support Laying the Groundwork “Oftentimes, the most successful changes are the changes that both the franchisor and franchisees commit to together” - CEO of Popeyes Louisiana Kitchen, Inc.
• Have a strategy to secure franchisee buy-in from the beginning • Engage advisory councils and associations • Emphasize long-term success and return on investment in your business case
Building Franchisee Support Communicating Changes “People don’t resist changes, they resist being changed” • Timing • Late enough that you have enough information to answer questions • Early enough that you can benefit from franchisee input and support
• Engage standing or ad-hoc committees • Keep franchisee association up to date on time sensitive and highly technical changes.
Building Franchisee Support Early Adopter Programs • Help to fine tune new products or requirements • Help to gain franchisee support even where: • Franchisor lacks the authority to require the change • Business case favors the franchisor over the franchisee • Franchisees may initially dislike the change • Offer meaningful incentives to engage program participants
Building Franchisee Support Incentivize Reticent Franchisees • Extending the franchise agreement • Investing in training and marketing • Involving advisory councils in future decisions • Reducing the scope of post-term noncompete clauses • Consider increased incentives for franchisees who agree to terms before a deadline.
1. Enforcing Existing Provisions in the Franchise Agreement
Enforcing Existing Provisions • Unenforced provisions can be resurrected and put to work • When assessing risk, consider the reasons why the provision was never enforced
Enforcing Existing Provisions Advantages • • • •
No need for re-negotiations Previously agreed upon language Easy, quick, inexpensive implementation System wide change is possible instead of gradual implementation
Enforcing Existing Provisions Risks • Contractual discretion is limited by the duty to act in good faith • Express contractual language is not always a complete defence • Where contract ambiguous, courts will look to parties’ intentions and commercial reasonableness of the exercise of discretion • Franchise Agreements should not be padded with “back pocket” unenforced provisions
Enforcing Existing Provisions Risks – Cont’d • Fraud and misrepresentation allegations • Waiver claims • Does the history between the parties suggest that the franchisor has waived its right to enforce franchisee compliance? • The standards the courts apply to prove waiver vary across jurisdictions • Temporarily delaying enforcement of a right does not necessarily constitute waiver
Enforcing Existing Provisions Mitigating Risk • Non-Waiver Clauses NON-WAIVER PROVISION: We will not be deemed to have waived our right to demand exact compliance with any of the terms of this Agreement, even if at any time: (a) we do not exercise a right or power available to us under this Agreement; or (b) we do not insist on your strict compliance with the terms of this Agreement; or (c) if there develops a custom or practice which is at variance with the terms of this Agreement; or (d) if we accept payments which are otherwise due to us under this Agreement. Similarly, our waiver of any particular breach or series of breaches under this Agreement or of any similar term in any other agreement between you and us or between us and any other franchise owner, will not affect our rights with respect to any later breach by you or anyone else.
• New Day Letters – provisions will be enforced, reasons why, and timing of enforcement
2. Modifying the System through the Operations Manual
Modifying the “System” • Most franchise agreements contain contractual provisions reserving for the franchisor the right to modify its system
General Reservation of Rights Clause CHANGES TO THE SYSTEM: The Franchisee recognizes that variations and additions to the System will be required from time to time to preserve and enhance the public image of the System, to accommodate changing consumer trends and to ensure the continuing efficiency of the System generally. The Franchisee acknowledges and agrees that the franchisor may, from time to time, upon written notice to the Franchisee add to, subtract from or otherwise change the System, through the Manual or otherwise in writing. The Franchisee agrees to operate and maintain its Franchised Business according to each and every element of the System, even if it believes that a System standard, as originally issued or subsequently modified or supplemented, is not in the System’s or its best interest. The changes to the System may include, without limitation, the adoption of new or modified trademarks and trade names, new products, services, renovations, equipment, fixtures, furnishings and signs, and new techniques relating to the sale, promotion, and marketing of the Products and Services and other products and services. The Franchisee agrees to promptly accept, implement, use and display all such changes to the System in the conduct of the Franchised Business, at the Franchisee’s sole cost.
Modifying the “System” • These clauses may be specific to changes relating to the operations manual: CHANGES TO THE OPERATIONS MANUAL PROVISION The Franchisor shall have the right to add to, modify, withdraw from or otherwise revise the provisions of the Manual from time to time as provided for in this Agreement or to maintain the goodwill associated with the System and the Trade-marks, provided that (i) no such revision shall alter unreasonably the Franchisee’s fundamental rights under this Agreement except to the extent permitted under Section () of this Agreement and (ii) each such revision shall be made in good faith and in accordance with reasonable commercial standards.
Modifying the “System” Advantages • Easy to make and justify • Natural to assume that these procedures will change over time • Changes can be implemented system-wide at one time, rather than gradual implementation
Modifying the “System” Risks • Limit changes to those reasonably foreseeable at the time of entering into the franchise agreement • Substantial changes or those with a significant financial impact more likely to damage the relationship • Risk of breach of the duty of good faith claims • Potential claims for constructive termination
Modifying the “System” Risks –Cont’d • “Material” changes may require specific language in the franchise agreement – examples: TRADEMARK CHANGES PROVISION In the event it becomes advisable at any time in the discretion of the Franchisor for the Franchisee to modify or discontinue use of any of the Trademarks, including the [NAME OF FRANCHISE SYSTEM] trademark, or use one or more additional or substitute names or marks, the Franchisee agrees to do so. Any costs associated with such changes will be borne solely by the Franchisee. TELEPHONE SYSTEM CHANGES PROVISION As part of your local marketing, you promise to acquire and maintain a dedicated business telephone line. We have the right to specify the specific type, model and/or carrier that you must pay for and use for this service. This line must be answered by a person during business hours. You are required to pay for, and use, the Call Center that we authorize to answer incoming sales calls for rollover, evenings, and weekends. We may at any time, with 30 days prior notice to you, designate another method, vendor or manner for answering sales calls.
Modifying the “System” Risks –Cont’d AUTHORIZED PRODUCT CHANGES PROVISION The Franchisee must use in the operation of the [Restaurant] and in the preparation of menu items and other food and beverage products only the proprietary and non-proprietary ingredients, recipes, formulas, techniques, processes and supplies Franchisor designates, and prepare and serve the menu items and products in such portions, sizes, appearance, taste and packaging, all as the Franchisor specifies in the Manual or otherwise in writing. The Franchisee acknowledges and agrees that Franchisor may change these requirements periodically and that the Franchisee is obligated to conform to the then-current requirements. The Franchisee acknowledges that the [Restaurant] must at all times maintain an inventory of ingredients, food and beverage products and other Products, materials and supplies that will permit operation of the [Restaurant] at maximum capacity. The Franchisee must place a minimum initial order for Products, ingredients and supplies as set out in the Manual or as we may designate in writing in connection with your particular [Restaurant] opening.
Modifying the “System” Risks –Cont’d • More specific clauses will apply over more general clauses • State franchise laws can restrict a franchisor’s ability to impose material changes
Modifying the “System” Mitigating Risks • Safeguards can be built into the franchise agreement describing the process for implementing system changes • Consider giving concessions or allowing franchisees to implement the changes in stages or over an extended period of time
3. Negotiating Amendments or Restatements to the Franchise Agreement
Amendments / Restatements • Sometimes, need to look to amendments or restatements of the franchise agreement • Best for major system changes • Smaller or growing systems may have more success than larger systems with this method
Amendments / Restatements Advantages • System-wide consistency • Alignment of multiple forms of agreement • Helpful for operations and legal • Need for agreement between franchisor and franchisee to minimize risk of future disputes
Amendments / Restatements Risks • Negotiation required • Takes time to negotiate terms, obtain acceptance and comply with applicable laws • May not work where the change requires rapid implementation • May be too expensive and time consuming in a large system
Amendments / Restatements Risks Each of the following steps involve different obstacles that can slow down or complicate the process: 1. 2. 3. 4.
Negotiations Drafting Complying with Regulatory Requirements Holdouts
4. Implementing a New Form of Franchise Agreement on Renewal or a Going-Forward Basis
New Form of Agreement • Best for changes that are not time sensitive • Can be years before the change is consistent across the entire system
New Form of Agreement Advantages • Most franchise agreements require franchisees to sign the then-current form of franchise agreement upon renewal • Easy, no need for negotiation • Because franchisees may not be facing an upcoming renewal, there may be less immediate objections, even though existing franchisees will eventually feel the impact
New Form of Agreement Risks • This method is only viable if the existing franchise agreement requires franchisees to execute the thencurrent form of agreement • Many states with franchise relationship laws require the franchisor to have “good cause” before declining to renew a franchise agreement • Declining to implement a system-wide change may not constitute “good cause”
New Form of Agreement Risks • Lack of uniformity • Operational and administrative challenges • If franchisees believe the franchisor has not considered their wants or needs when making such changes, it may negatively impact that relationship • In certain states, franchisees can claim that the changes were amounted to a constructive termination of the franchise agreement
New Form of Agreement Risks • Existing franchisees may refuse to sign the new agreement • This can be problematic when a significant number of (or a small number of successful) franchisees refuse to enter a renewal term
Building Franchisee Support Dealing with Rogue Franchisees
Building Franchisee Support Dealing with Rogue Franchisees • Look to support from the franchisee association. • Need to consider confidentiality obligations • Enforcing compliance from a “special circumstance” franchisee may outweigh value of the change, especially with established and otherwise compliant franchisees • Consider whether it is time to part ways: Has the conduct of a franchisee becomes a drain on the system?
Questions?
Thank you!
Panel Jonathan Koudelka Dwyer Group Gillian Scott Osler, Hoskin & Harcourt LLP Brenda Trickey Popeyes Louisiana Kitchen, Inc. Alexander Tuneski DLP Piper LLP
Primary Drivers of Change 1. 2. 3. 4.
System improvement Brand image / recognition / evolution Brand protection Financial benefits
Enforce existing provisions
New form of franchise agreement
TOOLS OF CHANGE
Negotiate amendments or restatements
Modify operations manuals
Popeyes Turn-Around Story 2008 - 2015
Increased Transfer Fees
2008
2015
Same-Store Sales Growth
Average Domestic Unit Volume
Average 5.7% Same-Store Sales Growth over the last 4 years 6.9%
2.6%
6.2%
5.9%
2014
2015
3.7%
3.1%
0.7%
2008
2010
2011
2012
2013
-1.7%
In Thousands
Domestic Chicken-QSR Market Share Growth*
Domestic Franchise Restaurant Profitability 24.0%
$400 $340 K
23.0%
$308 K $279 K
22.0%
$251 K
21.0% $177 K
$192 K
$208 K
$211 K
23.0%
22.4%
$150
19.5%
18.0%
$100 18.7%
18.5%
$50
17.7%
2008
$300 $250
21.6% 20.4%
19.0%
$350
$200
20.0%
17.0%
2009
$-
2009
2010
2011
2012
2013
2014
2015
* The growth rates in the graph above are according to independent data
Popeyes Stock Performance December 30, 2008 $4.42/share
December 30, 2015 $58.89/share
Reported EPS Has More Than Doubled
$1.91 $1.60
$1.24 $0.76
YOY %
$0.74
(3)%
2008
2009
$0.90
+22%
2010
$1.41
$0.97
+8%
2011
+28%
+14%
+13%
+19%
2012
2013
2014
2015
Market Cap Has Grown Eleven Fold
$1,302
$1,315
$1,400 $1,200
$916
$1,000 $800
$625
$600 $357 $119
$358
$400
$208
$200 $-
2008
2009
2010
2011
2012
2013
2014
2015
Using All of the Tools in your Toolbox - Two Brands – One System • The Acquisition • The Challenges
Using All of the Tools in your Toolbox - Two Brands – One System • The Drivers of Change • The Tools – Restated Contracts – New Contract/FDD – Special Addenda – Manuals • The Result: Two Brands, One Great System
Building Franchisee Support for System-Wide Change
Building Franchisee Support Laying the Groundwork “Oftentimes, the most successful changes are the changes that both the franchisor and franchisees commit to together” - CEO of Popeyes Louisiana Kitchen, Inc.
• Have a strategy to secure franchisee buy-in from the beginning • Engage advisory councils and associations • Emphasize long-term success and return on investment in your business case
Building Franchisee Support Communicating Changes “People don’t resist changes, they resist being changed” • Timing • Late enough that you have enough information to answer questions • Early enough that you can benefit from franchisee input and support
• Engage standing or ad-hoc committees • Keep franchisee association up to date on time sensitive and highly technical changes.
Building Franchisee Support Early Adopter Programs • Help to fine tune new products or requirements • Help to gain franchisee support even where: • Franchisor lacks the authority to require the change • Business case favors the franchisor over the franchisee • Franchisees may initially dislike the change • Offer meaningful incentives to engage program participants
Building Franchisee Support Incentivize Reticent Franchisees • Extending the franchise agreement • Investing in training and marketing • Involving advisory councils in future decisions • Reducing the scope of post-term noncompete clauses • Consider increased incentives for franchisees who agree to terms before a deadline.
1. Enforcing Existing Provisions in the Franchise Agreement
Enforcing Existing Provisions • Unenforced provisions can be resurrected and put to work • When assessing risk, consider the reasons why the provision was never enforced
Enforcing Existing Provisions Advantages • • • •
No need for re-negotiations Previously agreed upon language Easy, quick, inexpensive implementation System wide change is possible instead of gradual implementation
Enforcing Existing Provisions Risks • Contractual discretion is limited by the duty to act in good faith • Express contractual language is not always a complete defence • Where contract ambiguous, courts will look to parties’ intentions and commercial reasonableness of the exercise of discretion • Franchise Agreements should not be padded with “back pocket” unenforced provisions
Enforcing Existing Provisions Risks – Cont’d • Fraud and misrepresentation allegations • Waiver claims • Does the history between the parties suggest that the franchisor has waived its right to enforce franchisee compliance? • The standards the courts apply to prove waiver vary across jurisdictions • Temporarily delaying enforcement of a right does not necessarily constitute waiver
Enforcing Existing Provisions Mitigating Risk • Non-Waiver Clauses NON-WAIVER PROVISION: We will not be deemed to have waived our right to demand exact compliance with any of the terms of this Agreement, even if at any time: (a) we do not exercise a right or power available to us under this Agreement; or (b) we do not insist on your strict compliance with the terms of this Agreement; or (c) if there develops a custom or practice which is at variance with the terms of this Agreement; or (d) if we accept payments which are otherwise due to us under this Agreement. Similarly, our waiver of any particular breach or series of breaches under this Agreement or of any similar term in any other agreement between you and us or between us and any other franchise owner, will not affect our rights with respect to any later breach by you or anyone else.
• New Day Letters – provisions will be enforced, reasons why, and timing of enforcement
2. Modifying the System through the Operations Manual
Modifying the “System” • Most franchise agreements contain contractual provisions reserving for the franchisor the right to modify its system
General Reservation of Rights Clause CHANGES TO THE SYSTEM: The Franchisee recognizes that variations and additions to the System will be required from time to time to preserve and enhance the public image of the System, to accommodate changing consumer trends and to ensure the continuing efficiency of the System generally. The Franchisee acknowledges and agrees that the franchisor may, from time to time, upon written notice to the Franchisee add to, subtract from or otherwise change the System, through the Manual or otherwise in writing. The Franchisee agrees to operate and maintain its Franchised Business according to each and every element of the System, even if it believes that a System standard, as originally issued or subsequently modified or supplemented, is not in the System’s or its best interest. The changes to the System may include, without limitation, the adoption of new or modified trademarks and trade names, new products, services, renovations, equipment, fixtures, furnishings and signs, and new techniques relating to the sale, promotion, and marketing of the Products and Services and other products and services. The Franchisee agrees to promptly accept, implement, use and display all such changes to the System in the conduct of the Franchised Business, at the Franchisee’s sole cost.
Modifying the “System” • These clauses may be specific to changes relating to the operations manual: CHANGES TO THE OPERATIONS MANUAL PROVISION The Franchisor shall have the right to add to, modify, withdraw from or otherwise revise the provisions of the Manual from time to time as provided for in this Agreement or to maintain the goodwill associated with the System and the Trade-marks, provided that (i) no such revision shall alter unreasonably the Franchisee’s fundamental rights under this Agreement except to the extent permitted under Section () of this Agreement and (ii) each such revision shall be made in good faith and in accordance with reasonable commercial standards.
Modifying the “System” Advantages • Easy to make and justify • Natural to assume that these procedures will change over time • Changes can be implemented system-wide at one time, rather than gradual implementation
Modifying the “System” Risks • Limit changes to those reasonably foreseeable at the time of entering into the franchise agreement • Substantial changes or those with a significant financial impact more likely to damage the relationship • Risk of breach of the duty of good faith claims • Potential claims for constructive termination
Modifying the “System” Risks –Cont’d • “Material” changes may require specific language in the franchise agreement – examples: TRADEMARK CHANGES PROVISION In the event it becomes advisable at any time in the discretion of the Franchisor for the Franchisee to modify or discontinue use of any of the Trademarks, including the [NAME OF FRANCHISE SYSTEM] trademark, or use one or more additional or substitute names or marks, the Franchisee agrees to do so. Any costs associated with such changes will be borne solely by the Franchisee. TELEPHONE SYSTEM CHANGES PROVISION As part of your local marketing, you promise to acquire and maintain a dedicated business telephone line. We have the right to specify the specific type, model and/or carrier that you must pay for and use for this service. This line must be answered by a person during business hours. You are required to pay for, and use, the Call Center that we authorize to answer incoming sales calls for rollover, evenings, and weekends. We may at any time, with 30 days prior notice to you, designate another method, vendor or manner for answering sales calls.
Modifying the “System” Risks –Cont’d AUTHORIZED PRODUCT CHANGES PROVISION The Franchisee must use in the operation of the [Restaurant] and in the preparation of menu items and other food and beverage products only the proprietary and non-proprietary ingredients, recipes, formulas, techniques, processes and supplies Franchisor designates, and prepare and serve the menu items and products in such portions, sizes, appearance, taste and packaging, all as the Franchisor specifies in the Manual or otherwise in writing. The Franchisee acknowledges and agrees that Franchisor may change these requirements periodically and that the Franchisee is obligated to conform to the then-current requirements. The Franchisee acknowledges that the [Restaurant] must at all times maintain an inventory of ingredients, food and beverage products and other Products, materials and supplies that will permit operation of the [Restaurant] at maximum capacity. The Franchisee must place a minimum initial order for Products, ingredients and supplies as set out in the Manual or as we may designate in writing in connection with your particular [Restaurant] opening.
Modifying the “System” Risks –Cont’d • More specific clauses will apply over more general clauses • State franchise laws can restrict a franchisor’s ability to impose material changes
Modifying the “System” Mitigating Risks • Safeguards can be built into the franchise agreement describing the process for implementing system changes • Consider giving concessions or allowing franchisees to implement the changes in stages or over an extended period of time
3. Negotiating Amendments or Restatements to the Franchise Agreement
Amendments / Restatements • Sometimes, need to look to amendments or restatements of the franchise agreement • Best for major system changes • Smaller or growing systems may have more success than larger systems with this method
Amendments / Restatements Advantages • System-wide consistency • Alignment of multiple forms of agreement • Helpful for operations and legal • Need for agreement between franchisor and franchisee to minimize risk of future disputes
Amendments / Restatements Risks • Negotiation required • Takes time to negotiate terms, obtain acceptance and comply with applicable laws • May not work where the change requires rapid implementation • May be too expensive and time consuming in a large system
Amendments / Restatements Risks Each of the following steps involve different obstacles that can slow down or complicate the process: 1. 2. 3. 4.
Negotiations Drafting Complying with Regulatory Requirements Holdouts
4. Implementing a New Form of Franchise Agreement on Renewal or a Going-Forward Basis
New Form of Agreement • Best for changes that are not time sensitive • Can be years before the change is consistent across the entire system
New Form of Agreement Advantages • Most franchise agreements require franchisees to sign the then-current form of franchise agreement upon renewal • Easy, no need for negotiation • Because franchisees may not be facing an upcoming renewal, there may be less immediate objections, even though existing franchisees will eventually feel the impact
New Form of Agreement Risks • This method is only viable if the existing franchise agreement requires franchisees to execute the thencurrent form of agreement • Many states with franchise relationship laws require the franchisor to have “good cause” before declining to renew a franchise agreement • Declining to implement a system-wide change may not constitute “good cause”
New Form of Agreement Risks • Lack of uniformity • Operational and administrative challenges • If franchisees believe the franchisor has not considered their wants or needs when making such changes, it may negatively impact that relationship • In certain states, franchisees can claim that the changes were amounted to a constructive termination of the franchise agreement
New Form of Agreement Risks • Existing franchisees may refuse to sign the new agreement • This can be problematic when a significant number of (or a small number of successful) franchisees refuse to enter a renewal term
Building Franchisee Support Dealing with Rogue Franchisees
Building Franchisee Support Dealing with Rogue Franchisees • Look to support from the franchisee association. • Need to consider confidentiality obligations • Enforcing compliance from a “special circumstance” franchisee may outweigh value of the change, especially with established and otherwise compliant franchisees • Consider whether it is time to part ways: Has the conduct of a franchisee becomes a drain on the system?
Questions?
Thank you!
