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When it Comes to Franchise Negotiations Are the Odds in Your Favor?
Not all parties who claim to settle franchise disputes have the experience or relationships in place to negotiate an affordable, equitable resolution.
Tuesday, March 01, 2011
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Last week, I received a phone call from a hotelier who refused my advice two years earlier. In 2009, the owner was facing a $200,000 liquidated damages claim imposed by a franchise company. He contacted me to help him resolve the matter. Using my many years of hospitality industry experience and leveraging a long-time relationship with franchise executives, I quickly was able to reach what I felt was an equitable settlement of $65,000 structured on a payment plan. The owner wouldn't bite. Emotional and upset with the franchisor, he refused to pay the reduced penalty and counter-offered an unreasonable settlement of $20,000, which the franchisor rejected. The owner thanked me for my time, and said he would take his chances with litigation.
The call I received last week began with the owner saying: "Help me! They are now suing me for $350,000!" The initial $200,000 liquidated damage claim had compounded and now contains interest, attorney fees and infringement costs.
This true story is not uncommon, and it's a good lesson in weighing risk vs. peace of mind. Therefore, if you're still looking for a New Year's Resolution, here are a few to consider.
In 2011:
- I will deal with franchise issues sensibly because they will not just go away.
- I will try to avoid litigation at all costs by first working with a professional franchise negotiations company that can leverage long-time relationships.
- I will not be enticed by an attorney offering a low fee if he has a reputation of switching to litigation mode at a dramatic increase in costs.
Liquidated damages are termination fees imposed upon franchisees for early contract termination. This typically happens for two reasons: 1) An owner decides that he or she wants to fly a different flag in hopes of attracting more customers and making more money; or 2) The franchisor has determined that the owner/property is in default for quality or monetary reasons. If the contract is terminated before its expiration date, the owner will be required to pay substantial liquidated damage fees to the franchise company -- period.
This is not a theory -- rather it's carved in stone in the form of a franchise agreement. Those stories and promises you casually shared with a franchise salesman over a beer are irrelevant. The franchise agreement is mostly all that matters. Remember: If you look at the percentages of franchisor vs. franchisee law suits, the odds are greatly in the franchisor's favor.
Negotiator vs. Litigator
Years ago I opened the industry's first franchise negotiations company because it was a service area that genuinely lacked expertise and direction. As former CEO of Ramada Hotels (among other executive-management roles) and also a former hotel owner, I had first-hand knowledge of both sides, fully understanding the intricacies of franchise contracts and spending more than 35 years building relationships with the leading franchise companies. Before Hospitality Solutions LLC was established in 2002, there was no other resource for hotel owners to turn to when needing assistance with liquidated damage claims or structuring a new, fair franchise agreement other than hiring a law firm.
I'm not an attorney -- and that serves the franchise community especially well because by law, attorneys are required to speak to the franchise company's attorney. An attorney cannot go to the franchise executive team and enter into productive negotiations other than with another attorney. It's simply not allowed. And everyone knows what happens when two attorneys get together; because they are unaware of business conversations and/or relationships that have been developed between the franchisor and franchisee over the years, it results in one attorney trying to impose his power over the other.
That's why working with a professional negotiations company has such merit. A third-party negotiator is able to enter into "meaningful dialog" with the franchise company. A negotiator is not bound by the laws of conduct or other legal protocol that a law firm would be. Negotiators can dig deep and leverage their relationships and hospitality industry experience to work out an mutually-agreeable settlement and avoid the costs and aggravation of litigation.
Beware of Bait-and-Switch
Since 2002, some attorneys have disguised themselves as professional franchise negotiation companies much to the dismay -- and sometimes eventual demise -- of the franchisee.
Recently I have heard from some owners who had been contacted by an attorney advising not to hire a professional franchise negotiator but to work with the attorney instead. The hook is that the attorney will charge $1,000 less than the fees charged by a reputable negotiations firm.
Here's the potential problem: A month after the franchisee agrees to attorney negotiations, the litigator advises the owner that the "offer of settlement" is not attractive enough and recommends litigation. Thus the time-consuming and costly litigation cycle begins all over again.
While low upfront fees may be attractive to owners in today's economy, unless the offer is coming from a proven, reputable franchise negotiations company, franchisee beware! Your goal when entering into franchise negotiations is to avoid litigation -- period.
Let me be clear. I am not anti-attorney. It's an honorable profession that many of us will need at some point in our lives. It's just that sometimes when business people communicate without attorneys, settlement can often be reached.
So regardless which New Year's Resolution you adopt (if any), a goal for any hotel owner in 2011 should be to avoid litigation and partner with a reputable franchise negotiations specialist to either assist you in structuring your new, fair franchise agreement or settling your liquidated damages claim at a substantially reduced fee. That's a "hospitality solution" that everyone can live with, and afford.
Steven Belmonte is CEO of Hospitality Solutions, LLC, a company providing new franchise agreement negotiations, franchise termination and liquidated damage claim negotiations, mediation, expert witness, litigation support, insurance and payroll services.
Former President and CEO of Ramada Hotels, Belmonte also served as Chairman of the American Hotel & Lodging Assn.’s Educational Foundation and serves on the Board of Directors of Arlington Hospitality Inc. and the Industry Relations Committee for the Asian American Hotel Owners Assn.
For more information on Hospitality Solutions LLC, call (407) 654-4600, email stevenbelmonte@aol.com or visit www.stevenbelmonte.com
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