In order to manage the Coronavirus crisis with as little economic damage as possible (recognizing that no business is likely to escape totally unscathed), franchise systems may wish to consider the following.
The spread of the Coronavirus (COVID-19) represents a threat to the global economy on a scale that few of us have ever experienced. Most recently, the World Health Organization has declared a global pandemic, the stock markets have crashed, states of emergency have been declared, travel has been restricted, businesses have been shutting down or enforcing “work from home” edicts, and even professional and collegiate sports leagues have shut down.
In the words of medical professionals, all businesses are now being urged to take every available precaution to help “flatten the curve” to slow the transmission of the virus, particularly to vulnerable citizens whose health is most at risk.
Franchise systems are confronting many of the same pressures that are now afflicting other businesses. Customer counts and revenues may fall sharply and unexpectedly. Supply chains may be affected. And perhaps most difficult of all, there is an unprecedented degree of uncertainty as to how long the disruption will last and how much more severe it may become.
Closures of schools and public facilities are now expected to last for weeks; the situation will be different if these persist for several months. Because the pace of recovery is also difficult to predict — business planning requires consideration of a host of contingencies that may or may not come to pass.
In some respects, planning within a franchise system is even more difficult than it is for other businesses, particularly where — as here — rapid decision-making is required. As a general principle, the franchise relationship is based upon contracts between independently-owned economic entities, as opposed to being a superior/subordinate relationship where commands are given and must be executed.
Franchise communities are also frequently dispersed geographically, making communication a challenge in the best of times, let alone when travel is restricted and employees may be working remotely.
In order to manage the Coronavirus crisis with as little economic damage as possible (recognizing that no business is likely to escape totally unscathed), franchise systems may wish to consider the following:
1. The health and safety of employees and customers should be the first concern of every franchisor and franchisee. With that in mind, the franchisor should direct any inquiry from employees or franchisees regarding the Coronavirus to the World Health Organization, the Centers for Disease Control and Prevention and local health authorities.
2. In order to protect the functioning of the system to the extent possible, develop and implement a “work from home” protocol for the franchisor’s employees. Consider connectivity issues, including internet access, cellular service, and video conferencing capabilities, if necessary.
Distribute any new contact information to franchisees so they can stay in touch with key support personnel. Consult local employment counsel when implementing any work from home policy to avoid wage and hour infractions. Franchisees that can adopt work from home strategies likewise should be urged to consult with counsel concerning compliance with local laws, including HIPAA laws relating to private health information of employees.
3. Establish communication channels to ensure that the most critical information can be communicated quickly and authoritatively to the franchise community. At the same time, ensure that communications from franchisees are received and responded to promptly. Open communications are always important to the health of a franchise system; they are critical in times of economic crisis.
4. Senior franchisor leadership should instill the trust and confidence that can minimize the harm to the brand and allow recovery to begin as promptly as possible. To the extent possible, given the inherent uncertainty, communicate a realistic plan for damage minimization and recovery.
5. Consider suspension or extension of development and store opening deadlines, to the extent that they are materially affected by ongoing events. Depending upon how long the Coronavirus-induced economic slowdown lasts and the pace of recovery, plans that appeared feasible even a month or two ago may no longer be achievable. Consider the application of force majeure and related provisions in all contracts.
6. Consider temporary suspension of specific “brand standard” obligations under the franchise agreement should a location be forced to close as a direct result of the Coronavirus. These could include provisions relating to required operating hours, minimum staffing requirements, minimum franchise fees, required menu, product, or service offerings, abandonment” time frames, etc.
Similarly, evaluate potential temporary suspension of approved supplier restrictions if it appears that shortages are likely to develop. Where feasible, allow franchisees to source goods or services from available resources until normal supply lines are restored. Better yet, locate alternative suppliers who meet the quality standards and make them available to franchisees. Consider absorbing or sharing any increased costs of the alternative suppliers.
7. Evaluate whether any new product testing or rollouts make sense in the current environment. The sudden economic contraction will make meaningful comparisons with prior periods difficult, at best. If the situation persists, systems may wish to consider strategies for dealing with financially distressed consumers.
8. Follow national, state, and local legislative developments regarding any relief or economic stimulus programs that might become available to assist distressed businesses.
9. Strongly encourage franchisees to increase their routine cleaning protocols using products effective against viruses and surface contamination. Post information for employees and customers regarding the importance of frequent handwashing and hand sanitizers. As soon as franchisor’s operational personnel are able to visit franchised locations, ensure that required sanitation protocols are being followed to the letter.
10. In the unfortunate event that the franchisor or a franchisee is required to suspend operations because of a mandatory quarantine, investigate whether the affected party can file claims under the business interruption provisions of their insurance policy. The timely submission of claims can be critical, so consider consulting with insurance recovery counsel who has expertise in negotiating such claims with insurers.
Through the duration of this crisis, the health and wellness of employees and customers must be paramount. Communicating openly with franchisees about these issues demonstrates that the franchisor is aware and taking proactive steps to work with its franchisees and employees to minimize the limit the effects of this outbreak and promote recovery.
ABOUT THE AUTHOR
Michael Sturm is a franchise litigator based in the Washington, D.C., office of Lathrop GPM LLP. He advises franchisors on claims that arise in the course of the franchise relationship, including alleged violations of statutory disclosure and relationship obligations, claims with respect to supplier payments, contractual disputes, and claims under the implied covenant of good faith and fair dealing. Also contributing to this article are fellow Lathrop GPM franchise attorneys Mike Gray and Carl Zwisler .