Is it a simple oversight, a lack of cash flow or a real demand? David Borgel, delivers his advice to franchise networks to help them manage the late payment of their franchisees.
Most franchise networks avoid communicating about the late payments of their franchisees. For fear of conveying a bad image to their financial partners, for fear of broaching a topic that would trigger heated debates at their next convention or, quite simply, to keep quiet about a taboo subject that can only be resolved on a case-by-case basis, depending on the balance of power between the partner and the network management. Before the contract is signed, and after the 21 regulatory days following the delivery of the Pre-contractual Information Document (PID), a network can receive financial flows from its (future) partner. Throughout the duration of the contract, this partner will owe various invoices to its network head: operating fees, communication fees, mandated purchases, training, paid assistance provided for in the contract, participation in regional, national meetings or other events, etc.
When everything is going well for the partner, when his turnover is increasing and he is correctly remunerated, there is in principle no debt between the two legal entities. Royalties are paid on time and commissioned purchases are collected without incident. However, the partners of a network can sometimes be « ticklish ». If they are not satisfied, they will act like the true business leaders they are. They will hit them where it hurts! Royalty payments will be suspended, mandated purchases will no longer be reimbursed and if they don’t go so far as to boycott meetings (their participation allows them to make their discontent heard and to rally other partners to their cause), they will delay payment of their participation in these events. The head of the network, and primarily the facilitator and the franchise director, must then respond quickly to prevent the situation from escalating.
Some pitfalls to avoid :
- Not visiting these partners placed in the « toxic » segmentation is a bad strategic choice. It alienates them from the network and accelerates the risk of non-compliant practices, non-compliance with procedures, customer dissatisfaction and can even have negative consequences on the brand image of the entire network. However, it is an easy solution that suits everyone. Everyone is left alone. The partner gets used to managing his business as he pleases, by taking his foot off the pedal with respect to procedures. As for the network coordinator, he keeps to the strict minimum of visits in order to avoid repeated grievances from the partner, or even the aggressiveness of the comments that the latter makes towards the network head, who is responsible for his situation. Worse, if the personal and emotional side of the situation gets involved, it may be necessary to consider a change of manager.
- Tolerating these late payments without reacting will be perceived as a sign of weakness that will be difficult to make up for in future negotiations. The partner will quickly make this known to his fellow franchisees who will in turn test this laxity of the network head in order to strengthen their cash flow. A « strong franchisor » attitude is then strongly advised to discourage other members of the network from entering this game. The management, with the support of the finance department and the legal department, should then apply a debt collection process called « escalation » in order to increase the chances of a quick resolution of this dispute.
- Blocking the supply of mandated purchases as long as the partner’s account is in debit encourages the partner to find new suppliers by taking the risk of being less careful about the constraints of the specifications that they committed to respect when they signed their contract. This easy to implement approach has medium-term consequences for the client, the partner and the entire network. As a reminder, the franchisee is a businessman, so he will not have great difficulty in finding substitute suppliers with the sole aim of not degrading his turnover and margins in the short term.
- Stopping the sending of advertising campaigns or reducing the commercial visibility of this outlet destabilizes the network’s customers and contributes to the fall in the outlet’s turnover. If some franchisors think that it is not normal to make a sales outlet benefit from services (communication services in this case) that it refuses to pay for, others will answer that it is necessary to avoid falling into a spiral of exclusion of the partner and, on the contrary, to help it to find the financial results that it expects so that this incident is only a bad passage. The role of the network head is to encourage the success of its partners by all means.
- Not monitoring customer satisfaction: It is not uncommon to see a correlation between declining customer satisfaction, increasing litigation and increasing partner default. The resentments of both sides trigger a spiral of frustration, bad faith and alienation from the concept that puts the end customer in the front line. This is when the partner most needs the win-win relationship they signed up for.
This list of advice is not exhaustive, but it is important to remember that any step that could aggravate the lack of profitability of the partner’s point of sale should, as far as possible, be banned.
Actions to be taken
First of all, you have to act quickly. The network coordinator must contact the partner to understand the reasons for this payment incident.
It may be an administrative incident such as a problem with the bank (unless it is the third « problem » in a month), a negligence of the accountant, his absence, a computer bug, a bad organization, the loss of the invoice, or simply an oversight on the part of the partner, who is probably more concerned with the collection of his own invoices than the payment of the franchisor’s. In short, an unpaid invoice with no ulterior motive and the matter will be settled in two days.
It can also be a question of a one-time cash flow problem: an investment supported without a bank loan, a tax deadline that was not sufficiently anticipated, a dispute with a service provider or a late payment from one of its own customers. The network coordinator must then suggest that the partner get in touch with the financial department in order to :
- agree on a new payment schedule by signing a moratorium,
- work on monitoring his cash flow using management tools capable of preventing these tensions,
- get in touch with its chartered accountant in order to manage the activity in the short and medium term.
It can also be a case of non-payment linked to a real malaise. In this case, it is up to the network manager to find a solution with his partner.
If the payment incident is indeed the result of a claim, the collection actions will have to be carried out at a crescendo pace. At his level, the Network Manager will probably be overwhelmed by the scope of the conflict and may not have the means to appease the partner’s annoyance. He must refer the matter to the network manager, who will arrange a physical meeting, preferably at the company’s headquarters. At the same time, the finance department will initiate collection actions.
The pressure of the administrative departments can help the network management teams to manage the arm wrestling that is imposed on them. Everyone has a defined role. The facilitator recreates a complicity with his partner by advising him, for example, to hand over an initial settlement in exchange for his intervention to slow down the litigation procedure. The network management acts with an iron fist in a velvet glove. It listens to grievances and provides answers, but must remain firm about the methods used by its partner to make itself heard.