Franchisor Advisory Boards – Why Every Franchisor Should Have One
Franchising is a business model which requires a franchisor to constantly be wearing two hats. Under the first hat, it retains responsibility for the development of the brand and oversight of the business economics much like it would if it continued to operate the underlying business by itself. Under the second hat, it operates all of the necessary business components for franchising – new franchisee recruitment, disclosure, site selection, brand fund, franchisee compliance, system growth, human resource management, territorial expansion, crisis management, system finance and succession.
Not surprisingly, start-up and developing franchisors do not usually possess all of the management talent they need to fulfill all of these functions in-house. As such, it is common for start-up and developing franchisors to purchase the services they require – legal, accounting, sales, marketing, real estate brokers and other consultants on a as needed basis. Similarly, the founders often remain the only formal members of the board of directors. They may be heavily reliant on organizations such as their national franchise association and other providers of continuous education for programming so they can learn general strategies and best practices. People experienced in the industry do not typically want to join nascent board of directors because of liability concerns.
It is strongly recommended that franchisors from their earliest days establish for themselves an advisory board which can provide guidance in the development, oversight and accomplishment of strategic plans.
An advisory board is a collection of industry expertise which ownership is not likely to possess itself. The franchisee principals would retain an individual to act as the Advisory Board Chair and assist the principals on the selection and recruitment of board members based on the skill sets that are not available in-house to the principals.
An advisory board is to be contrasted with a franchisee advisory council which the franchisor may also come to have. A franchisee advisory council is a committee typically made up of franchisees selected by the franchisor and franchisor management personnel who discuss issues relating to the operation of the franchise system of concern to the franchisees or for the discussion and implementation of potential changes to the system.
An advisory board should be made up of up to six individuals to ensure full membership meeting attendance is regular. The board would meet to assist the principals to establish their short, medium and long term strategic plans. They would provide advice to the principals on action plans to accomplish the strategies. They would remain available between meetings to address any particular issue that may arise in their areas of specialty. The principals remain accountable to the advisory board. The board may be used to interview key prospective members of the management team as the needs arise to hire and as resources warrant the hiring of in-house expertise.
Advisory board members do not have the same exposure to liability as do formal directors. Their appointments are generally at will. They are often paid a flat fee to attend meetings. Key in-house personnel may be asked to make appearances at or make presentations to the advisory board from time to time. The advisory board owes no legal duty to the franchisor per se; it serves only in a strategy advisory capacity to the principals. Membership expertise at the advisory board level may change from time to time as the franchisor evolves.
Advisory board members are expected to bring to the table substantial industry and franchising expertise. They are expected to take a keen interest in the overall performance of the franchisor. They are expected to have excellent contacts to be able to provide recommendations for whatever services or resources the franchisor may require in the operation of its business.
As examples, many franchisors are often in need of capital at various stages of growth. An advisory board with a strong finance representative should be able to assist in the planning for when such requirements will arise and the options and contacts for securing capital. Similarly, an advisory board can assist in the development of a crisis management plan and assist if a crisis occurs. An advisory board can plan for and assist the principals in determining potential exit scenarios or assist in identifying the need for and options for system change.
The end result is that a franchisor has access to experts that work together as a single team at every stage of development to assist the franchisor’s principals in the development of their franchise system. These individuals may not be financially invested in the franchisor but critically they can be expected to be emotionally invested in the franchisor dedicated to providing value to the achievement of franchisor success.
At Sotos LLP, our team of lawyers have significant experience in the restaurant and hospitality industry working with many franchisors from start ups to mature system having hundreds of units in Canada. We are often called upon to assist franchisors in their strategic planning including to assist in the creation and maintenance of franchisor advisory boards. The writer can be contacted at adjdick@sotosllp.com if you are interested in discussing how an advisory board can assist your business.
Allan D.J. Dick, Sotos LLP
Allan is a partner at Sotos LLP and sector leader of the firm’s Restaurants practice area. Allan is a trusted primary advisor to many top franchisors, with more than three decades practising law in the franchising, licensing and distribution industry. Allan has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner.
This article was originally published by Foodservice and Hospitality magazine in March 2021 issue.