Thursday, November 16, 2006

Culligan's New Franchise Agreement Reflects "True Partnership"

This posting was written by Peter Reap, editor of CCH Business Franchise Guide.

The new franchise agreement between Culligan International and its water-treatment franchisees could become a model for other franchise systems, according to an article by Richard Gibson in the November 13 issue of The Wall Street Journal. The new agreement features shared commitments, responsibilities, and rewards, a departure from many franchise agreements designed to give the franchisor firm control over the business, Mr. Gibson reports.

Under the revised terms, franchisees who previously had little clout – something common in many franchise systems – now must be consulted on critical changes to the brand and hold some veto power. In addition, the new agreements grant the franchisees exclusive territories, caps on wholesale costs, the right to select a qualified successor, and longer franchise terms of 20 years, among other changes.

The new agreement was negotiated after the private equity firm Clayton, Dubilier & Rice purchased the franchisor in 2004. According to the franchisees, the firm said it was prepared to consider a significantly revised agreement. The goal was to align interests and remove troublesome issues that had strained franchisee relationships with the previous owners. However, the initial draft submitted by the firm contained few of the franchisee’s suggestions.

The franchisee association of approximately 650 members called an emergency meeting in May 2005, during which the franchisees made a fateful decision, Mr. Gibson observes. If they could not persuade their new franchisor to make significant concessions, they would leave the franchise system en masse and found a rival water treatment company of their own. “When they realized we weren’t bluffing, they snapped around pretty fast,” says one of the franchisees involved in the negotiations.

Within a few days, both sides returned to the bargaining table, and “things got ironed out.” The resulting new agreement “reflects more of a true partnership, with shared decision-making, mutually supportive financial goals and, perhaps most importantly, mutual respect,” according to Mr. Gibson. Among the significant points:

-- The franchisor collects a royalty payment on every dollar of franchisee revenue. Previously, the company made money only on equipment sales.

-- The duration of the agreement is 20 years, twice the length of previous agreements.

-- Franchisees have a right to renew their agreements on then-current terms.

-- Franchises are required to be consulted on major changes to the business. They previously had almost no say in such matters.

-- Prices on current equipment are reduced and future equipment prices are capped.

- Except in connection with certain promotions, the franchisor will not advertise suggested retail prices without dealer approval.

-- Franchisees are now paid for all warranty work and receive a royalty on sales by the franchisor to large retailers.

-- The franchisor may no longer examine franchisees’ customer lists.

-- Franchisees are now granted exclusive territories for residential business.

-- Franchisees can now select a successor to their businesses, with the franchisor having no right of first refusal.

-- Franchisees are entitled to purchase as much as 10% of the franchisor’s privately held stock.

Susan P. Kezios, president of the American Franchisee Association, praised the agreement as “definitely a step in the right direction, on a number of levels.” One of them is that the franchisor has no right of first refusal on transferred franchises, she commented. Extending the duration of the agreements to 20 years has the similar effect of encouraging new franchisees looking for long-term investments, she noted. The full text of Mr. Gibson’s article appears on page R11 of the Monday, November, 13, 2006, Wall Street Journal.

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