By Michael G. Charapp
Charapp & Weiss LLP
Always respond to critical letters from franchisors
We have regularly written about the need for dealers to give attention to communications from franchisors critical of dealer performance. Franchisors contend they send such communications strictly to help dealers to take steps to improve their performance. Sometimes that may be true. However, sometimes franchisor communications are a prelude to losing benefits to which a dealer is entitled or even to set up a dealer for termination of its franchise.
It is hard to know the agenda of a franchisor sending a critical letter. Therefore, all critical communications should be taken seriously. Investigate the bases for the claims of the franchisor. Determine why the claims are incorrect or poorly supported. Answer each criticism.
Below is a checklist of issues to consider when preparing a response to a franchisor’s critical communication. This checklist is not all inclusive. It does not answer every question. However, it is a starting point to put together a response that may one day be critical for you in protecting against losing benefits and even protecting your ability to continue to do business as a franchisee.
What is the Criticism? Respond to each.
Sales efficiency?
CSI?
Capitalization?
Other?
Sales Efficiency
Is your franchisor’s measurement consistent with your dealer sales and service agreement?
Is your franchisor’s performance measurement consistent with your state’s law?
How statistically valid is your franchisor’s performance measurement?
- Is the assigned primary market area correct? If you are responsible for geographic areas where you do not have an advantage, that will negatively affect your calculation.
- Is the comparison basis valid – is statewide, regionwide or other comparison basis equivalent to your PMA?
- Does the measurement standard take into account your special circumstances – geographic obstacles, demographic factors, vehicle choice differences, vehicle brand preferences, etc.
- Are there commuting or other travel factors from areas in your PMA that make the PMA disadvantageous?
- Are there temporary factors – construction, natural disaster, etc. – that make areas of your PMA disadvantageous.
Availability of vehicles – you cannot sell what you do not have. Has your franchisor made available sufficient vehicles for you to meet objectives?
Types of vehicles -- has your franchisor made available “hot” models and equipment or has the availability been skewed to your disadvantage?
Does your state law require the franchisor to provide the measurement calculation if requested? Have you requested it?
CCSI
Are there statistical deficiencies in the franchisor’s calculations?
- Are the questions valid?
- Do the questions make your dealership responsible for manufacturer deficiencies?
- Are there sufficient numbers of responses to make the survey statistically sound?
- Is there a franchisor process to obtain sufficient responses?
- Do any narratives suggest that negative responses are affected by manufacturer deficiencies?
Has the franchisor made the underlying data available to you? If not, is it available on request?
Do the franchisor’s measured results differ materially from your internal measurement results?
Capitalization
Does the franchisor contend that your dealership does not meet capitalization standards?
Have you done your own calculations using the franchisor’s method to determine the validity of the franchisor’s position?
Can you recategorize assets/liabilities on your statement delivered to your franchisor to positively affect the calculation?
If recategorization is not sufficient, what funds can be invested to solve the issue?
Other Criticisms
What are the specific criticisms made?
Are the criticisms proper issues under your DSSA, e.g. are you being held to a standard not included there?
Are the criticisms proper issues under your state’s law, e.g. is there a demand for facility improvements despite state law protection?
What is your position with respect to each other criticism?