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In 2004, 7-Eleven Inc. offered its entire U.S. franchise network a new franchise agreement. More than 96 percent of the franchisees representing its 3400 franchised stores signed the new agreement. The plans, process and activities that were a part of this endeavor and the experiences developing and implementing this new agreement offer insight to both franchisors and franchisees when planning systemwide changes and/or new franchise agreements. This article outlines how the process was organized and initiated. The author also provides his recommendations based upon 7-Eleven’s experience in introducing a system-wide new agreement. 7-ELEVEN’S FRANCHISE OFFERING 7-Eleven franchises and operates its well-known 7-ELEVEN� convenience stores in the United States and Canada. It also has area franchisees that operate and/or subfranchise more than 22,000 licensed 7-Eleven convenience stores in the United States and 16 countries and U.S. territories. The company’s domestic franchise offering is a single-unit convenience store that operates under a somewhat different franchise agreement than most franchises. The principal differences between the more traditional bricks-and-mortar franchises and 7-Eleven include: 1) a royalty based upon the gross profits of the business (sales less cost of goods), set at 50 percent of the gross profits in the new agreement; 2) 7-Eleven owns or leases the land, building and equipment, and leases or subleases all of it to the franchisee under the franchise agreement; 3) 7-Eleven provides a complete bookkeeping service to the franchisee, including bill paying, payroll and financial statement preparation; 4) the company provides complete operational financing through an open account it carries for each franchisee; and 5) the company provides each franchisee with contractual indemnification against losses typically covered by business and liability insurance in an amount up to $500,000. There are a few other minor differences from a more traditional model. 7-Eleven’s franchise provides an infrastructure that includes a proprietary point of sale system, known as the Store Information System. The system provides the franchisee with sales and purchase information that enables it to use 7-Eleven’s Retailer Initiative to align inventory to customer needs. The system incorporates information from sales, weather, forecasting and other factors. Other operating principles generally include a centralized distribution system that delivers fresh products to the stores each day, leveraging 7-Eleven’s collective size to drive down cost of goods, and team merchandising through which 7-Eleven co-develops new products that are introduced weekly to the stores. While 7-Eleven’s offering has unique features and the company is a large franchisor, the steps taken and issues raised and solved in this process can nevertheless provide guidance to others when planning the introduction of a new systemwide franchise agreement. GENESIS OF A NEW FRANCHISE AGREEMENT In the 1990s the company began considering the need for a significantly changed franchise agreement. This arose principally because the 7-Eleven Business Concept that had been refined over the last several years was showing significant success (several consecutive years of franchisee-reported net profit increases), and the company sought a more direct relationship between its Business Concept and the requirements in the franchise agreement. Also, the company sought to leverage its size to reduce costs, which necessitated consolidating franchisee and company purchases. At the time, 7-Eleven had 18 different franchise agreements, and this, too, drove the desire for a single agreement. Obviously, administration of different agreements adds complexity to a franchise system and can create confusion among franchisees and company staff. Finally, changes in laws and legal precedents and economic, demographic and societal changes make it important for a franchisor to periodically alter its franchise agreement. As franchisors grow and develop, many new issues tend to crop up, so considering a systemwide new franchise agreement is something most franchisors should periodically do. 7-Eleven had been periodically reviewing its agreement, as many franchisors do, and would make changes as appropriate. However, those changes only applied to future franchisees, and the changed agreements were not offered to existing franchisees. The company had conducted major revisions of the franchise agreement in 1977 and 1986. Because of the factors mentioned above and the timing of a planned offering of a new franchise agreement under a settlement around the end of 2004 (see below), 7-Eleven saw this effort as a significant opportunity to fully update and upgrade its franchise agreement. A more formal need for a new franchise agreement came out of a settlement of a franchisee lawsuit originally filed in 1993. After settlement talks were initiated by the plaintiff franchisees, the lawsuit was settled in 1997, and the trial court accepted the settlement. Approximately 98.5 percent of the franchisees in the suit opted in to the settlement, which had a new agreement element in it. However, due to an appeal from two of the franchisees’ former attorneys over legal fees and a couple of other points, the Settlement was not declared final until April 2001. At that time, the California Supreme Court denied review of an appeals court decision affirming the trial court’s approval of the settlement. So, although the company had been considering developing a new franchise agreement for a number of years, the effort really did not get underway formally until 2001. As a part of that settlement, 7-Eleven agreed to extend any expiring agreements until Dec. 31, 2004, unless further extended, to coincide with the approximate date a new agreement was due under the settlement. That meant that there would be a large number of franchisees with the same expiration date. Although the company only had to offer the new agreement to franchisees that had been a part of that lawsuit, given the other actions 7-Eleven wanted to accomplish, it decided to develop a franchise agreement it could offer to its entire franchise system. The settlement established a Review Committee (composed of seven franchisees, five selected by the plaintiff franchisees in the suit and two by the company) that would review the new agreement to see that two specific requirements of the settlement were fulfilled. Those two requirements were a valuation comparison against an earlier agreement and a 10-year term. GOALS FOR THE NEW FRANCHISE AGREEMENT Certainly in undertaking the development of a new systemwide franchise agreement, goals for that agreement must be well thought out and carefully developed, with buy-in from senior management and others. It’s a time-consuming process for any group, but it is critical in guiding the work throughout the entire process. Of course, the goals must be obtainable within a company’s cost structure and practical. In the case of 7-Eleven, the company’s Task Force worked with the CEO and COO to establish goals at the beginning of the process. These included: 1) better alignment of the terms of agreement with the company’s business strategy; 2) improving the bottom-line profit of both franchisees and 7-Eleven; 3) removing points of friction between the company and franchisees; 4) improving franchisee performance of the system’s business strategies and improving control over the use of the business system by franchisees; and 5) meeting the terms of the Settlement. In addition, the company wanted to develop an agreement that would continue to attract high-quality franchisees. The goal statement was simply that the new agreement should be “Simple, Fair and of Mutual Benefit.” PROJECT MANAGEMENT A company must carefully look at who needs to be included in this type of a project, based on experience, position, and ability. The initial cross-functional task force established to manage the development and implementation of this new agreement included store operations personnel, and the group was headed up by an operations division vice president and included legal, accounting, auditing, planning, communications and franchise personnel. Three representatives of this group reported directly to and had frequent meetings with the CEO and COO and other top management personnel. Other resources were called on for specific items. The task force made periodic reports to the company’s executive committee. The board was kept advised by the CEO, as necessary. Every person on the task gorce had a regular full-time job in addition to this project; however, for three of the lead individuals this effort became somewhere between a half-time and full-time job and took up the better part of two years, as literally thousands and thousands of person-hours were devoted to the effort. The individual chosen to lead the project was selected in part because he had successfully headed up the company’s “Year 2000″ effort, a complex and detailed task to ensure that no information technology problems arose on Dec. 31, 1999. One critical initial step any new agreement development team must take is to fully understand the entire “audience.” Where a systemwide agreement is being changed and offered to existing franchisees, it has significant potential for positive or negative impact on various groups. Therefore, the task force attempted to be sure that: 1) All stakeholders were identified and the nature of their interest was understood; 2) Those stakeholders had the opportunity to provide their thoughts and respond to specific questions, if appropriate; and 3) There were communications plans for every group. OUTSIDE RESOURCES Consultants: The task force sought the expertise of two consultants. The first was a small, well-known franchise specialty consulting firm, and the second was a large accounting/auditing/consulting firm with capabilities for financial modeling and information gathering on a large scale. For the larger firm, the company used a formal request for proposal exercise and interviews with the three firms selected to submit RFPs. Quite a bit of the initial work of the task force during the first few months of the project was spent on these matters. The task force utilized consultants for: 1) valuing the current and new franchise agreements; 2) identification of tools/techniques being used by other franchise systems to redo or introduce franchise agreement changes or new agreements; 3) identification of new franchise agreement trends or provisions that could assist in image enhancement motivation of franchisees; 4) assisting in developing a communication strategy to inform the entire franchise community; and 5) developing an economic model of franchised stores that would assist in the development of a new agreement. Certainly, some of this work could be done in-house, depending on a company’s resources and circumstances. The large consulting firm ended up providing only the economic model and a valuation study. The specialist franchise consulting firm helped to develop best practices, suggested items for the overall plan, and participated in initial meetings with franchisees. About midway through the effort, the task force decided to bring in a project manager consultant to track and follow up on all of the detail and changes, as well as the plans for implementation. Outside Legal Counsel: The company retained a well-known franchise counsel to develop the initial draft and provide initial general advice on several matters. Later in the project, about midway through the drafting, the company asked outside counsel to provide an associate to assist in the drafting and tracking of changes. Early in the project, the company asked its intellectual property, antitrust and litigation counsel for suggestions about things to change in the current agreement and ran drafts by the firm as they were finalized. However, most of the legal drafting, coordinating of comments, and incorporating suggestions was handled by in-house franchise attorneys. FRANCHISEES’ INVOLVEMENT From the outset, 7-Eleven wanted an inclusive process and significant franchisee input, over and above the review that the review committee would do. Communication began with a letter from the CEO to all franchisees discussing the project, the reasons for it, the goals for the agreement, and the general process to be followed. All franchisees were encouraged to participate. If a franchisor wants existing franchisees to sign a new agreement, obtaining franchisee input is vital. Unless the franchisor is prepared to make huge concessions, obtaining and using franchisee input for changes is vital to a successful rollout. If a franchisor does not ask for franchisee involvement, franchisees will seek to provide input anyway — and such an action can become a rallying point for future disagreements. Throughout the country, 7-Eleven has approximately 25 local franchisee owners associations of varying sizes and capabilities. The company also has a national franchisee association composed of the president and one vice president of most of the local FOAs as board members. That national association, mostly through the local associations, has a large number of franchisees as members. In addition, the company had a franchisee advisory council, composed of approximately 30 elected or selected franchisees from all parts of the country, many of which were on the association’s board. The task force and senior management established a working group that consisted of several of the task force members, the chairperson, and two (later three) vice-chairpersons of the association. The company also allowed the association’s retained general counsel to be a part of the group. 7-Eleven had approximately 15 to 20 meetings with the work group over a two-year period, either personally or via video/phone. These included meetings, memos and phone conversations between counsel for the association and the company. 7-Eleven also met separately with a local FOA that was not a member of the association. The association submitted a list of at least 18 items its members were interested in changing, and during the process additional matters of interest by the association were raised. 7-Eleven wanted the project to be as inclusive and broad-based as possible, so it created two questionnaires. The first was sent to all franchisees, and then a more detailed set was given to about 220 franchisees. The first questionnaire asked for the three most valued services provided by 7-Eleven and the three services that could use the most improvement. In addition, franchisees were asked for the three things they would change in a new agreement and relationship. Other franchisees participated in focus groups that homed in on specific agreement areas (e.g., merchandising), and the task force also conducted meetings with members of the FAC to review specific issues and areas. Finally, throughout the process, franchisees contributed additional comments and suggestions. The goal was to have no real surprises when the agreement was offered to virtually all franchisees. INTERNAL COMPANY INVOLVEMENT The project began with task force meetings with senior management and the development of the goals mentioned above. Through discussions with senior management, the task force developed a list of items which were within its scope and which were off-limits. The effort to gain internal input began with a task force-drafted letter from the CEO that announced the project to virtually all exempt personnel. It set the expectation for full cooperation with the task force by all employees. Each group within the company (departments and operational units) was advised to have a lead person coordinate input, suggestions, and final drafts. Each department in the company received a memo outlining the task force’s plans and highlighting the existing franchise agreement provisions that related to the particular department. The memo included excerpts from the franchise agreement of the relevant language and specific questions applicable to the particular unit that the task force developed in earlier meetings. The department or operations unit reviewed the material and participated in a meeting (typically two to four hours) with the task force. After the unit meeting, the task force communicated the suggestions and issues back to the unit and set up another meeting to discuss final changes, and those were again communicated to the unit. Special work was done with the franchise sales personnel (who are all employees at 7-Eleven). An extended meeting was held to discuss the issues those individuals were seeing and what changes they recommended. Additional input was obtained from all field personnel by having the field consultants, who have the most direct contact with each franchisee, submit comments on suggested changes and problem areas. These suggestions were combined into reports given to the Task Force. The operational vice presidents had periodic video conferences and meetings to discuss these issues. 7-Eleven devoted accounting and planning resources to analyze the economic impact of the suggested changes on both the company and franchisees. Spreadsheets showing all suggested changes, not just the financial results, were kept and used by the task force to narrow issues. As decisions were made, they were reported to the various groups as appropriate. The task force divided the effort into four phases: 1) announcement and startup; 2) analyze and develop; 3) draft and design; and 4) finalize and implement. The second step was the longest, although implementation continues to this day, well after the agreement was introduced. In its own work, the task force took the existing agreement and studied the suggestions and recommendations made on a section-by-section basis, making decisions, confirming them with the appropriate personnel, and then obtaining senior management’s approval. The task force reported to the CEO and COO on a limited number of agreement issues at a time. That same approach was used with the various input groups, all of which was being done to resolve issues before attempting to move on to others and combining the ideas in a draft. Many companies make the mistake of drafting the document too early in the process, while a large number of issues remain. This forces the company to have to undertake many drafts and rewrites. The initial draft the company used for an extended period of time in this process was the existing franchise agreement, changed to “plain English,” a step taken to simplify the agreement. Michael R. Davis is vice president and assistant general counsel, 7-Eleven Inc. He can be contacted at [email protected]. This article is intended to provide useful information regarding the process of developing a new system-wide franchise agreement and the references to the 7-Eleven franchise are for clarity. No offer or solicitation of an offer of a franchise is made by this article. Subscribe to the Franchising & Business Law Alert.

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