Using Shared Services Arrangements To Manage Costs During and After Covid-19
As Covid-19 continues to disrupt franchised businesses and affect the global economy, franchisors and franchisees should consider shared services arrangements to spread costs, create efficiencies, and leverage knowledge and expertise across brands. In shared services arrangements, an entity provides generally the same type of services to more than one brand operated by a franchisor and its affiliates; the same applies to franchisees and their affiliates. Examples of shared services for brands include human resources, legal, finance, real estate, IT, training, and sales and marketing.
Anecdotal evidence suggests that shared services arrangements are highly beneficial to franchisors and franchisees alike. In the current economic climate, shared services arrangements may help brands cut costs and remain financially viable. Franchisors and franchisees that implement shared services arrangements now to counteract the present impact of Covid-19 will likely continue to realize the benefits of shared services arrangements long after the Covid-19 pandemic is over. However, there are some risks to consider. The overarching concern in shared services arrangements is to prevent unfair advantage to one brand at the expense of another brand. Here are some critical factors to consider in creating a shared services platform.
Disclosure of shared services arrangement
A franchisor should disclose the shared services arrangement to its franchisees, especially where costs for the services may be passed on directly to the franchisees. Disclosing this information will foster transparency and may avoid legal claims alleging breach of the implied covenant of good faith and fair dealing or tortious interference with contractual relations, based on a franchisee’s objections to the shared services arrangement.
A franchisor would disclose the existence of shared services arrangements in one or more items of its FDD. In Item 1, the franchisor may alert its franchisees that certain services will be provided by an affiliate or by personnel or departments that also service the franchisor’s other brands, especially where such brands offer competitive services. If the affiliate will sell goods or services directly to the franchisee, such affiliate must be disclosed in Item 1. If the franchisees are required to directly use the shared services, disclosure of the arrangement will commonly occur in discussion of fees in Item 5 and Item 6. In fact, such disclosure is required if the franchisee will pay the affiliate directly or if payment is made to the franchisor for the benefit of the affiliate.
For example, a franchisor may use the real estate services of an affiliate designated as an “approved supplier” by the franchisor to assist franchisees with site selection, lease negotiation, and construction. Item 8 should address affiliates that are designated or approved suppliers or suppliers of goods or services that must meet the franchisor’s standards or specifications. Item 11 may discuss shared services in the context of the franchisor’s obligations to the franchisee, particularly if the entity providing shared services will provide those services directly to the franchisee on behalf of the franchisor. For example, if a franchisor conducts franchisee training for multiple brands on a shared services basis, the third party that conducts the training would be described in Item 11.
It is also advisable for the franchise agreement to require the franchisee to acknowledge and agree to the franchisor’s right to delegate a third party to perform services for or on behalf of the franchisor. The franchise agreement may also require the franchisee to acknowledge and agree that shared services may be performed for competitive businesses within the same territory. The franchisor may reserve the right to allocate costs, personnel, and other resources across its brands.
Safekeeping of confidential information
There should be no transmission of a franchisor’s confidential information to a related franchisor for its advantage. Armed with non-public information about a competitor, the brand could have an unfair advantage at the expense of its related franchisor.
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