Before the SARS-CoV-2 (COVID-19) pandemic,1 the last global disease outbreak was the H1N1 influenza (swine flu) pandemic of 2009, which spread from Mexico and the United States to other parts of the world in just two months.2 Although yielding a relatively low death toll and economic impact, the unprecedented global rate at which the swine flu spread was a harbinger of the risk a more virulent disease could pose in the future with the continued globalization of the world’s economies and populations. Just eleven years later, the world was suddenly confronted with that risk in the form of the novel coronavirus. The United States and other countries have struggled to contain the COVID-19 virus since February 2020. The health, economic and social impacts of the pandemic have been significant during that time, including over five million reported deaths worldwide, overwhelmed healthcare systems, supply chain disruptions, mandatory business and school closures, travel restrictions, and postponement or cancellation of large, public gatherings and events (e.g., the 2020 Summer Olympics in Tokyo). Indeed, with more than 48.7 million people infected and over 781,000 deaths,3 the total estimated economic cost (direct and indirect) of the COVID-19 pandemic to the United States alone will exceed $16.1 trillion.4 It is impossible to predict what the next pandemic will be or when it will occur, but the factors believed to contribute to the occurrence and spread of novel infectious diseases like the 2009 swine flu and COVID-19 (i.e., over-population, animal husbandry, human encroachment on wildlife habitats, global trade and travel, and climate change) continue to exist and will likely be exacerbated with time. So, even as the world begins to emerge from the current pandemic, experts caution that the next pandemic could already be on its way.5 This article reflects on the lessons learned over the past year and a half and what steps franchise businesses can take now to prepare their systems for the next pandemic (or other major market disruptor).
II. Key Strategies for Successfully Navigating a Pandemic
The COVID-19 pandemic exposed critical weaknesses—if not outright failures—in the existing infrastructure, plans, and preparedness of many franchise systems. Franchisors and franchisees alike were forced to scramble and employ ad hoc approaches to address the impacts of the pandemic as those impacts arose. Some worked, but many did not. Below are four key takeaways from strategies that helped businesses to successfully navigate and, in some cases, thrive during the COVID-19 pandemic.6
A. Regularly Perform a 360 Degree Assessment of the Business and Develop a Crisis Management Plan
The common refrain that “knowledge is power” is particularly true when it comes to operating a successful business. Knowledge gives business owners the power to identify their company’s strengths and weaknesses and plan and act accordingly. In 2020, employment in the franchise sector declined by 11.2%, nearly 20,000 establishments were forced to close their doors, economic output decreased by 14.9%, and gross domestic product (GDP) declined by 5.7%.7 Mandatory shutdowns, customer capacity limits, and decreased sales were evident factors behind the industry’s 2020 performance. Perhaps less obvious and confounding factors were that some executive teams did not know how to quickly stabilize their companies, how to reduce their risk and liabilities, where to focus their limited reserves, or how to adapt their business models to meet the changed demands and needs of their customers and employees. Positioning a business to successfully navigate the next pandemic or market disruptor starts with knowing it at a micro level. This means leadership must perform a critical analysis of the industry and its cycle(s), the market conditions that are best and worst for the business and customers, the company’s market position, and the company’s financial health and situation. It also means taking a hard look at where the business is most vulnerable (e.g., supply chains, technology, labor, and/or production), the basic resources the business needs in order to operate, and, on the flip side, the things the business can forgo, if necessary, without significantly and irreversibly impacting its operations. A comprehensive analysis, like the one contemplated here, likely requires input from various employees or internal departments. Therefore, businesses should consider establishing an internal task force that consists of members from key or critical areas of the organization, such as operations, marketing/communications, legal, and accounting.8 The task force should plan to meet regularly to review and update the state of the business because markets are not static and elements of the task force’s initial assessment will necessarily require updates to account for shifts in market dynamics. In addition, the task force should create (and update as necessary) a crisis management plan identifying different possible crisis scenarios and their potential impacts, the core response team (and point person(s) of that team), and actionable steps for each scenario. Businesses should be mindful of any third-party assistance that may be needed to aid in the execution of their crisis management plan. For example, during the COVID-19 pandemic, the co-author’s company, Certified Restoration Drycleaning Network, LLC (CRDN), worked with employment groups to ensure their human resource policies complied with the constantly evolving COVID regulations, and it employed government lobbyists to help protect the system’s interests, including seeking to have franchisees’ restoration services designated as an “essential business.”
B. Establish and Maintain a Strong Relationship with a Financial Lending Institution
Business leaders generally agree that maintaining sufficient liquidity is critical to a business during a crisis or turbulent markets because it affords the owner a higher degree of control and flexibility in managing its operations while cash flow is tight or uncertain. Liquidity can, of course, take the form of cash, cash equivalents, and accounts receivable. But liquidity can also mean having access to lines of credit and other loans, which requires having a relationship with a lending institution. The fact that many systems lacked access to sufficient capital to endure the pandemic downturn was another significant factor behind the franchise industry’s reported employment numbers and closures in 2020.9 In particular, many franchise systems did not have strong, pre-existing banking relationships, and that weakness was magnified during the federal government’s roll-out of the Paycheck Protection Program (PPP).10 Congress initially funded the PPP with $350 billion, which funds were administered by private lenders.11 Loan applications for the program were supposed to be processed and funded on a first-come, first-served basis until the allocated funds were depleted. But participating lenders, particularly the major banks that accounted for one-fifth of the PPP loans made, added their own guidelines that required PPP loan applicants to have an existing borrowing and/or core banking relationship with that institution and no line of credit with any other institution.12 So, when the initial $350 billion was officially depleted in just twenty days, many businesses who did not have strong existing banking relationships found themselves in the back of the PPP line and effectively excluded from obtaining the capital lifeline.13 And, if not for the over $285 million in additional funding subsequently allocated to the PPP by Congress, it is estimated that another 36,000 franchise businesses would have been forced to close down.14 One of the key takeaways from the COVID-19 pandemic is the importance of building cash reserves and developing and maintaining a strong relationship with a lending institution to ensure that one’s business has potential access to the capital needed to help it navigate and survive the next pandemic or market disruptor.
C. Create a System Support Plan in Collaboration with the Franchise Network
Franchisors are not only responsible for preparing their own businesses, but also for providing guidance, support, and resources to their franchisees to ensure that they are likewise prepared for the practical realities of a pandemic or other market disruptor. As franchisors found during the COVID-19 pandemic, effectively assisting franchisees to traverse the seemingly infinite variables of a pandemic had the simultaneous effect of strengthening their systems and bolstering their brand reputation and recognition through demonstrated resilience.
1. Communication Strategy
Having a good communication strategy is critical. Franchisees justifiably became uneasy and overwhelmed and looked to franchisors for help with the constantly evolving information that they received during the COVID-19 pandemic (including significant topics affecting businesses’ ability and obligations required to operate, infection updates and statistics, financial resources available, legal regulations and guidelines). Thus, franchisors quickly learned the importance of creating a thorough communication strategy to ensure that they provided accurate information, resources, and guidance to their franchisees to help support their teams’ well-being and business operations. Moreover, franchisors learned that, as the voice of the system, if they were silent, misinformation and resentment for a lack of leadership often quickly filled the void, or worse, resulted in actions not representative of the franchisor’s brand or culture. A robust communication plan entails frequent contact in multiple formats (e.g., updates posted to company intranets, town halls, emails, and video messages), with content catered to the appropriate audience(s)—franchisees, customers, or corporate employees.15 It also includes sharing and discussing with franchisees relevant customer and employee-facing collateral, signage, handouts, and other printable resources in advance of posting. To that end, franchisors should engage their franchise systems16 (and any advisory councils) and provide a platform, such as an intranet/portal or surveys, to ask questions and share best practices and experiences. It is no surprise that franchisors reported that some of the best suggestions and feedback that they received during the COVID-19 pandemic came from their franchisees because of variations in regulation and impact among different states and localities.17 So facilitating the sharing of information among similarly situated franchisees can prove invaluable during such times. Further, franchisors can showcase positive franchisee experiences and successful initiatives to help fuel system morale and camaraderie.
2. “Best Practices” Plan
Franchisors should develop and share a “best practices” plan to help franchisees mitigate pandemic-related vulnerabilities (i.e., operational disruptions, reduced customer demand, risk of reputational damage, and diminished workforce) and respond to changing demands during a pandemic, while maintaining and stretching resources. As part of any “best practice” plan, franchisees, like franchisors, should perform 360 degree business assessments, which include a review of their financial health and, importantly, their current and future access to cash, as discussed earlier. Franchisors should encourage franchisees to prepare and regularly update their financials and other key business metrics to enable them to assess their ability to absorb additional expenses or revenue decreases that could occur during a crisis. For example, the COVID-19 pandemic required businesses to incur the expense of obtaining personal protective equipment (PPE) for employees and implementing certain social distancing and cleaning protocols. Maintaining updated financials and other business metrics will also position franchisees to quickly apply for funds and assistance offered from governmental, industry, or other organizations (such as PPP loans awarded during the COVID-19 pandemic). Given that business financial reviews can be overwhelming and downright frightening, franchisors may consider compiling and sharing with existing franchisees sample worksheets and other financial resources. Along those lines, a well-constructed “best practices” plan should incorporate methods for protecting and creating flexibility with financial resources. The ideal approaches may vary by system, but consider things such as pre-emptively seeking lease concessions (e.g., rent abatement or deferral, or prepayment savings), negotiating amendments to supplier/vendor contracts that have performance or purchase requirements, and centralizing or consolidating locations and/or production facilities. A comprehensive “best practices” plan should also include workforce considerations. Employment issues wreaked havoc on businesses during the COVID-19 pandemic. For instance, as the pandemic surged, employers had to make reductions in their workforce and/or furlough workers, and limit or cease day-to-day operations due to mandatory stay-at-home orders, while simultaneously scrambling to outfit, regulate, and manage remote workforces and cybersecurity issues, and keep abreast of and digest legislative developments. Then, upon reopening, employers were forced to address workplace fears of disease contraction (and now vaccine hesitancy), implement detailed reopening emergency response plans requiring significant oversight, provide PPE, and instigate internal processes and controls to prevent the spread of disease.18 The impact of the foregoing issues were reflected not only in the 11.2% decline in employment in the franchise sector, but also in the current difficulties facing employers across many industries in trying to bring back or find new workers.19 Keeping in mind that it typically costs far less to keep existing employees than to find new ones,20 it is important to offer strategies targeted toward employee hiring and retention. Again, the right strategies (or combination thereof) will vary by system. A few of those that proved successful for franchise systems during the height of the COVID-19 pandemic included (1) limiting hours of operation as a means to reduce operational costs; (2) limiting hours worked by each employee to keep as many employees working as possible; (3) organizing shared labor arrangements with neigh-boring franchisees to keep employees working full-time; and (4) preemptively aligning with temporary staffing agencies and/or securing a reserve of contracted labor. Additionally, many franchisees, often with franchisor encouragement, implemented incentive programs to attract returning staff and/or new hires. For example, various Taco Bell and Chipotle locations have promoted increased benefits for their general managers (including four weeks paid vacation and eight weeks paid maternity leave),21 Fazoli’s has increased its minimum wage by eight percent,22 and some New York City restaurants have offered $300 signing bonuses to waitstaff.23 McDonald’s has also launched a robust worker compensation program, co-funded by McDonald’s and its franchisees, which includes increased wages (up to ten percent), paid time-off, tuition assistance, and a piloted emergency childcare program.24 Beyond wages, a competitive incentive program can create appealing work environments by incorporating benefits such as implementing flexible remote or in-person schedules; taking actions to develop and define corporate and social purpose (appealing to the current societal demands for corporate responsibility); enhancing onsite perks such as snacks, drinks, and recreational areas; fostering team building with additional in-person or remote activities (e.g., hosting virtual game shows or team outings); and seeking feedback directly from staff to identify incentives and polices to foster a positive, inclusive culture and increased morale. As a final “best practice,” franchisors should also remind franchisees to comply with evolving federal, state, and local guidelines throughout any pandemic. Although it remains the franchisee’s obligation to fully research and adhere to the applicable laws,25 franchisors should—without going beyond the limits of what may risk joint employer liability—consider pro-viding aid in the form of template and/or sample policies (e.g., reopening/return to work policies and employee handbooks) and communications (e.g., employee/internal and customer/external communications), as well as pro-viding statewide or local research and/or resources with respect to key pandemic-related regulations.
3. Franchisor Assistance Programs
Franchisors need to determine what they can do directly to lessen the financial and operational burdens on franchisees in the next pandemic and are wise to preemptively establish uniform programs for possible incentives, con-cessions, or waivers. They should consider providing reasonable royalty or other fee concessions (such as discounts, forbearance, postponement, or forgiveness), relaxing or extending franchise opening obligations (such as locating and opening new stores or facilities, branding/rebranding, and securing pre-commencement licenses or permits and insurance), and offering extensions or reductions to ongoing and/or outstanding operational requirements like development schedules or remodeling. Franchisors should also leverage their purchasing power and resources in any way possible, including negotiating system-wide discounts (or favored pricing) and other contractual term adjustments and/or concessions from system vendors and suppliers. In a similar supportive vein, if franchise locations are forced to close—temporarily or permanently—due to another pandemic, franchisors may want to consider waiving franchise agreement terms or suspending strict enforcement of term compliance. With a temporary closure, a franchisor may, for example, agree to a limited period in which to waive the obligation to operate the business full-time and any correlative performance requirements. And with permanent closures, franchisors may consider reducing or waiving future expected fees and/or termination fees or providing limited refunds on initial franchise fees for unopened locations. The practical reality is that locations brought to the brink of closure by disaster are less likely to survive and contribute to the system long-term. A franchisor’s ability to collect fees in such instances is apt to be significantly reduced, and insisting on full compliance may force franchisees into bankruptcy. Moreover, franchisors may find franchisee-sympathetic courts that are reluctant to further inhibit franchised business operations during a pandemic, thus making it less likely that contractual obligations will be fully enforced or that full damages will be awarded, and making it more advantageous to pre-establish closure and/or termination parameters. Regardless of the assistance program features established, franchisors must define clear program terms and conditions—including parameters such as the covered dates/periods, minimum and/or maximum amounts of concessions, eligibility, and documentation requirements—and clearly communicate those terms and conditions upfront with its system to encourage program awareness and utilization. Internally, franchisors will need to implement methods to track program usage and status of participants—such as those nearing concession term expirations, repayment status for any financial assistance, number of closures, and any related waivers. Franchisor also will need to create methods and systems to evaluate, in real time, the effectiveness and particulars of the program. Uniform treatment of franchisees participating in any such programs is a must; provided, however, that a franchisor may determine one or more groups or classes of franchisees are disparately affected by the pandemic and provide additional or differing terms for such groups or classes, so long as this option is explained and substantiated.26 Finally, franchisors should be mindful that certain actions may not be suitable during a life- and business-threatening pandemic. Certainly, for most systems, it is not the time to implement expensive system standard modifications, name or brand changes, or initiate compliance efforts that will further strain already limited resources. Effectively constructing a pandemic relief program should serve as another opportunity for franchisors to illustrate the value and strength of their franchise systems through the provision of thoughtful and significant aid otherwise unavailable to independent mom-and-pop businesses.
D. “BOLO” for Opportunities
“In the midst of chaos, there is also opportunity.”27 A pandemic can present certain options or possibilities that were not previously available in a nor-mal market. Franchisors and franchisees alike should “be on the lookout” for those opportunities.
1. Operational Cost Savings
The cost of debt is typically lower during a significant market downturn,28 so a pandemic may be a great time to investigate securing financing. In addition, significant market disruptions or slowdowns will (or should) cause most businesses to take a hard look at their current expenses and budget strategies, and, as a result, creditors are likely to take proactive steps to shore up their cash flow. For instance, some commercial landlords offered substantial concessions, such as rent reduction, temporary abatement of parking fees, and waiver of certain lease costs, to lessees who were willing to prepay their rent and/or renew or extend their leases. And, in a similar vein, rather than risk wholesale defaults, credit card companies offered relief to customers in the form of lowered or deferred monthly payments, waiver of late fees, and reduced interest rates.29 Identifying and taking advantage of these cost- saving opportunities will not only help reduce a business’s total expenses during a volatile time, but also can help a business secure favorable terms for the future when times get better.
2. Remodels/Unit Updates
During the height of the COVID-19 pandemic, “non-essential businesses” were subject to indefinite, mandatory shutdowns (in some instances, more than once) under state or local government emergency orders. But construction, which was deemed to be an “essential business” in many states,30 was largely able to continue. This combination of events (along with the decreased cost of debt) presented hotels and restaurants a perfect opportunity to make necessary renovations and capital improvements without the typical concern of the impact of such work on operations and customers.
3. Restructure/Consolidate/Adapt Franchise Model
The handcuffing effects of a global crisis should open franchisors’ eyes to the need for system flexibility and encourage reconsideration of their models and structures at large. Nimble systems able to diversify their services and lines of business and adapt to an altered consumer environment can limit their vulnerabilities and the overall effect of financial crises. For example, during the COVID-19 pandemic, many fast casual businesses added or grew drive-through and delivery services when in-room dining was not possible, grocery stores offered curbside pickup and home delivery, and many retail stores added curbside pickup as well.31 Restoration and cleaning companies also expanded offerings to encompass disinfecting and sanitization products and services, touting adherence to CDC and other health organization protocol.32 Similarly, drycleaners promoted their clothing and household item cleaning services as sufficient to kill infection, and, although most drycleaners lost retail store customers in droves, many added pickup and delivery drycleaning and laundry services and/or prominently marketed such services as “contact-free” to help offset their losses.33 Successful business model pivots will transcend a pandemic by aligning with long-term trends merely intensified—but not necessarily caused—by a pandemic, become an extension of a company’s existing capabilities and ultimately may prove profitable.34 Production of components of PPE and/or disinfecting products may prove lucrative in a health crisis, but incorporating technological advancement into products or services may prove more viable in the long-run. To that point, in addition to full-blown restructuring, franchisors should review their models and processes for pandemic-propelled improvements and efficiencies. There was no greater driver of efficiency on display during the pandemic than technology. Technology effectively made work during the pandemic possible for nonessential office workforces reliant upon video conferencing platforms such as Zoom, Cisco Webex, MicrosoftTeams, and GoToWebinar. And many companies are incorporating their newfound appreciation for such platforms into post-pandemic standard operating procedures by, for instance, transitioning at least portions of their previously on-site staff to permanent remote positions and allowing flexible hybrid remote/in-person schedules (which has the added bonus of attracting a much larger talent pool).35 Virtual meeting technology can also be used to provide greater and more flexible franchisee interaction and support. For example, by offering some or all training virtually, franchisors can considerably increase the frequency and size of classes offered, virtually eliminate travel time, reduce scheduling conflicts, and remove food, lodging, and travel expenses for participants, all while providing additional training fee revenue and allowing the brand’s products/services to get to market faster. In addition, franchisors can also keep precise records of class content and attendees, as well circulate portions or whole class recordings with the trainees for reference/refresher purposes, by recording training sessions. That said, franchisors will have to balance this convenience and cost savings against the quality of training. Beyond training, remote meeting platforms can serve as temporary or permanent replacements for large-scale system meetings like regional meetings or conventions. Franchisors might also consider offering dual virtual and in-person meeting options to increase attendance. Further, the simple two-way screen sharing of most meeting technology (or even Facetime) can also reduce expensive in-field visits/assistance by allowing virtual face-to-face interaction for check-ins, troubleshooting, and training follow-up. Similarly, franchisors and franchisees alike can implement meeting technology or Facetime to assist in sales efforts, as it is customary (and often preferred) now to forgo donuts or lunch and connect virtually. This choice can greatly increase the volume and frequency of sales opportunities. A myriad of other technological improvements should be considered as well, knowing consumer demand for convenience and speed of service/delivery are not going anywhere. For example, software applications (apps) are one popular technology used to transact business quickly and efficiently while providing customers with more information related to their orders, such as instant order confirmation, status updates, chat functions, and feed-back/review opportunities. Any software available that can improve operational efficiencies, such as shipping and invoicing, should also be evaluated. In addition, when developing new or modified models or products and services, franchisors should consider ideas and input from franchisees and advisory councils, who serve on the front lines. It is likely that some franchisees have experimented (authorized or otherwise) with the products, services, or processes that a franchisor seeks to implement. Additionally, as with any system upgrades, it is important to be mindful of both the financial implications of any restructuring plan and the timing of implementation thereof (i.e., current market conditions, duration of the plan rollout, and sys-tem lifecycle).
4. Business Acquisition Considerations/Readiness
The strongest and the most adaptable franchise systems generally performed better than others during the COVID-19 pandemic (e.g., business services, commercial and residential services, real estate, and retail food, products, and services performed well).36 But those franchisors receptive to acquisitions or divestitures in the wake of the crisis were also able to fare well. Indeed, although the overall rate of acquisitions initially slowed significantly during the COVID-19 pandemic, momentum reportedly picked up,37 and the franchise industry continues to contribute noteworthy transac-tions,38 with some placing a premium on systems that successfully weathered the pandemic.39 Private equity firms and other strategic buyers have also employed multiple creative deal structures, including asset acquisitions, share sales, accelerated auctions, and Chapter 11/Section 363 sales, providing opportunities for resilient and thriving franchise models, as well as those hard hit by the COVID-19 pandemic.40 A distressed market may bring exceptional opportunities (and historically low interest rates for buyers),41 but not without marked risk. The underlying data of a franchise transaction, including everything from unit metrics to revenue, may be affected by a pandemic (e.g., potentially skewed year-over-year sales data, uncharacteristically high turnover/closure and default rates, inflated compliance issues, etc.). In turn, the ability to accurately portray a franchise system’s health, forecast future growth and sustainability, and calculate and arrive at a valuation is also affected. Similarly, and aside from accelerated and/or fire sales, deals may take longer due to considerations such as prolonged due diligence periods and quality of earnings closings, lender caution, and the sheer uncertainty of the times.42 Further still, deals in this environment may be more likely to fuel post-closing disputes. Looking ahead, as indicated earlier, companies should prepare and maintain financial documentation and secure solid banking relationships (with an emphasis on documenting historical data and information related to pandemic- time performance that lenders and buyers will undoubtedly scrutinize) to position themselves to take advantage of any and all opportunities. If a prospective deal does present itself, franchisors should be prepared to address the additional risks and considerations associated with mergers and acquisition transactions in a distressed market.
The COVID-19 pandemic gave business leaders an intensive course in crisis management and navigating a public health emergency. While some franchise businesses did not pass, others were able to do more than just survive. Seeing as scientists predict that the next pandemic may be just around the corner, it is important to examine the strategies that proved most successful during the current pandemic. There are four key steps that franchise systems can take now to help pre-pare for the next pandemic. One, form a task force to regularly conduct a full and in-depth assessment of the business and create a crisis management plan. Two, prioritize building cash reserves and establishing and maintaining a strong relationship with a financial lending institution to ensure that the business has access (or potential access) to capital during a market disruption or downturn. Three, create a system support plan with the franchise net-work, which includes a communications strategy, best practices guide, and potential franchisee-assistance programs. And four, be on the lookout for and position the business to take advantage of opportunities that may not have previously been available, such as operational cost savings, remodels, and unit upgrades, restructuring or adapting the franchise model, and business sales or acquisitions. Those businesses that generally fared the best during the COVID-19 pandemic were the ones that were prepared both financially and operation-ally to adapt to the needs and demands of the changed market and were able to take advantage of new rules and opportunities that are likely here to stay—at least until the next pandemic (or other market disruptor) changes things again.