Saving for a Rainy Day: What To Set Aside in Your Budget for the Unexpected

Every franchisor is going to have unexpected expenses come up from time to time. Whether it be legal disputes with franchisees or a public relations crisis, it is important that a brand is prepared for these expenses and makes a plan for what costs may occur. The best way for a franchise to withstand unforeseen expenses is to be in a solid financial state with an emergency fund in the bank and a high credit rating. To help prepare, here are some best practices every franchisor should keep in mind when creating a budget. 

Always Be Prepared For a Crisis

Brands can’t deal with a crisis on the fly—that’s a recipe for disaster. Crisis management and budgeting may be one of the most important skills to learn and understand for a brand and franchise system. Once a PR plan is put in place, test it out and have crisis drills to see how it holds up and tweak your budget accordingly. 

As the former in-house counsel to Nutrisystem 20 years ago, Nancy Lanard, a Senior Partner at Lanard and Associates, P.C., got to see firsthand how expensive a PR crisis can become. 

“In the early 1990s, Nutrisystem was involved in a huge, national PR crisis after a customer claimed that the product caused gallbladder disease,” said Lanard. “The story ended up spreading all over the country and resulted in over 500 lawsuits. We were on the national news every single night for weeks and the company had to hire outside PR counsel as well as a medical director just to handle interviews and television appearances.” 

While not every PR crisis is going to be massive, it can’t hurt to plan for a major disaster. Have a crisis PR agency among your contacts, and build in the budget to hire one for when a crisis rears its head. “Crisis PR is a specialized skill and it doesn’t come cheap,” said Lanard. “Find the best crisis agency that fits your needs and budget for it.”

Plan For Consumer Litigation

While a litigation budget can never be set in stone as each case will have its own complexities or difficulties, it is important to plan for the worst. 

In Lanard’s case, Nutrisystem ended up having to hire counsel for 500 lawsuits, including a separate paralegal just to go through and manage the mail. “Each of the 500 lawsuits had pleadings involved all over the country,” she said. “None of the in-house attornies were litigators and we had one large firm in the Midwest that handled oversight nationally. When a company has lawsuits all over the country, they often have to hire local counsel, which gets very expensive.”

According to Lanard, the costs of the entire experience were astronomical. “No company can afford to litigate 500 lawsuits,” she said. “Nutrisystem was already financially weak, mainly due to the owners taking out substantial quarterly dividends that left no funds in reserve. In the end, Nutrisystem went into bankruptcy, resulting in massive layoffs. At the time, the brand was one of the biggest weight loss companies in the world, with over 13,000 locations nationwide.”

Don’t Forget About Franchisee Litigation

In franchising, where the relationship and obligations of a franchisor and its franchisees rest upon the terms of the franchise agreement, it’s inevitable that disagreements will arise. Despite the best efforts of the franchisor to resolve a franchisee dispute without resorting to legal action, there are instances where litigation may be necessary.

In the 1980s, another contentious battle was taking place for Nutrisystem. A large number of franchisees felt gouged by the price of the food they were obliged to buy from the franchisor. The franchisees formed a federation that sought compromise, eventually resulting in a lawsuit filed against Nutrisystem that counted 280 of the 550 franchised centers as litigants in the antitrust suit.

While brands should be doing everything they can to avoid franchisee legal disputes like this, sometimes these costs can be unavoidable. “Legal fees for a particular case are mainly a combination of two variables: the hourly lawyer rate and the number of hours worked,” said Lanard. “While this may seem simple, estimating the total amount for legal fees for litigation is a complex and challenging task.”

No business can predict the future, but it can never hurt to be prepared. “In today’s world, you never know what expense is going to come up next,” said Lanard. “Through my experience, I’ve seen how important it is to expect the unexpected when it comes to a franchisor’s budget."