Approximately one third of all franchise systems in the U.S. are service franchises. Services franchises can offer business services (e.g. insurance, printing), services related to residential and commercial real estate and fixtures (e.g. landscaping, plumbing), or personal and consumer services (e.g. education, health care). As with all goods-focused franchise systems, the franchisee territory is often a  primary source of disputes between franchisees and franchisors. Service franchises, however, often contain a unique, territory-related feature: national account programs.

Service franchise systems use national account programs to serve customers who need consumer services across territories and often from multiple franchisees. The franchisor usually markets and negotiates such accounts, and it typically manages the relationship with the customer. The franchisor also can bill the national account customer on behalf of the franchisees and allocate revenues respectively.

National accounts can be a boon to a service franchise system in the form of additional and reliable revenue for franchisees and by creating association with other national brands. Service franchise agreements should thus anticipate national accounts and address certain issues that will arise. For instance, franchisors might consider obligating their franchisees to service national account customers, but could also impose limits on the amount of revenue any franchisee generates from such national accounts. The former term guarantees the customer will be serviced, and the latter reduces risk of franchise failure where there is too much reliance on one stream of revenue.

A good franchise agreement will also contemplate how national accounts can be generated. Though it will typically be the franchisor’s role (or even obligation) to market and develop national accounts, they can also come from franchisees. A franchisee will probably be territorial about its relationship with a national account customer it introduced to the franchise, and it may contest the franchisor’s management of the relationship. The sourcing franchisee could even rebrand and take the customer with it, at least within a territory, if the relationship becomes strong enough, such as when the majority of the franchisee’s revenue comes from that customer.

Franchisee sourced national accounts may also cause intra-system strife where a franchisee in a different territory bristles at servicing the original-source franchisee’s chief customer at a lower cost point, as national accounts will often be at a lower price point due to the large volume. Anticipating the unwillingness or inability of some franchisees to service certain national accounts, the franchisor could reserve a right to let outside franchisees service a national account customer in a territory where the host franchisee will not or cannot.

Franchisor sourced national accounts can also create tension. As explained above, the lower price point may not offset the value of an additional revenue stream for some franchisees. Conversely, some franchisees may gripe if they miss out on a national account due to their location.

On the whole, national accounts are a valuable, perhaps vital, aspect of service franchise systems, but franchisors should take special care in their franchise agreements to anticipate the potential pitfalls.

The IFA Legal Symposium occurred May 7-9, 2019 in Washington, D.C. Several attorneys attended this event and took away numerous tips. This post is one of a series of posts reporting from this event and summarizing details from the sessions. This post is based on the session entitled “Service Brands – You’re Not Selling Burgers” by Presenters: Grayson Brown (Neighborly), Kerry L. Bundy (Faegre Baker Daniels LLP), Ken Hutcheson (U.S. Lawns), Robert D. Rose (Dale Carnegie & Associates, Inc.)