Strategies for Brand Protection During Retraction
By Al DeNapoli Partner, Tarlow Breed Hart & Rodgers, P.C. | October 28, 2008
Concerns And Strategies To Protect Your Core Concept When Growth Slow Down And Retraction Is Necessary.
As the hospitality industry continues to grow, many companies - private and public - are contemplating further expansion. During the exuberance of growth, many successful businesses (those in the hospitality industry being no exception) fail to consider how the commitments they are making today that may restrict them in a cooler market. It is as important to implement sound business and legal plans - hedging if you will - in good times as it is in bad ones.
The adage to "be careful how you treat people on the way up because you will see them on the way down," is very applicable to your legal documentation starting from your very first deals. Often the terms in these documents, although seeming benign initially, can limit the control you have to steer your business through the challenges of slow growth or retraction. Worse, the parties with whom you have done business may have rights that they may want to pursue to your detriment.
The handling of reversals for formerly successful hospitality businesses (as in other industries) starts with a critical evaluation of the commitments made during the exuberance of expansion. Loan documents, leases, franchising and/or management agreements, supplier agreements, employment agreements, and shareholder agreements, to mention the most common, need to be inventoried and evaluated. You need identify and understand the terms such as default and cure provisions, termination clauses, liquidated damage and/or penalty terms, and even non-compete commitments. All of these may limit your options.
This evaluation must include not just written agreements, but also the unwritten "commitments" that field personnel may have created (the proverbial handshake deals that may have been made in the sales process). Importantly, there may be unwritten "warranties" or other obligations which came with the commitments in place (including the obligation of good faith and fair dealing that comes with every contract). You need to know that the labels you may have used to refer to your agreements may not be the ones the law uses - for example, licenses can easily cross the line into "franchises" if there has been too much control in the licensor (and classification as a franchise can dramatically change the parties' rights). Also, you need to differentiate binding agreements (which can be oral) from non-binding "brand" commitments which may have to be modified.
In short, your road map through this adjustment is not just in the fine print - you may have certain associated obligations that need to be considered to avoid costly litigation. In a changing market, difficult compromises on brand-related commitments may have to be made.