When Valuation Eats Values for Breakfast: The CRO’s Dilemma

This story continues from where my earlier article titled “When Valuation Eats Values for Breakfast: A True Story” had left. That story ended with the wrongful termination of an Indian Unicorn’s Franchisee, in which the Founder-CEO and the highly deceptive Chief Revenue Officer (CRO) played key roles. This story is written in the belief that there could be good people who become part of unethical decisions due to professional and personal compulsions. What if the CRO was, in reality, an ethical person, and was forced by circumstances to play a part in the conspiracy. This article is a fictional account of what could have happened on that fateful day of the Franchisee’s termination. What would you have done if you were the CRO?

It was around 6 pm on Friday. The Chief Revenue Officer (CRO) was in the back seat of his car with his trusted driver of 12 years behind the wheel. The driver was still getting used to the new Jaguar F-pace wading carefully through the Delhi traffic. The CRO was looking forward to the weekend. Not that there was much to speak of for weekends after he joined the Unicorn. Being in an omnichannel retail business, weekends were when almost half of the business happened. And the senior management would constantly be buzzed for various interventions – some important, but mostly menial. More so, in a young and vibrant set-up such as the Unicorn which was growing at a pace that the CRO was not used to handing in the past. He missed the relative peace of being the Managing Director of a well-oiled CPG MNC. This was also his second stint in a Franchise business. His first break as a CEO had been about 16 years ago with a globally well-known apparel retail brand. He had been much younger then, and thrived in the work-pressure. He does not seem to have the energy any more.

These thoughts were going on in his mind when his phone rang. He dreaded yet another crisis. It was a franchisee calling. It was the same franchisee who he had spoken with a few weeks before, promising to resolve the issues she was facing. He had promised to get back to her with an action plan to resolve her issues based on inputs from the regional team. She had been following up regularly over messages. Only the previous day he had replied to her promising that he will send his plans by today. He had spoken to the regional team about preparing the plans, but he knew there would have been no progress. Everybody was busy managing too much stuff. There was no time to sit back and resolve individual franchisee issues. But this franchisee’s issues had to be solved, as she was the last cog in the wheel for moving to the new business model that the Unicorn was implementing. The company had succeeded in pushing through the new business model, and a heavily one-sided contract to all existing franchisees. Except her. She was refusing to sign the new contract citing various issues. Her concerns were genuine, and they had to be addressed. “But she can wait”, he thought “I don’t want to spoil my Friday evening to try and resolve this issue. She can wait till next week.” He decides not to pick up the call.

The WhatsApp buzzes. It’s a message from the Franchisee.

“Hi. We have been served a termination notice even while our discussions were on. I guess its with your knowledge.”

The CRO was puzzled. There must be some mistake. He decides to call the regional manager.

“Hi Rags… how are you doing?” He hated the culture of having short names for everyone. He hated his own short name.

“All well Sir. How about you.” Rags was one of few youngsters who addressed the CRO “Sir”. He appreciated the deference.

“Good. Good.” Enough pleasantries. He went straight to the point. “Remember we had spoken about the Franchisee who was not signing the new contract. I had asked you to come back to me with a plan to resolve her issues. What happened?”

“I did not complete that Sir. PB told me not to work on it.”

PB was the young, firebrand founder-CEO of the company.

“When was this?” the CRO asked.

“Just a couple of days back. He had called me. He told me to send the AM to the store and send out an email putting down a list of problems with the store… the standard list. He told me we are sending a termination notice. I thought you knew.”

The CRO knew what the “standard list” was. That’s a list of minor deviations – sometimes even half-truths that cannot be proven or denied – that is pointed out to a Franchisee to hold payments or to threaten termination. It always helps reign in difficult franchisees. Must be a ploy to force them to sign the new Agreement, he thought. And PB is intelligent - he would never put such instructions on email.

But he was not aware of the instruction from PB. No point in letting Rags know that he was not aware.

“Oh ok… you have done that?” he asked.

“Yes. Yesterday.”

“Ok good.”

But the CRO had made a promise to the Franchisee. And he had made them wait for weeks promising them a solution. He felt personally responsible. He had to find out from PB if anything changed in the interim. “Good evening PB. Can we have a quick call” he messaged. PB calls him back immediately.

“Hey Chats… Whassup?” He continued without pausing for a reply. “I have told you many times you don’t have to be formal here… just pick up the phone and call me. It will just save us all time.”

“Chats” - an abbreviated form of his surname - was the short name he hated. It was mentioned as a joke by PB in the very first leadership meeting after he joined, and it stuck. There was no going back now.

“Yes I know… just old habits, and it was Friday evening… anyway, the reason I called was that I got a message from that Chennai Franchisee saying that she has been served a termination notice. What’s the plan? I presume we wish to force them to sign the new contract and move to the new model?”

“Oh that… Forgot to tell you. I had written to her, hadn’t I that we will take over her store if she does not agree to the new terms. She didn’t, so the termination notice is for real. The plan is to take over the store. I don’t want her to continue in the system.”

The CRO was not expecting this. Using threats of termination is usual in franchise business to get “rogue” franchisees in line. He was convinced that the franchisee in question was not one of them.

“But PB, I was in discussions with her.” He tried to reason. “She had raised some genuine issues. she has been running the store for almost four years with losses, and to me it seems like we are to blame because we opened our own stores near hers. I have also confirmed with Rags that the Franchisee was affected by our aggressive marketing in the area to drive our own store sales. And then she has issues of receivables that we have not solved for years. I had promised to get back to her with a revival plan, and she was waiting for it. This will make us look very bad.”

“Oh come on Chats… since when have you started thinking of franchisee welfare and what they think of us? You have run a franchising business earlier. These franchisees are idiots, and they are greedy. They will do anything to make money. She has the audacity to ask me for Rs. 75 lakhs for her store! She was trying to fleece us. In fact, you played along really well to hold their attention while we planned the termination.” This was exactly what the CRO was worried about. The circumstances make him look like the key conspirator.

“But PB, I think in her case it was genuine. And from what I understand from the call, she has investments and accumulated losses adding up to Rs. 75 lakhs. I have spoken to the Regional team, and given their location and past sales it is possible they have invested so much. That was her reason for seeking that amount. She seems to have put all her family’s savings into this. Plus, even if you consider the fact that the store is doing Rs. 90 lakhs sales per annum, it is not an unfair valuation. After all, our company is valued at 12X turnover….”

“Chats… Chats… Chats…” PB interrupted. He did not sound very pleased. “Let us not talk about franchisee valuation. They only make profits if there is good business. They don’t get “valuation”. I have done all the hard work for the 12X valuation, not them. And as far as their savings are concerned, we cannot be sympathetic. If the business had done well, they would also have benefitted. It’s a risk they took with their money.”

The CRO was amused also at how PB always claimed to have done things all by himself even though he had three co-founders, only one of whom being active in the business. Even in their presence, PB would always be in the “I” mode, and the co-founders would never object. They were too meek to have a voice. They probably also did not want to take on any major responsibilities. It is true PB was taking most of it on himself. He probably deserves the credit. And as for the franchisees - they were the ones who backed PB when the brand was virtually unknown. Even till a year before the company became a unicorn, 85% of the company’s turnover was coming through the franchisee network. It is okay not to give them credit, but to treat them this way did not seem fair to the CRO. This was being thankless.

“But PB, I was speaking to them. I would have gotten them to sign the contract. Or if their asking price was the problem, we could have negotiated with them. I am sure they had kept cushion to negotiate.”

“Chats… we are in a hurry here… we don’t have time for all discussions and conversion… we have not reached where we are through consensus building… and anyway, I don’t want someone like them in the system who needs convincing on all our decisions. We are running against time here. We don’t have time for franchisee consensus building. Once they are in the system, they just follow what we say. Period.

“And as far as buying out the franchise is concerned, this is the best way to do it” he continued, “… as per the contract they will have to sell us the franchise at a depreciated value. We will get the location at a throwaway price… I will get them at Rs. 15 lakhs max… how else do you think we built our 200+ own stores at such a low Capex… it has really helped us in improving our valuations. This is part of our strategy.. it has been very successful, we are just continuing with it... we may have some franchisees falling by the wayside… that’s part of the game.”

He was witnessing a “bait and switch” strategy in action in the franchising business. The affected franchisee’s concerns with the new model were genuine. The CRO was aware of how the other franchisees who objected were arm-twisted to sign the contract with threats of termination. But this franchisee had not relented, and for good reason. The CRO never thought the company would actually try to carry out the threat of take-over. He was sure the franchisee also didn’t. He did not think it was right to use the termination clause to forcefully take over the store at a low price. He had made a personal commitment to the Franchisee, and felt very responsible.

“But PB…” he tried to reason “… this was our last franchise on the old system… we could have been generous… We just got a Rs. 1200 Cr. funding… how much difference would it have made to us anyway. We know we could have turned around the store and made it profitable. The problems were actually caused by us in this case.”

“You don’t understand Chats… if we relent on this one, others will follow. We have succeeded so far only by being tight-fisted and hard on the franchisees. You may not be aware of this, but two years back when we had a franchisee uprising and threat of store shutter-down. We picked the leaders and terminated them. They got no support from other franchisees. That put the rest of them in place. They have nowhere to go with the high investments made. We just cannot be seen as lenient. Also, our whole own-store business is built on this model where we acquire well-run franchisees at depreciated value. We cannot create precedence for higher valuation here.”

“But PB… what if they go the legal route?”

‘Ha ha… I thought you have enough grey hair to know that will never happen. In a day you will see them come down on their knees and asking us to take the store at whatever value we offer. Our agreement is pretty tight. Do you think this franchisee in South India will come all the way to Delhi to fight this case? We will have them on the clause of jurisdiction itself. And they don’t have any option but to sell us the store now, as our contract term does not allow them to be in the same business for a year. It’s a well-scripted story, Chats… don’t worry.”

He had enough grey hair to know which situations are best avoided. But this was not the time to educate the young haughty founder.

“What if they do PB… we don’t have a legal basis to terminate them for not signing the new contract… and the amount is not small for them… they claim that it is all of their life savings... And this Franchisee is quite educated, and seem to be determined. None of the other franchisees pushed back as hard as she did in this ”

“I'm not a fool, Chats” PB interrupted him “…we have of course not cited the new contract as the reason. There are points related to store maintenance and KRA adherence that have been listed as the reason in the notice. And we have made adequate communication trail for it, including a mail sent out by the AM to the franchisee yesterday”

Now it was becoming clear to the CRO what Rags had told him.

“But are these breaches real? Can we prove them?” The CRO was hoping to be able to justify to himself that the Franchisee was in-fact not following company procedures correctly, and hence should be terminated.

“It doesn’t matter, Chats. We have decided to take them out, and this is how we do it. Our contract is also sufficiently vague about breaches to make them look like deviations. If at all there is a case, we will see how it is going and then decide.”

The CRO was feeling very uncomfortable about the whole thing. The Franchisee had trusted him to find a solution. He tried to get another chance.

“Let me try and talk to them, PB. Give me a few days to resolve it. By the time the termination is effective, I will come up with a solution”

“What do you mean ‘by the time’. It's effective today… immediately…why do you think we chose Friday evening for the notice? So that they don’t have any legal recourse. By the time courts open Monday, the termination is already effective and there will be no going back. They cannot even get an interim injunction.”

“But isn’t there a clause giving them 15 days for carrying out remedies…” The CRO had not gone through their Franchisee Agreement in detail, but had enough experience to know that there would be such a clause.

“Yes, but I am sure by the time they find a lawyer who can tell them about it, it will be too late. And even if they raise it, we don’t agree…”

The CRO was surprised. He indeed has used termination notices in the past. But he has always given the franchisee an opportunity to correct themselves. The period of remedy is there just for this reason. After having made heavy investments, to terminate a franchisee without honoring the period of remedy is unethical. In Western countries, this can lead to heavy penalties and loss of reputation. The MNC guidelines he previously followed would never have allowed this. He was aware that companies get away with such things in India.

“I don’t think the court will accept that PB, if it comes to a litigation.” He tried to reason.

“It doesn’t matter Chats… that will be many months from now… we will tire them out by then. Haven’t you seen that despite so many franchisee takeovers and terminations we haven’t had a single verdict against us? They eventually always back-off. I know how to handle it Chats… you just focus on business…”

“But let me at least speak to them once…”

“Stay away from this Chats… its already a legal matter now. Anything you do can act against our interest. We will let the legal team handle it now. Legal is already saying that my email threatening them with store take-over could work against us. I am regretting doing that in a fit of anger that day. We don’t want anything else to crop up now. Now let's discuss some important things….”

PB went on for another 15 minutes with a lot of ideas and instructions to be worked on over the weekend. The CRO kept listening, his mind half-occupied by the Franchisee situation.

After the call, the CRO was reflecting on the whole situation. All this made business sense since it reduces Capex. Perhaps they will also get away with it legally. But this was taking a very short-term view of the business. This was the kind of situation he never let happen in his last two stints as MD. He can understand being tough on franchisees in general. But to arm-twist with the intention of financial gains for the company did not go well with his personal ethos. He had always lived by high ethical standards all his career. The Franchisees who were with him in the apparel business he headed over 10 years back still swear by his support and fairness. And now this.

The thought of resigning came to his mind, as he has many times thought in the past few months. He was brought into the company by the investors to take over as CEO from PB, who was more than 20 younger than him. It has been more than six months now, and there is no more action on that. They got a round of investments and became a unicorn after he joined. He was aware that his profile probably helped them get the valuation too. But PB doesn’t seem to be in any hurry to step down, and the investors are also silent about it now. In a way, he was also a victim here. And if the CRO were to be true to himself, he also was not sure he was the right fit for this fast-paced, young organization.

And then there were so many ethical issues he was seeing around. Franchisees on the whole were being exploited. Unilateral margin deductions were being made. There were many complaints of unauthorized deductions from margins and shortfalls in credit notes, and he has come to know that it is systematic and deliberate, and been going on for years. The company has not paid rent for its Head Office for almost two years now. Vendor payments are being held back citing frivolous deviations. There have been threats of litigation by many. Many employee settlements were not given. Understood that there are cash pressures in a high-growth environment like theirs, but these practices are not acceptable in any situation. He was also not sure he would be able to resolve many of these past issues even if PB allows him to take over as CEO.

He wanted to get out, but he could not. At 54, he was pretty much in the last phase of his career. It was this or nothing. There would not be another role for him outside if he quit this job. Not that he has not saved enough for a decent life, but no harm having the coffers fill up while he can. Truth be told, the money is good at the Unicorn. The ESOP value at the end of three years will be substantial, and he will have to hold on to the job till then. Hopefully, things will become better soon. Hopefully, he will be able to take the reins soon and correct some of the wrongs. Meanwhile, he has to survive. He decided to swallow the bitter pill and carry on with life, at least for three years till he is able to cash out. Hopefully, in the end, all this will be worth it.

“Babu, can you pick up my usual from the wine store on the way. I will need a drink today.” he told his driver.

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P.S. About a year after this incident, the CRO finally left the Unicorn. What he thought would be "the journey of a lifetime" lasted only 18 months. In the interim period, he had changed his title to “Management Intern”. He never got confirmed as CEO.

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Santosh Sreedhar is a Partner with Avalon Consulting, a leading Asia-focused Strategy and Management Consulting firm. He can be reached on [email protected]

Views are personal.