Hey Culligan Man!:
Culligan's franchise agreement could become a model for other businesses.
Culligan is one of the most recognizable names in U.S. business, identifying the leader in water treatment since 1936. But now, after a seven-year ordeal involving negotiations, litigation and buy-outs, the independent Culligan dealers in North America have something else to brag about -- a new legal milestone and unprecedented business relationship with their parent franchise corporation, Culligan International Company. The Culligan dealers now own a stake in the parent company, and possess what can be described as, "The Best Damn Franchise Agreement Out There - Period." The final settlement included a $10.5 million payment to the dealers, and an option for dealers to buy an additional $10 million of stock on the same terms granted to Culligan International's senior management. But the road to get there has been long, and often arduous.
Culligan dealers are a unique group of business people. Most are second and third generation dealers, who trace their business roots back to partnerships and / or original franchises with the company's founder, Emmett Culligan. However, as oft happens in the corporate world, Culligan International Company was victimized by a plethora of buy-outs, mergers and take-overs - fourteen such transactions in the last 20 years, to be exact. Despite changing ownership and "revolving door" management teams at the parent company, the Culligan name, system, reputation, and market share remained intact. This is due largely to the steadfast Culligan men and women who have diligently served their communities for seventy years. The dealers' commitment to their communities and customers is matched only by their commitment to each other. This commitment never became more apparent than during the last seven years through their support of the Culligan Dealers' Association of North America ("CDANA").
The last spin in the corporate blender in 1998 found Culligan International being purchased by U.S. Filter Company, which then sold months later to the French conglomerate, Vivendi. Culligan International tried to introduce a new form of franchise agreement. That agreement would have eliminated renewal rights, price and territory protections, the ability to transfer franchises to kids or key employees and generally devalued the businesses that dealers, and their families, had built for multiple generations. Just as bad from the dealers' perspective, Culligan's new owners took a much more liberal interpretation of their franchise rights and obligations in the agreements that were already in place and the manner in which dealers had been operating for many years. In response, CDANA appointed a six-member "Franchise Negotiation Team:" John Packard (Minneapolis, MN), C.R. Hall (Wichita, KS), Henry Strait (Beaumont, TX), Mike Hebert (Salinas, CA), Dennis Rupert (Hillsdale, MI) and Buzz Cooksey (Youngstown, OH). In turn, the Team hired Pete Singler, a NorthernCalifornia lawyer who represents businesses, particularly franchisees and trade associations, across the country.
Singler had a three-tiered strategy: 1) Exert enough pressure to stop Culligan/US Filter from imposing the proposed franchise that would strip dealers of basically all of the rights they historically enjoyed, and devalue their businesses; 2) Propose alternatives to better align interests and serve as a "win-win" platform for both the dealers and Culligan International; 3) Continually communicate with, and increase, the unity of the CDANA group so they could maximize their influence and effectiveness in the negotiations. For the next four years, CDANA attempted to negotiate terms for a new franchise agreement with Culligan. "This was probably the most frustrating thing I ever experienced," notes Henry Strait who owns a single Culligan Dealership in Beaumont, Texas, which he took over from his father: "We thought we had a deal, would write up notes, shake hands with the President and Vice President of the Company, and then weeks later, get a document back from their lawyers that looked nothing like the agreement we thought we had." Singler explained that the root of the problems stemmed from the company and its dealers seemingly heading in two different directions. The previous agreements only allowed for royalties on a few select areas of the dealers' business. For the most part, Culligan's revenues were based on the sales of equipment. Dealers, on the other hand, derived a majority of revenues from rental and service contracts. The factory did not share in any of these revenues, and did little to support the mainstay of the dealers' businesses.
CDANA and Culligan management remained at an impasse. Frustrations built on both sides of the table. Culligan International dubbed the Franchise Team, "the CDANA Six," an allusion to the infamous anti-establishment group of the '60s - The "Chicago Seven." CDANA ultimately filed a lawsuit, asking a court to intervene and interpret current franchise rights and remedies.
Meanwhile, Vivendi had embarked on an ill-fated venture away from its core business of water and environmental services, into entertainment and mass media. A few years (and fourteen billion dollars in debt and multiple indictments for Vivendi's top officers) later, Culligan International Company was again on the auction block. This time around, CDANA and its over 400 dealer members, were not going to sit on the sidelines.
"Because of the long history dealers shared and the multiple sales of the company, the support for CDANA was incredible," Singler comments. "Never before did I have such a supportive and tight knit group with which to work. They were so strong, I believed we could actually step up and be a potential bidder for the Company when it came on the market again."
Given Vivendi's problems, wholesale divestitures were inevitable. Singler called a meeting of CDANA's Board and several key dealers from around the country. After acouple of hours, they agreed to form a company to independently pursue a purchase of, or partnership to buy, Culligan. One of the reasons - Singler agreed to do it for free. He asked only that the dealers reimburse his travel expenses -- and if the dealers ended up owning some or all of Culligan's equity, that they pay him whatever they thought was fair. Why did he do it? "Over the previous four-plus years, I had become friends with the dealers (and Singler comments he does not use that term lightly). I had faith in them and knew they would see this thing through. I also had faith that they would take care of me if I came through for them."
Singler is a University of Pennsylvania Law School graduate, and also attended classes at the Wharton school, where he developed a number of friendships and contacts that came in very handy. He began contacting Private Equity funds and investment bankers to explain the dealers' situation, concerns, and the investment potential if a better relationship could be forged. In the last 14 times the company had been purchased, no buyer ever contacted a dealer to find out what they knew and/or thought about the company and its potential. This was despite the fact that the dealers represented approximately $1 billion in annual revenues, while Culligan International only generated about $650 million. The dealers were, on the whole, bigger, more profitable, had increasing sales and better operations. Singler was committed to making sure they were not taken for granted or treated as an afterthought for a fifteenth time.
"I contacted all of the potential suitors I could identify, and explained what the dealers believed was a good fit and formula for success. At the same time, I contacted a number of financial sponsors who would have provided financing for dealers to purchase the company directly if were let into the bidding process. I was going to New York so often, the flight attendants on United Flight 1 recognized me when I boarded the plane." The dealers and their sponsors tried every angle, but were never allowed to bid for Culligan. " In fact," Singler says, "Culligan and their Wall Street advisors barred any potential bidders from talking to us after the bidding began, under threat of being dropped from the process . . .We were even threatened with lawsuits by the investment bank handling the sale -- All we ever did was tell the truth, and explain the dealers' legitimate business concerns and desires." However, unbeknownst to Vivendi, Singler had extensive meetings with all of the bidders (save one) even before Culligan went on the market. When it got down to final bidding time, the bidders insisted on talking directly with the dealer group - a far cry from how previous sales went.
Ultimately, the dealers were never allowed to bid, and this probably cost Vivendi $200- $300 million, Singler estimates. The dealers' backers and investment group were prepared to pay in the $800 million range. The ultimate buyer, Clayton, Dubilier & Rice ("CD&R"), a leading New York private equity firm, paid only $610 million for the company.
However, Singler and 20 key dealers had met with the CD&R people extensively before the sale process began and before final bids were submitted. These talks influencedCD&R's view of the company, its value, and the potential benefits of aligning interests with the dealers.
After the sale was concluded, several negotiation meetings were held to try and put the dealers and Culligan International on the same track. These reached impasse over several critical areas. "Things got so strained," Singler explains, "that more than 400 dealers were making preparations to exit the system and start their own brand. I had never before advised any group to do anything like this as none of them had either the resources, or the determination, to pull it off. However, the Culligan dealers had both." The strained relationship had little to do with CD&R's attitude towards the dealers and the system, and more to do with the years of tensions that had built up with previous ownership and management teams. Luckily for all, representatives of CD&R and CDANA agreed to hold one final set of talks.
At a defining moment in the talks, John Packard, one of the leading Culligan dealers and spokesman for CDANA, looked across the table at CD&R's principals and said: "You have a decision to make - you can either own the #1 water treatment company in the world, or not agree to what we have proposed, and own the #2 water treatment company in the world, behind the one we will start." Given the cumulative revenues of the independent dealers and the plans that had already been put into play, this was no idle threat.
Cooler heads prevailed that afternoon, and both sides began outlining a relationship that more clearly aligned economic interests, supported dealers in ways that had been absent for many years, and encouraged growth and investment into the system. The new arrangement converted the franchise to a gross revenue royalty structure, where dealers pay 2% of all of their revenues from all sources. In exchange for this, Culligan agreed to lower equipment prices across the board, restructure its product policies to allow more flexibility and competitive pricing for dealers, and to cap price increases on products it made and sold to dealers.
This basic structure was designed to be "revenue neutral" meaning Culligan and its dealers, in the aggregate, would be in the same economic position after the change was implemented, as they were before. The real benefits would be realized in the future from a renewed and strengthened relationship and better alignment of economic interests. Dealers have faith in the new arrangement as well -- over 90 percent have already signed the new form of agreement.
In addition to the basic economic structure, Culligan paid a $10.5 million cash and stock bonus to dealers in the aggregate, and allowed dealers to purchase an additional $10 million in stock at the same equity price that CD&R bought the company ($10/share). All told, this further aligns interests, and the dealers will cumulatively own just under 10% of Culligan's stock.
"The economic structure, and ability to change an entire system over in mid stream, is unprecedented in the world of franchising," Singler notes. However, the agreement did not stop there. Substantial changes were made to the franchise agreement which extend the initial term to 20 years, allow transfers to family members, partners and key employees, place strict controls on price increases and limits Culligan's ability to dictate the products used by dealers, and improve other critical areas which are often problematic in franchise agreements. Most important, Singler comments, is the function of the "Dealer Advisory Council." Culligan cannot make major changes to the system without consulting with, and in many critical areas obtaining the consent of, the Dealer Advisory Council (made up of 16 dealers elected by their fellow franchisees). "I think this is the example of perfect franchise agreement. There are enough teeth in it for both sides, forcing both the franchisor and its franchisees to work together to find proactive and cooperative ways to deal with challenges and opportunities that face the system." This agreement is truly groundbreaking and unprecedented. "We believe that it will be extremely successful and allow Culligan to get back on track and retain its dominance in the water treatment industry for many years. We also think it will serve as a model for other systems," notes Packard.
When asked, "how did you pull this off," Singler says: "It was a team effort. I may have been the coach, but never could have done it without the incredible sacrifice and dedication of the six dealers who comprised the 'Franchise Team.' Ultimately, we could not have done it unless we had the total faith and trust of the over 400 members of CDANA."
Henry Strait, past CDANA President and Franchise Team Member is apt to give Singler a little more credit: "The best move we made was hiring Pete. He had the right mix of legal knowledge and business acumen, along with an uncanny ability to predict the franchisor's next move time after time. It was almost as if we held an unfair advantage. His people skills and ability to communicate with the 500 independent dealers on a personal basis was crucial. Through his honesty and integrity that was demonstrated over the 7-year ordeal, he was able to earn the trust of our entire association."
Regardless of who gets or shares the ultimate credit, Don Karger, CDANA's current President, describes the result as, "Remarkable. -- the Team and Pete saved the Culligan system, increased the value of our businesses and allowed for the next generation of Culligan Men and Women to proudly serve their communities." This sentiment is shared by other dealers, who also believe the new agreement encourages further investment in the Culligan System. As multi-dealership owner CR Hall notes: "This new agreement removes the concerns and risks I have had over the last several years, and I will be aggressively pursuing acquisitions and reinvesting in my current dealerships. As I also own a sizeable amount of Culligan stock, I share in the overall success of the parent company and think this new agreement is a win-win for everyone involved."
In February, The Franchise Team and Pete Singler were honored at the CDANA Annual Convention in San Francisco. The over 750 people present, including independent Culligan dealers, Culligan International's senior management, vendors and sponsors brought Singler and the Team on stage amidst a standing ovation. Each was presented with a matching Rolex watch, with a quote from Thomas Jefferson engraved on the back: "In matters of principle, stand like a rock." Singler (who normally does not wear a watch) says: "I'll wear this one - not for what it is, but because of who gave it to me and what it represents - a bunch of great people who I was privileged to help."
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