Franchisee Recruitment – Legal Considerations
Franchisee Recruitment – Legal Considerations This is a short list of dos and don’ts – things that an experienced franchisor takes for granted but which, if not followed, are commonly at the root of many disputes. It is not exhaustive, and it may surprise some franchisors.
Although some franchisors are keen on psychometric testing I am still surprised that many do not even carry out basic credit checks on franchisees. Checks through one of the two big agencies can cost up to £150, but it can reveal a bad credit risk which may stop a franchisor wasting a lot of time on someone who will probably struggle to get bank funding. And remember – the new age and sex discrimination legislation largely applies to employment and partnership relationships, but not to franchising (yet). And consider requesting a medical history – if it turns out the franchisee has for example, an undeclared alcohol problem then it will be easier to deal with them under the “misrepresentations” provisions in the franchise agreement.
Do get a properly drafted confidentiality agreement signed BEFORE the first face to face meeting. These are not always enforceable but I believe do act as a deterrent to time wasters and competitors who might be tempted to find out more about you.
Even though BFA members will feel to compelled to comply with the BFA guidelines on deducting costs only if a deposit has to be returned, it is sensible that if you are incurring increasing costs (e.g. site finding in particular) you should keep the franchisee abreast of these as you go along so there are no surprises. It might stop time wasting; you could even consider subcontracting put such activities out to a third party, so that the full cost is deductible.
There are several areas here where there is a potential for misrepresentation. The obvious area is earnings claims (which is big enough to merit a separate article) but also by over promising or misleading. E.g. “Since 2000 we have been …” written by a franchisor company that was incorporated in 2005. These may appear to be minor, but an aggrieved franchisee can make a lot of them.
Just because your agreement complies with the BFA Code of Ethics won’t in itself make it a good agreement from the point of view of being able to enforce standards against your network. So make sure that it actually reflects how you run your business NOW – most experienced franchisors will review their franchise agreements at least every couple of years. I also strongly believe it ought to be a selling tool, or at least not hinder recruitment – I have known franchisors use 80 page franchise agreements so complex the franchisor needed to pay the draftsman every time there was a query.
Often overlooked as boring, but becoming increasingly important, as illustrated by the franchise case that recently went as far as the Court of Appeal. As a minimum, both you AND each of your franchisees will almost certainly need to notify with the Information Commissioners Office why and how your businesses use, share and store customer employee and supplier data. Failure to notify can lead to fines, and make your franchise agreement difficult to enforce in one important set of circumstances.
The above is meant to be a brief, but practical, guide. Most franchisors would get 5/10, but experience suggests that there is a direct correlation between those with higher marks and those with lower dispute costs.
