Why disputes arise in franchise relationships
Article by Andrew Perkins
A surprising number of franchise relationships can end in dispute. Franchise Dispute Lawyer Andrew Perkins looks at why this happens and what can be done to avoid it.
The starting point is to follow the timeline of a typical franchise to see what goes wrong, when it happens and to understand why.
The early period of a franchise is easy - putting aside the commitment, effort and sheer hard work required to launch any business - as the Franchisee and Franchisors' interests are fully aligned, the relationship usually flourishes. The Franchisor is often in daily contact with the Franchisee, training its staff, providing help and guidance, steering the Franchisee through those tricky first months. The Franchisee is motivated and excited by the prospect of launching the new business venture. It's perception is that it is receiving a great amount of attention from the Franchisor and is receiving value for money for it's initial investment (the Franchise Premium) and its ongoing charges (the Management Services Fee) The Franchisee has received a significant head-start - a springboard into business - following a tried and tested formula.
The early years of the franchise relationship usually continue in this vein - the business grows, the parties' respective incomes grow and the relationship prospers. Fortunately, in the vast majority of case this continues - but things can go wrong.
There are two sides to every story but typically, when a franchise relationship sours from a Franchisee's perspective, there are a number of common reasons:
- Increasing Franchise Fees
- A perception of decreased levels of support
- A perception of decreasing return for the payment of the Franchise Fees
- A lack of commitment to the franchise venture on the part of the Franchisor
- An inability to freely sell the franchise business
It is useful to look at each in turn
An increase in Franchise Fees without a perceived increase in services is bound to upset Franchisees whose interpretation will likely be that the Franchisor wants to increase profit for no more effort - to milk the 'cash cows' that are the franchise network. Very often a Franchise Fee rise will be necessary for good reasons - increased Head Office operating costs, new compliance regimes, investment in management support services. From the Franchisor's perspective it is crucial to communicate with the network to explain the reasons for increases highlighting where additional services are being provided, the benefits to Franchisee's or where costs pressures are forcing a change. Franchisees also appreciate advance notice and fee increases should not be sprung as a surprise.
It is inevitable that franchisees will perceive a lower level of support in the years subsequent to the initial launch. After the initial drive of launching a franchise there has to be a 'fall off' in the intensity of contact. The perception of lower support levels can be a source of complaint from franchisees. Franchisees should ensure that they communicate with Franchisors, to make it clear where they feel they could benefit from guidance and where they require a support. A good Franchisor will, within reason, respond to those requests and address concerns franchisees have. For Franchisors communication is again key - new franchisees should be educated to expect lower support levels after launch and to see their requirement for less support as a positive rather than a negative. Franchisors should stress that whilst the frequency of support may diminish in later years the support that is required will usually be at a higher level - perhaps looking at strategic issues, expansion or the development of new markets and clients - rather than simple operational issues.
The Franchisees perception of a decreasing return on their Franchise Fee payments can perhaps be the most difficult issue to address. After several years of guidance and training many Franchisees feel that they could easily run the business without Franchisor guidance, this is especially so in simpler franchise systems. After years 3 and 4 the Franchisee has often forgotten the 'head-start' they received in launching the business and the fact that the provision of an 'established system' meant this new venture far more likely to succeed. Many feel by this stage that they are shackled to the franchise, paying Franchise Fees for guidance and support they no longer require. This can lead to resentment and a desire on the Franchisee's part to break out of the network. From a Franchisee's perspective, sight must not be lost of the benefits received in setting up the franchise and the fact that the franchisee bought the rights to use the franchise systems in a geographical territory; they did not launch their own independent business. The Franchisor must be sympathetic to the Franchisees position and realistic in consideration of the Franchisees position - human nature often dictates that the Franchisee will overlook the early benefits and concentrate on their perception of negatives. Established Franchisees will often be the most valuable in the network - producing the highest levels of MSF for the Franchisor. Skilled Franchisors are alert to these issues and are careful to educate Franchisees as to the value of brand association and to ensure that upon entering into the franchise arrangement, they appreciate the long term nature of the relationship and the commitment to providing ongoing reward to the Franchisor for the use of its business system. The most successful Franchisors ensure that through regular dialogue, communication and support the Franchisee perceives an ongoing value to the franchise relationship, such that it never needs to question the Franchise Fees.
Lack of Franchisor Commitment
Franchises are a two-way relationship they require a great deal of effort from the Franchisee in training for and then launching the Franchise business. They also require a significant commitment from the Franchisor. Any business which decides to expand by franchise opportunities needs to be prepared to contribute significant resources into initial training and set up and to ongoing support and guidance. A franchise system based upon the sale of a territory, the charging of an initial fee and little of no support thereafter is usually a flawed model and one which is likely to lead to dispute. A Franchisor which is also operating its own business or territories needs to be prepared to commit a good deal of its attention away from its own business and towards that of its Franchisees.
Inability to Freely Sell
Another cause of friction is the Franchisee's inability to independently sell the franchise business. It is remarkably common for Franchisees to overlook this provision and to be surprised by it, when they come to consider retirement or sale. In a successful franchise network, it can often be to the Franchisee's benefit that sales are processed through the Franchisor, who might well have a waiting list of investors looking for the opportunity to acquire a franchised territory. However, in other situations Franchisor's should be flexible and work with Franchisees to achieve disposals. Like all of the highlighted areas, communication is the key and the topic of succession and future planning should be a regular 'agenda item' in meetings between Franchisor and Franchisees.
Franchisors complaints are less general in nature and habitually stem from breach of the Franchisees obligations contained within the franchise agreement. Often those breaches are a symptom of underlying difficulties in the franchise relationship. Complaints are many and broad and might stem from purchasing goods 'out of tie', failing to properly follow the franchise system or simple payment failures. Swift informal intervention by the Franchisor can often nip problems 'in the bud' and stop minor niggles becoming significant disputes. Communication is, of course, a two-way track and Franchisees need to be open with Franchisors in raising issues or concerns that they have. Where parties cannot settle their differences mediation through an independent third-party should be considered. Organisations such as ADR and CEDR have mediators available and the BFA has a panel of recommended mediators with franchising experience.
- Tips to Avoid Disputes
- Investigate - Franchisees should carefully investigate franchise opportunities before they commit
- Manage expectations - Franchisors should ensure that Franchisees understand the arrangement they are entering into and understand the levels of support, training and guidance they can expect.
- Communicate - most disputes start as relatively minor issues, if addressed quickly dispute can be avoided
- Mediate - If disputes cannot be settled between the franchisee and Franchisor consider the dispute resolution procedures in the Agreement or consider mediation
Andrew Perkins is a Litigation Partner at Ashfords LLP where he heads up the Dispute Team within the Firm's Franchising Department. To contact Andrew:
+44 (0)1392 334112
Last Updated: 25-September-2014