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Common challenges and mistakes in franchising

In some cases, franchisors even lack awareness of business and industry laws and regulations or standards that affect or regulate their type of franchise system.

By Frank Zaid

I have been involved in franchising in many capacities for more than 45 years, as a franchise lawyer, mediator, ombudsman, arbitrator, expert witness, investor, business franchise consultant, member of franchisor advisory boards, and as an executive director of franchisee associations. Through this extensive involvement, I have seen many challenges commonly faced, though from diverse perspectives, and many mistakes commonly made. To tackle these challenges and avoid these mistakes, the key is to take a simple, pragmatic approach based on certain fundamental values.

Legal issues

From a purely legal perspective, there are many common challenges and mistakes in the franchising sector, including franchise agreements that are outdated, do not reflect adequate attention to detail, or do not sufficiently capture the unique features of a particular franchise system, along with franchise disclosure documents that are deficient in one way or another. Other outdated or incomplete collateral documents may include leases, subleases, personal property security agreements, guarantees, intellectual property or software licences, intranet use agreements, and social media policies.

Franchisors can sometimes be caught off guard by not monitoring that insurance policies or coverage obtained by individual franchisees or on a group basis are up to date.

Some franchisors identify but fail to protect their intellectual property, particularly trademarks, while others fail to enforce their system standards when dealing with non-compliant franchisees. In some cases, they even lack awareness of business and industry laws and regulations or standards that affect or regulate their type of franchise system.

It is essential for franchisors to stay well-informed and remain alert of any such issues. These matters can be minimized by retaining knowledgeable, legal counsel with experience in franchising. Franchise lawyers can proactively review and revise a franchisor’s documents on a national basis.

Business and financial issues

Franchise systems must also tackle common business and financial challenges. Undercapitalization of the franchisor, for example, can lead to an inability to service and grow a system, which, in turn, can cause discord among franchisees.

There may be a lack of a proper and detailed financing program for both the franchisor and the franchisees. And where there are incomplete and/or delinquent records and reports from the franchisees, these may be due to a franchisor’s failure to monitor and enforce franchisee performance. Franchisees should be wary if their franchisor does not provide ongoing services and advice, collect sufficient funds to develop a successful national advertising program, or negotiate the best possible commercially reasonable terms with suppliers pertaining to pricing, allowances, assistance, and rebates.

These matters can be partially addressed by working with a business advisor or consultant experienced in franchising, but the franchisor must also become familiar with industry trends and specific systems, including social media policies and electronic point-of-sale and reporting systems. And the franchisor needs to be willing to provide financial and operational advice and assistance to its franchisees on a timely basis.

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