Common challenges and mistakes in franchising

Operations manuals

Surprisingly, far too many new and emerging franchisors offer franchises without having completed the preparation of operations manuals setting out the standards, specifications, procedures, rules, and policies of the franchise system even though their franchise agreements refer to manuals and require franchisees to comply with them. Failure to provide manuals can be disastrous to a franchisor trying to enforce a franchise agreement against a franchisee, and, in certain cases, may even lead to an action for rescission of the franchise agreement. The simple lesson: franchisors must ensure operations manuals are complete and regularly updated before and after  franchises are offered.

Other issues

Other common challenges and critical mistakes that can lead to failure of the franchisor, its franchisees, or the franchise system in general, include failure to introduce and use new technology, insufficient monitoring and understanding of the competition, failure to introduce continual system changes and improvements, poor location analytics, lack of qualified and responsive head office support, and failure to understand changes in the consumer marketplace.

Two other common business mistakes made by franchisors are the failure to arrange for or monitor up-to-date insurance policies and coverage, whether obtained individually by franchisees or arranged on a group basis by the franchisor, and failure to establish an integrated crisis management system to protect the franchisor’s brand and consumer reputation in the event of an unexpected and highly publicized crisis.

Dispute resolution

As suggested, some of the aforementioned challenges and mistakes can lead to disputes between franchisees and their franchisor. And, unfortunately, many franchisors do not have a program in place to deal with such potential disputes before or after they arise.

There are numerous ways through which franchise disputes can be avoided or, at least, resolved prior to litigation, including the implementation of a franchisee hotline, the formation of a franchisee advisory board or peer review panel, the designation of a dispute officer, or an experienced independent franchise ombudsman, mediator, or arbitrator. Each option calls for experienced counselling before implementation. Whichever dispute resolution program is selected should be well-documented and openly disclosed among the franchisees.

Communications

However, in my experience, the most common problem affecting franchise systems is poor communications between the franchisor and the franchisees. A successful business must be built on trust, so positive relationships between these parties are paramount.

Ups and downs in franchisee financial performance, the threat of competition, and the level of consumer acceptance are all normal. However, if the franchisor does not maintain an ongoing, informed, and open process of communication with its franchisees, then a lack of trust can easily arise between the parties at times of stress or unrest.

Communications within a franchise system can take many forms, including newsletters, email blasts, a dedicated intranet, franchisee advisory boards, town hall meetings, national and regional conferences and conventions, independent ombudsman programs, senior management hotlines, controlled social media, field visits, inspection reports, performance reviews, supplier announcements, training sessions, and operations manuals, to name a few.

Communication must be frequent, open, objective, direct, useful, and honest. Franchisors should welcome suggestions and recommendations from their franchisees. Any negative communication must be conveyed in a responsible manner, with appropriate rationale and expectations. Franchisees’ complaints should be dealt with in a professional and timely manner. And franchisors should not denigrate franchisees among one another but should focus instead on recognizing good performance and encouraging success.

Some examples of topics and items that would merit communication with franchisees include changes in management, withdrawal of the founders, changes in the industry, arrival of new competition, consumer research and preferences, new technology, new governmental regulations, product recalls, enforcement of system standards, financial assistance programs, franchise advisory board reports, franchisee performance and milestones, ombudsman reports, renewal procedures, additional franchise policies, social media policies, new franchise openings, crisis management and, as referred to earlier, alternate dispute resolution programs.

Many potential problems and challenges can be avoided with frequent, open, and honest communications, with the franchisor exercising reasonable and responsive consideration for franchisees’ concerns. The key is to start ahead of time. When communications about a given challenge only begin after that challenge has already arisen, they are likely to escalate the problem.

Some of the most highly publicized franchise class or group actions in recent years have involved systems in which communications were addressed. In some cases, the courts praised the franchisors’ communications and the franchisee advisory boards in question, while in other cases they were highly critical of them.

In any case, successful franchisors understand the value of strong communications, which can be seen in their excellent relations with franchisees and are also reflected in a high level of consumer acceptance and an absence of negative publicity. It is never too early to start.

The key takeaway

As I stated at the beginning of this article, there are many common legal, financial, and business challenges and mistakes made by franchisors, however, most can be avoided or tackled by taking a simple, pragmatic approach, based on certain fundamental values. Of course, franchisors must become informed and knowledgeable and be properly advised before launching a franchise program and be certain their franchise systems and documents address the most common issues in franchising. However, in my experience, the most common problem affecting franchise systems is a relatively simple one: poor communications between the franchisor and the franchisees. As successful franchise business must be built on trust, positive relationships between the parties are paramount.

During his 40-year career as a lawyer before retirement at the end of 2012, Zaid’sbusiness law practice was concentrated in franchise law, and he was involved with over 400 franchise systems. He has been an investor in both franchisor and franchisee operations and has served on the advisory boards or boards of directors of several prominent franchisors. Since retirement, he has transformed his business and legal experience in franchising into several support service functions through his company, Frank Zaid FRANlegal Support Services (www.frankzaid.com): franchise dispute mediator and arbitrator with ADR Chambers in Toronto (www.adrchambers.com).