Q: What common mistakes do you see in franchising and how can they be avoided?
A: I have been involved in franchising in many capacities for nearly 45 years, as a lawyer, a mediator, an ombudsman, an arbitrator, an expert witness, an investor and a member of franchisors’ and franchise associations’ boards of directors and executive committees. 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.
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there are many common challenges and mistakes in the franchising sector, including franchise agreements that are outdated, do not reflect adequate attention to detail or do not sufficiently capture the unique features of a particular franchise system, along with franchise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 Other outdated or incomplete collateral documents may include leases, subleases, personal property security agreements, guarantees, intellectual property (IP) or software licences, intranet use agreements and social media policies.
Some franchisors define but fail to protect their IP, particularly trademarks, while others fail to enforce their system’s standards when dealing with non-compliant franchisees. In some cases, they even lack awareness of the business and industry standards that affect their type of franchise system.
It is essential for franchisors to stay well-informed and remain alert of any such issues. All of these matters can be addressed by retaining knowledgeable, experienced legal counsel. 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 terms with suppliers in terms of pricing, allowances, assistance and rebates.
These matters can be partially addressed by working with a business or financial advisor experienced in franchising, but the franchisor must also become familiar with industry trends and specific systems, including electronic point-of-sale (POS) 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.
Some of the 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.