A Franchisor’s Guide to dealing with troublesome franchisees

A Franchisor’s Guide to dealing with troublesome franchisees

That old truism, the 80/20 rule will tell you that in your franchise network 20% of the people will be taking up 80% of your time. These may be franchisees who are under-performing, not co-operating or even rebelling against the systems you are trying to impose, through your franchise agreement, operations manual and the evolution of your franchise business.

Frequently, franchise agreements contain dispute resolution provisions, known as Escalator clauses, which provide a process to resolve disputes. This may include face to face meetings, mediation and then either arbitration or litigation and the parties are contractually obliged to follow that process.

You can adopt a similar escalation procedure in dealing with your franchisees but you also need to have followed some basic business principles, to reduce tension and turn around the franchisees, to become successful advocates for your business.

Communicate  

From my experience as a franchise lawyer over the last 20 years, dealing with disputes, a failure of communication is often at the heart of the problem. Franchisors can fail to communicate with their franchisees. Email bulletins or an annual conference or issuing updates to the operations manual can be ways in which you tell franchisees of developments in your business but how do you ensure that they have “heard” you. Small group meetings such as those on a regional basis, or one to ones at least ensure that communication becomes a dialogue rather than a monologue. The franchisees feel that you are listening to them as much as telling them. If their feedback is important to you, you might just crack communication.

Demonstrate

You have to lead in your business which means constantly looking for improvements in processes, looking at how the market for your products or services is developing and ensuring your product or service remains cutting edge and competitive. This does involve innovation to test new ideas. Do not introduce any changes to the network that you have not yet road tested yourself and can demonstrate to franchisees that it is beneficial for their businesses. Equally don’t ask franchisees to do something that you would not be prepared to do yourself. You must lead by example and for some difficult franchisees, provided you show clear leadership, they will follow even if they grumble along the way.

Negotiate 

Sometimes franchisees that you have issues with will become bad payers and will slip into arrears in paying for your products or management services fees. There are sometime genuine cash flow reasons for this and an analysis of the franchisee’s accounts and records will prove whether they have genuine cash flow issues or are refusing to pay as a way of articulating some underlying dispute. For franchisees who can’t pay, rather than won’t pay, it is perfectly reasonable to negotiate variations in payment terms to help them out. You might have refused to agree that at the outset of the franchise relationship but there is no reason why you ought not to consider it as part of a negotiation during the course of the relationship. However, most commentators would agree that whilst you can negotiate over the terms of payment you should not give discounts on fees because that will get out to the network and you will create bad feeling.

Terminate 

Where you have tried to resolve a breakdown in relationship, a dispute, or an arrears situation there will be times when that is not possible. Your agreement will provide contractual rights to terminate before the expiry of the fixed term in certain situations. Whilst termination should be a last resort, because it is final, it is an option that should be properly used to protect the business and the network at the right time. Be aware however that there are consequences of termination in respect of the operation of the franchisee’s business and you need to be prepared to follow through on those consequences, in order to police the network to protect your goodwill.

Litigate  

  1. If you follow the first two steps of this advice then the likelihood of having to follow the last two will become infrequent. Communication and demonstration, show and tell, remain critical to avoiding disputes and expense.
  2. Successful litigation can enhance your reputation within the network and curtail the volume or frequency of disputes because your network know that you will see things through and are not to be trifled with.
  3. For the franchisee who continuously flouts the franchise agreement, with whom discussions and warnings have not worked and where eventually you terminate, you may need to litigate in court if they continue to operate a similar or competing business in the territory, or continue an association with your brand, or refuse to pay you what they owe. Some franchisors are very wary of litigation because they fear a counterclaim for misrepresentation. It is true that some franchisees will raise such a complaint for the first time if and when they are sued. However, if you have followed the Code of Ethics in disclosing facts and matters relevant to the franchise opportunity at the outset and have a have a factual basis for the representations you made then you should have no fear if such claims are raised. They are often tactical and when exposed to proper analysis will fall away.

Russell Ford

Owen White Solicitors


If you would like to talk to one of the team about any legal franchising questions, from franchising your own business to buying a franchise, please contact our team:

Owen White Solicitors, Senate House, 62/70 Bath Road, Slough, SL1 3SR, +44(0) 1753 876 800, jane.masih@owenwhite.com

Owen White Solicitors are bfa (British Franchise Association) Affiliated