No one wins when a franchise relationship breaks down, as not only can it cause significant disruption to the rest of the franchisor’s network, but it will also obviously have serious financial consequences for the franchisee in question. Yet the truth is that a large number of franchise disputes could have been avoided – simply and cost effectively – had the parties properly addressed certain issues at the start of the franchise process.
1 – Make sure you understand what a “franchise” is, and what it isn’t
It may sound like a statement of the obvious, but it’s surprising how many potential franchisees and franchisors do not actually properly understand how franchising works. For example, some potential “franchisors” actually only want to set up regional offices of their own business, and still want to retain ultimate control over the day-to-day running of those businesses. On the other hand, some potential “franchisees” really only want to manage a branch of a larger business and to do what they’re told to do, rather than be responsible for running their own independent franchise business. So all parties need to ensure that franchising is right for them as the first step of the process.
2 – Manage expectations from the outset
Arguably the biggest cause of franchise disputes is mismanaged and misaligned expectations, where the franchisor and franchisee have very different understandings about issues such as how the franchise business will operate, the degree of training and support to be provided by the Franchisor, how new business is to be generated, and the basis of any financial projections provided. At the start of the discussion process, when everything is going smoothly and both parties believe the venture is going to be an unqualified success, it can feel awkward discussing some of these issues and what might go wrong. However, in the long run, it can be far more disruptive for all involved not to challenge any such misconceptions, as this will likely just defer problems until further into the franchise relationship. The best approach is always to “hope for the best but prepare for the worst”. Having open and frank discussions at an early stage will also assist in ensuring that there is a proper alignment of expectations in the relevant legal documents, which brings us neatly to our next tip…
3 – Don’t “do it yourself”
It may sound self-serving, but it will often be a false economy if parties don’t instruct specialist advisors to assist them in setting up a new franchise. Franchising is a very specialist subject, and potential franchisors will often save money in the long run if, for example, they work with specialist recruiters to find suitable franchisees. Equally, both parties will be likely to benefit from instructing specialist financial advisors to prepare or analyse the financial projections, and specialist solicitors to draft or review the legal documents. Specialist bankers can advise on funding options, and there are even specialists that can analyse the local areas and advise on the best way to structure the franchise territories. Although taking these proactive steps may involve a larger initial cost, if the parties are serious about making the franchise a success, they will often view these costs as an investment to increase their longer term chances of success.
4 – Don’t run before you can walk
Successfully franchising a business is not something that can be done overnight. The most successful franchisors have taken their time to ensure they have the required infrastructure in place to support a growing franchise network, and they will often have run a “pilot scheme” to test the viability of the franchise concept. Rushing to franchise a business without carrying out this preparatory work is a common cause of failed franchise networks.
5 – Don’t be afraid to say “no”
Sometimes in all the excitement, a party might forget to take a step back and ask themselves, is this right for me? For example, a lot of franchisors are too quick to take on potential franchisees who are keen or who have available funding, and they fail to fully consider whether the potential franchisees have the necessary experience, temperament or skills to make a success of the franchise. Equally, many potential franchisees thinking of taking on a franchise opportunity will be wowed by the franchisor’s promotional material, but then fail to fully analyse the detail behind it. Once the franchise agreement is signed, it will be far more difficult for the parties to go their separate ways, so they shouldn’t be afraid to walk away during the negotiation phase if they realise that the opportunity is simply just not the right fit for them.
If you would like to know more about these or any other issues relating to franchise disputes, please contact Michael Axe today for more information.