10 ways to keep disputes at bay

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Inside Franchise Business: mishandled complaints can lead to a franchise disputeHow can franchisors handle complaints before they become disputes?

Recently I acted for a new franchisor in the hospitality industry. They were experienced business operators having owned and operated CBD stores under their own brand over the past five years. They had their own kitchen supplying the stores and could maintain the quality of the product and developed new products that found favour with consumers.

They were constantly asked by customers:“Are you are franchise?”, “Can we join you? We love what you are doing!”

They decided to franchise and quickly brought on board three franchisees. Were they the right franchisees to take on? If they had their time again, would they have reviewed their recruitment criteria?

The dilemma for new franchisors is that the franchisee, who may not have the funds, may be the right franchisee, whereas the franchisee who has the money, may be the very wrong franchisee to take on board!

One franchisee in this system after a few short weeks raised a complaint with my client franchisor about supply, stock and COGS issues.

These are serious issues when you are starting a new business. My clients knew their business, they knew the stock that sells, their COGS and margins, and were confident in the business model they offered franchisees, provided those franchisees followed the system.

Initially not having had any experience with franchise disputes my clients were taken aback by the franchisees’ concerns. The franchisee immediately threatened legal action which was unnecessary, and which did get my clients back up.

My client responded in a professional and businesslike manner although somewhat guarded due to the threat from the franchisee.

Advice for franchisors when a franchisee threatens legal action

My advice to the franchisor:

  1. Ignore the franchisee’s legal threat.
  2. Go to see them, don’t ask them to leave the store to come to head office.
  3. Sit down and take on board the issues raised by the franchisee.
  4. Be genuine in your desire to understand, identify and address them and their concerns
  5. Do everything in their power at that early stage to accommodate, appease and work with the franchisee to keep them on side and happy.
  6. Document and take file /diary notes and confirm the outcome after the meeting- File notes and emails are your friend.

The franchisor followed my advice and have diffused what could have escalated into an unproductive situation for both parties.

If my franchisor did not give this their immediate attention and act in a genuinely concerned way it could also have impacted on their ability to bring on new franchisees as disputes need to be disclosed by franchisors - it just doesn’t look good if you have to disclose you are in dispute as a new franchisor.

The transition from being a successful company owner operator, where you can make your own decisions be they good or bad to then wearing the hat of becoming a franchisor, is a huge step as anyone who has been through that experience will tell you. It is a different mindset, and takes different skills, managing systems, operations and people.

In the beginning franchisors believe that they will have few issues or disputes with their franchisees. But it will happen so you need to be ready and plan how to deal with these issues.

10 things to remember if you want to avoid a dispute

  1. Do you have a complaints policy and procedure set out in your operations manual?
  2. Don’t just rely on the Franchising Code dispute resolution provisions; they are minimum requirements but you can do a lot more before an issue escalates.
  3. Communication is the key, even if you do not consider the franchisee complaint to be a legitimate one. 
  4. Let them be heard: give franchisees the opportunity to be heard and then respond.
  5. Designate an individual with the right skills to address the complaint and deal with it. It should not be the CEO, or a director but someone with dispute handling training and skills.
  6. Don’t ignore or dismiss a complaint, you may learn from the issue being raised.
  7. If you ignore a complaint it is likely to escalate to either a lawyer’s letter and/or mediation, all of which will take up more of your time.
  8. Is it a simple matter that can be dealt with or a more serious issue? Identify the real issue that underlies the complaint, it may be an underlying issue that the franchisee does not feel valued or supported.
  9. Remember the obligations to act in good faith which are obligations on all parties.
  10. Make file and diary notes of verbal discussions, date them, make sure they are readable, note who was in attendance, the time and place and follow up with confirmation emails.

What not to do when a franchisee complains

  1. Do not ignore the franchisee. One of the regular complaints I receive from franchisees that trigger them seeking my advice is that the franchisor will not respond to calls or emails.
  2. Do not be dismissive of the franchisee or their issues.
  3. Do not hand this over to a junior BDMwho has a blasé or arrogant attitude.
  4. Do not threaten the franchisee with a breach as this is not acting in good faith

Communicate on a professional and businesslike manner. It is after all a relationship, and you are dealing with people, personalities and livelihoods.

Robert Toth

Robert Toth is franchise partner at Marsh & Maher. Robert is an accredited business law specialist, a member of the International Franchise Lawyers Association (IFLA), and a member of the Australian Institute of Company Directors. View More...
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