5 ways you can be a compliant franchisee

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Inside Franchise Business: compliance is crucial in a franchiseA decision to buy a franchise, as opposed to choosing to buy an independently branded business, is important for two reasons.

First, there are statistics which suggest the failure rate for small businesses is different for franchisees than those starting their own independent business.

Second, the decision to join a franchise system means that you will need to be committed to learn the business model and expectations of the franchisor and follow the system. A franchise creates a symbiotic relationship between the franchisee and their franchisor, each reliant on the other to perform their respective roles to achieve success.

In a franchise it is quite normal for everything from the trading hours, the uniform, the layout and sales methodology and the reporting to be specified by the franchisor. Consistency among the network of franchisees, so that customers have the 'same' experience regardless of which franchisee they deal with, is crucial to maintaining brand standards and value.

Some key areas where compliance is important within a franchise are set out below. 

1. Brand presentation

All franchisors are protective of their brand and the image it portrays to the market. Therefore ensuring that franchisee's premises, vehicles, people and sales materials are up to date, clean and professionally presented is crucial.

To remain compliant you will regularly need to update the fit out, re-paint, buy new uniforms and change menu items and service offerings. The commitment to ensuring a compliant presentation therefore requires an ongoing financial commitment.

2. Stock purchasing 

Most franchises require franchisees to purchase stock and consumable items.

It is quite normal for franchisees to be obligated to stock certain ranges and amounts of stock to ensure that reasonably expected customer demand can be met. This requires a commitment to a full range.

Also, it is often important to the franchise system that certain items are purchased from particular suppliers.

This might be to ensure consistency of product offering and it also may be that the franchisor has rebate arrangements with certain suppliers. Rebates obtained by the franchisor from the supply chain help to supplement the head office costs of the franchisor and can minimise or reduce the fees the franchisor needs to charge to franchisees.

3. Participation in marketing activities

Franchisors will often run national marketing activities and will offer the opportunity for franchisees to participate. When franchisees elect not to participate it can substantially erode the benefit of the activity for the franchise network.

This occurs in several ways. Where the marketing activity relates to the sale of a particular item, if everyone participates it creates buying power and enables the best price to be obtained. If franchisees do not commit, then it reduces that buying power.

If certain franchisees do not participate it is often necessary for the corresponding marketing materials to include statements such "at participating locations only".  Such wording in advertising materials waters down the benefit of the marketing activity for those franchisees who do participate.  

This is because customers do not have confidence that their local franchise will be participating and may dismiss the opportunity.

4. Attendance at meetings and conferences

Information sharing between franchisors and their franchisees is key as it enables issues to be identified and for current information to be shared. If franchisees do not make themselves available for meetings and conferences then opportunities are missed.

Franchisors will often have individual meetings with franchisees, group meetings and often a national conference. Franchisors will expect franchisees to attend and be engaged in all of these meetings and conferences.  

Conferences in particular can involve significant costs as they often require interstate or international travel, accommodation and meals. It is important for franchisees to budget for these costs.

5. Franchisee reporting

Reporting is the process by which franchisees share information about their business back with the franchisor. This can involve weekly, monthly and annual reporting.

Where royalties are payable based on turnover, the franchisor will be keen to ensure that it receives regular reporting on sales to enable them to calculate fees.

However, reporting also allows the franchisor to identify areas for improvement in a franchisee's business.

For example, a monthly or annual profit and loss and balance sheet can allow a franchisor to look at items such as the wages or rent as a percentage of sales.  

Where these are outside normal ranges this can be part of a coaching session whereby the franchisor assists the franchisee with some forward planning to endeavour to drive efficiencies and maximise profits for the franchisees.

Franchisee compliance takeaways

The key takeaway when thinking about the word 'compliance' in a franchising context is not to think of it as simply following the rules. Compliance is the method by which franchises maintain consistency and maximise benefits for every franchisee in the network.  

By being compliant, an individual franchisee plays their part in ensuring consistency and it also gives them the best opportunity to receive constructive support and feedback from the franchisor to guide the franchisee towards business success.  

Warren Scott

Warren Scott is the Partner at Mills Oakley Lawyers. Warren is a recognised expert in franchising law. He heads the Mills Oakley franchising team, which offers a premium service nationally. Warren advises both franchisors and franchisees and has recently been selected by his peers for inclusion in the Eighth Edition of Best Lawyers in Australia in the practice area of franchising law. View More...
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