As franchise lawyers, we often have minimal involvement in the franchise relationship (after the execution of the initial franchise documents, of course) until things go wrong. But as franchise lawyers, we are also well aware that things do indeed go wrong within the franchise relationship. As such, in advising and representing franchisors and franchisees, time and time again, we see the same common factors contributing to the breakdown of the franchise relationship. Nevertheless, with some simple implementation of systems and better communication, many of these problems could be avoided.
Here are some of the key contributors to disgruntled franchisees, and what savvy franchisors should be doing to prevent or manage such occurrences:
- Reliance on pre-contractual negotiations – the changes to the Franchising Code, introduced on 1 January 2015, provide that a franchisor can no longer include a clause that acts as a ‘waiver of any verbal or written representation made by the franchisor’ (clause 16(1)(b)). Notwithstanding this provision, reliance on promises or assurances made by franchisors during pre-contractual negotiations is a common cause for dispute and claims of misrepresentation or misleading and deceptive conduct. At the franchisor level, to avoid such claims, you should: a) Ensure any ancillary promise or variation to the standard terms is incorporated in the Franchise Agreement, by way of warranty schedule or special conditions; b) Encourage your potential franchisees to ask questions/ clarify the documentation and seek legal advice on same; c) Review your advertising material and ‘spiel’ – Is there anything that is written or said that could be misconstrued, or which could constitute a misrepresentation? If in doubt, a lawyer’s advice could be invaluable on this topic.
- Lack of forecasting/ planning – we have all heard the saying ‘If I had one hour to chop down a tree, I’d spend 50 minutes sharpening my axe’. The same principle applies to running any business, including a franchise. Plan, plan, plan. As a franchisor, you should be ensuring all franchisees not only have business plans and cash forecasts prepared, but also have in place practical measures to revisit those plans from time to time. Incorporate into your franchise documentation and/ or operations manual a system whereby the plans are regularly reviewed in consultation with your representative. Also, put in place a positive obligation to review and consider the performance of the franchise to help identify any minor problems before they escalate.
- Failing to keep up with technology – most franchise agreements provide that franchisees must upgrade software and hardware if required by the franchisor. By and large, franchisors are also permitted by way of the Agreement to access the financial or bookkeeping records of individual franchisees. The reason these clauses are invaluable is that they facilitate a mechanism to keep the franchise system up to date. Further, they allow franchisors to monitor performance and other KPI data of franchisees and identify areas that need improvement. As a franchisor, you should include such provisions in your master agreements, and ensure the costs of same to be met by the individual franchisees are adequately disclosed.
- Lack of understanding of termination provisions – when it’s all new and exciting, most franchisees fail to appreciate what happens at the end of the franchise relationship, and how a termination may occur. As a result, disputes often arise with respect to the franchisor’s ability to re-enter the business and use its assets and enforce its restraint of trade provisions. Some confusion may also arise with respect to the value and ownership of goodwill. Talking through these provisions and providing the franchisee an opportunity to ask questions before they sign on the dotted line could save a lot of heartache and trouble down the track. Further, (and we are not just saying this because we’re lawyers), encouraging incoming franchisees to obtain legal advice will provide a ‘second voice’ in advising upon termination obligations and rights.
- Inability to contribute to, or provide feedback, on changes to the system – the well-publicised Pizza Hut dispute playing out in the Federal Court should serve as a warning to Franchisors that not all franchisees will take substantial (and, at least arguably, detrimental) changes to their franchise systems lying down. Particularly now, with the statutory obligation of good faith enforceable, franchisors must be mindful of the impact of changes to their systems or updates to their manuals, as it will be critical in avoiding a claim of unconscionable conduct and/ or breach of obligation of good faith. As a practical measure, it is advisable to set up a system whereby notice of any proposed change is given, and franchisees (or their representatives) have an opportunity to raise any issues before the change is implemented.
At the end of the day, it’s important to both the franchisors and franchisees that things do not go wrong. The issue of breach notices, exercise of termination rights, and involvement in dispute resolution procedures are all stressful and costly exercises. Taking account of potential issues that could be experienced by your franchisees, and taking a pro-active approach to implementing systems to deal with same, could not only save franchisors that stress and money, but also promote the franchise relationship for many years to come.