Despite a franchisor and franchisee each operating their own business, a franchisee relies on the systems, resources and guidance that the franchisor provides to succeed. Often, the level of support a franchisor promises is a determining factor in a prospective franchisee’s decision to opt for one franchise system over another.
But what happens when the expected – or even promised – support isn’t forthcoming?
Here are some practical and legal steps franchisees can take.
Forms of franchise support
The types of support a franchisee receives will vary between franchise systems and industries. For instance, a mobile services franchisee needs a different kind of support to that required by a franchisee operating a large fast food business.
Support from a franchisor doesn’t guarantee success but rather, provides a solid foundation for the franchisee to succeed. Forms of support may include:
- pre-launch intensive training;
- onsite training and oversight;
- providing software systems and maintenance;
- marketing specifically in the franchisee’s territory;
- operations manual upgrades and associated training; and
- additional onsite training and assistance where required.
Legal obligations to provide support
Franchisor obligations relating to support generally arise in three ways:
1. The franchise agreement
The franchise agreement may set out when and how the franchisor will provide support and training to the franchisee. For example, the agreement may state that the franchisor will provide training initially, on an ongoing basis (possibly at the franchisee’s cost), and by way of convened meetings.
These clauses are often drafted to commit the franchisor to providing support only at its “reasonable discretion”. This can significantly water down specific obligations and make it harder for a franchisee to claim that a franchisor has not met an obligation. Nonetheless, when support that is clearly contemplated by the agreement hasn’t been provided, this gives a franchisee at least a starting point for a claim.
2. Franchisor representations
Franchisors can make specific representations outlining the support they will provide either via email or in face-to-face meetings.
A franchisor may have a legal obligation to meet any promises made during therecruitment phase or risk falling foul of Australia’s consumer laws for making a false and misleading representation. Some franchisors will even have a prospective franchisee list any such promises in a prior representations deed which creates a binding record of the franchisor’s statements..
To reassure yourself that the franchisor will provide specific training should get this put in writing (preferably as a special condition in the franchise agreement) to avoid any confusion or dispute.
3. Good faith obligations
In 2015, the ‘good faith’ requirement was introduced into the Franchising Code of Conduct (the Code). Good faith is a general obligation for both franchisor and franchisee to act fairly, justly and cooperatively with one another.
It’s possible this obligation could include the franchisor providing a reasonable level of support (taking into consideration the circumstances and objectives of the franchise agreement). If no support or training whatsoever is provided, this could clearly give rise to the possibility of a claim for breach of good faith or even failure of consideration.
Steps to take when support Isn’t provided
Before entering into a franchise agreement, you should ensure there is a shared understanding of how and when the franchisor will provide support. Having these conversations at an early stage is the best preventative action you can take to avoid or reduce the potential letdown of unmet expectations when an issue arises.
But, when support isn’t forthcoming, prompt, open and frank dialogue with the franchisor is the most appropriate first step. Making a complaint promptly ensures the franchisor understands you were unhappy with the training that was provided
Internal dispute resolution procedures
Make sure you promptly use the internal dispute resolution channels the franchise system has, which may include an avenue for requesting assistance, advice or support. Arrange a sit-down meeting or a teleconference with a franchise head office representative to outline your concerns and prepare your requests and/or suggestions to improve the situation in advance.
Tackling this problem with the right attitude and developing an action plan can be the most effective step you can take and quickly resolves any tension or animosity between the parties.
Dispute resolution procedure under the Code
If you have an ongoing problem, you may consider the dispute resolution procedure set out in the Code.
The first step is to issue a notice of dispute to the franchisor which outlines the issues, your desired outcome and the action required to settle the dispute. This puts the franchisor on notice and parties have three weeks to agree how to resolve the issue.
If the dispute remains unresolved after three weeks, you can refer the matter to mediation, which the franchisor must attend. Mediation provides a forum for the parties to conduct a guided discussion about the issues while focusing on a workable solution.
Legal advice
Another step you may consider is seeking advice on your legal position under your franchise agreement. Doing so can provide clarity on the strength of your claims and enable you to make an informed decision about the appropriate next steps. A franchise lawyer can also negotiate on your behalf or issue the notice of dispute.
The last resort
Sometimes the issues that arise can stop you from running your business, leaving you simply wanting to exit the franchise agreement. If this is the case, you can either sell your business or reach a negotiated exit with the franchisor.
Sell the franchise
Selling your business can provide a swift exit and even the potential return on your investment. But this avenue is not always open, and there may not be much of a market at the time you intend to sell.
A negotiated exit
The franchisor’s failure to provide support could strengthen your bargaining power when negotiating an exit. The franchisor could then ‘top up’ the sale price to facilitate your exit or even buy back the franchise. The process often involves:
- setting out the franchisor’s potential breaches; and
- offering to release the franchisor from any liability in exchange for your release from the franchise agreement and the franchisor’s purchase of the business assets at market value.
If you want to continue operating outside the franchise system, it may even be possible to negotiate a release from any restraint from operating the business independently.
However, a franchisor may be reluctant to release a franchisee if the lack of support is unlikely to amount to a breach of its specific obligations.
Before you buy
Ongoing support and professional, specialist training is a big draw card for franchisees. We can’t stress enough the importance of clearly establishing the specifics of the support and training that the franchisor will provide you at the outset.
While it can be distressing if you don’t receive the promised support, there are several avenues available to manage and address this issue.