Is franchising a hot bed of disputes between franchisees and franchisors?

By Sarah Stowe | 31 Aug 2017 View comments

Inside Franchise Business: disputes occur in franchising but can be avoidedAre disputes common in franchising? It’s a pertinent question for anyone looking to invest in a franchise business.

Disputes can make the headlines but the volume of disputes in the industry remains relatively low.

The  last report on the industry, the Franchise Australia 2016 Research Report from the Asia-Pacific Centre for Franchising Excellence, indicated that approximately 1.8 per cent of franchisees and 25 per cent of the franchisors in the sector had been involved in a dispute with respectively a franchisor and franchisees, in the previous 12 months.

There is still however a lack of accurate data available.

We rely on information from the Australian Competition and Consumer Commission (ACCC), the Franchise Council of Australia (FCA) and from lawyers and advisors actively involved in the industry.

There are the usual high profile cases such as PastaCup in 2016, and the recent Domino’s and Ultra Tune prosecutions by the ACCC, and then individual disputes that arise, usually involving dispute over the marketing fund, approved supplier issues and claims by franchisees alleging misleading and deceptive conduct under the Australian Consumer Laws.

There are few recent reported decisions and the ACCC with its increased enforcement powers has only taken limited action over the past year.

These are signs that generally the industry is self-regulating, well even with the heightened compliance and regulation.

Franchisors are generally behaving well.

The interesting thing to note is that due to franchisee conduct in underpaying staff, franchisors are now in the spotlight with the new Vulnerable Workers Bill being introduced under the Fair Work Act.

Who causes the disputes?

It may be caused by a  franchisor breach of the Franchising Code or the Australian Consumer Laws; perhaps the franchisee has unrealistic expectations and hasn’t selected a system suitable to their skills or lifestyle. Australia has one of the most sophisticated franchise regimes in the world and it has been reviewed and improved over the years since it first came into effect in 1998.The 2015 Code changes encouraged and required greater transparency by franchisors and entrenched good faith obligations on both parties with a view to levellingthe bargaining power between franchisors and franchisees.

The structural dilemma

The relationship of a franchise is more akin to a partnership, but despite the changes the power and control is still with the franchisor.

Regulation is one thing but the conduct of individuals in control, whether the directors or managers within an organisation, and the way they behave and their attitude to their business partners – namely their franchisees – is the true test.

Each party brings something of value to the relationship.

The franchisor brings a system, brand, training, marketingstrategy, intellectual property and ongoing support as resources that can be utilised by the franchisee.

The franchisee operates and manages the business using those resources on a daily basis, generating goodwill with the customers, engaging with the local community and building the franchisor’s brand.

The relationship therefore is built on mutual need and mutual objectives.

6 hot dispute topics

1. Underpayments

Top of the list is the recent publicity regarding underpayment of wages by franchisees, and the new Fair Work Amendment Bill (Vulnerable Workers Bill) which will impose stiffer penalties and liability on not only the employer but also the franchisor and their related or holding companies, for accessorial liability if they were aware of or involved in the breach. This will affect franchisors who have control or influence over the franchisees’ workers.

2. Accounting fails

The failure to keep proper marketing fund accounts:Domino’s was on the ACCC’s radar in May 2017 and was fined $18,000 for failing to provide annual marketing fund financial statements and audit reports within four months after the end of the financial year.

3. The scam

The ‘great opportunity’ offers or scams are still on offer, made all too easy by the internet and vulnerable people looking for money making opportunities. The old adage applies:if it is too good to be true, it generally is a scam. Seeking legal advice at the outset may save you a huge mistake.

Getting good expert advice will cost you money, but receiving poor or inexperienced advice will cost you a whole lot more money.

Seek advice from specialist franchise advisors recognised in the industry.

4. Online competition

Online versus retail, also known as ‘the Amazon dilemma’: will we still have retail stores?  The answer of course is yes, but retail stores must learn to manage and compete with the online environment.

The other tension we see is where the franchisor operates its online environment but they are causing distrust by competing with their franchisees,marketing to the franchisee’s customers directly, in the retail environment=.

5. Perceived imbalance and inequity

The franchisee pays franchise fees and set up costs and all sorts of novel fees introduced by the franchisor, such as lease negotiation fees, property management fees, design fee…

They pay royalty generally on gross turnover, and a marketing fund levy, IT support fees, and then possibly a margin on goods supplied. The franchisor may also receive a rebate not shared with franchisees.

There needs to be equity and reward to franchisees for their effort. Franchisors must do financial analysis on their model to ensure there is reward for effort to the franchisee.

No one wants to work 100 hours a week to take a below average salary, with no return on their investment. That is not a sustainable model. It is about equity and transparency in my view. That may mean reducing royalties and costs chargeable to the franchisee, or simplifying the model which is something we are working on with franchisors.

Doing thorough due diligence on the model and its viability (getting guidance from franchise accounting experts) will help avoid disappointments and disputes.

6. Lack of respect

A lack of mutual respect: one of the more regular complaints we hear from franchisees is that they feel that there is a lack of basic respect and poor or little communication by the franchisor’s support and/or management team. This leads to a lack of trust and that is the slippery slope to the relationship failing.

As one franchisee told me recently, if the franchisor had simply fessed up that they could not properly account for the marketing fund contributions, they could have lived with that, but they simply refused to acknowledge it.

Owning up and taking responsibility for one’s actions goes a long way to diffusing a dispute.

Avoid disputes where possible

Disputes in franchising are damaging and negative to both sides. They are damaging to the brand, and impact on the franchisor’s reputation and ability to bring on prospective new franchisees.

It causes disruption in the franchise network as other franchisees who may not be unhappy decide to jump on board the unhappy train.

Disruption costs time and money and takes the parties away from their core mutual endeavour to operate a business for mutual benefit reward.

The good news is that disputes can be easily avoided and many minor complaints can be resolved without the issue escalating.

It pays to do research on a brand and the level of disputes within the system (and the severity of these disputes) before committing to a franchise.