Fair or Foul? Lessons in Franchising best Practice
Franchising should be a mutually beneficial relationship built on trust and transparency. Franchisors need to remember that franchisees are business partners who have invested hard-earned savings into a business. They are not employees and they are certainly not adversaries. It’s a balancing act between being rigid with enforcing quality standards, but flexible enough to listen and adapt according to franchisee feedback. This is not always easy to accomplish!
In this edition of the newsletter we tackle some of the typical conflict zones between franchisors and franchisees and give some examples of best practice in the franchising sector.
Conflict zone 1: Fees
We start with the first potential conflict zone: fees. A point of contention between franchisees and franchisors. Franchisees don’t enjoy paying fees while franchisors may feel that they don’t earn enough for their efforts.
Initial or upfront fees should only cover franchisor development costs, pre-opening training and assistance with a small portion allocated towards the use of intellectual property. They should not be a main driver of franchisor income. Franchisors who open franchises to stay afloat are on dangerous ground and are unlikely be sustainable.
Ongoing fees mainly compensate the franchisor for ongoing assistance and should be the core of franchisor income. Most experts agree that variable fees as a percentage of franchisee income are fair to both franchisor and franchisee. This means that the franchisee will pay a fee which is in relation to his or her income. If the franchisee achieves higher sales, the franchisor will earn a chunkier royalty. This keeps both parties motivated and encourages the franchisor to support the franchisee.
Conflict zone 2: Territories
Assigning territories should be a scientific exercise rather than a thumb suck. A proper geographic information systems (GIS) study needs to be conducted to better understand the demographics of a territory as well as considering elements such as parking, accessibility and foot traffic. Franchisors need to know how many franchisees an area can support before they begin competing with each other.
It’s also considered fair for the franchise agreement to afford franchisees the first right of refusal when new competing outlets are going to open in their immediate area.
Conflict zone 3: Communication
As with any other relationship, regular communication between franchisor and franchisee helps to keep the atmosphere sweet. Franchisees don’t like to feel like they are operating in the dark and franchisors don’t want to hear about unhappiness through the grapevine.
While there is no legal requirement outlining means or frequency of communication, it’s considered best practice for a Field Service Consultant (FSC) to act as the main communication link between franchisor and franchisee. This person should be an all-rounder and live in the region to provide ongoing support to the franchisee. A rule of thumb is that the FSC should visit the franchisee in person once a month and be on hand at other times to answer queries. The FSC should keep the franchisee informed of new developments, provide refresher training and provide advice on matters relating to marketing and financial performance.
While the FSC should not be seen as a policeman, part of the role also includes conducting quality and compliance audits. This is an important feedback loop to the franchisor, although this part of the role can be inherently uncomfortable for franchisees.
If a franchisee has a complaint, the franchisor should address it and if a request can’t be met should explain the reason. Franchising should be based on a relationship with two-way communication and reciprocal trust. Merely dismissing a complaint from a franchisee is not acceptable practice. Franchisees are business owners and should be engaged as such.
Conflict zone 4: National marketing
When it comes to marketing, most people have some opinions on what is good marketing. This is true of franchising where franchisees often have strong views that marketing is working for their small businesses or not. Many franchisors allow for this input through the means of a Franchisee Representative Council (FRC). This is a representative body elected by franchisees and consulted by the franchisor.
Most franchisees contribute to a National Marketing Fund which is used to build the brand for the good of the entire network. The franchisor must account for this pool of money. This is not just best practice, its law. According to the Consumer Protection Act (CPA), the franchisor should manage the National Marketing Fund by paying it into a separate bank account and provide annual audited results of the account and reports on marketing spend. It’s important that franchisees who are not experiencing this kind of transparency hold their franchisors to account for this.
Conflict zone 5: Restraint of trade
A restraint of trade clause is usually included in a franchise agreement to protect the franchisor’s intellectual property. However, a restraint of trade may not preclude a person from earning an income and should be reasonable. For example, a franchisor will not be able to enforce a restraint which restricts the franchisee from working in a similar field for five years.
Got a query? Ask the experts
Are you a franchisee battling with an issue with your franchisor? Are you considering a franchise but have some concerns about the fairness of the offer? Drop us a line and one of the experts at whichfranchise.co.za will get back to you with their views.