Understanding the true heart of the franchise relationship – maintaining standards 


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Understanding the true heart of the franchise relationship - maintaining standards

When a problem occurs in franchising – if there is one – it comes from inaccurate notions about the nature of the franchisor-franchisee relationship. There has been litigation in the US after franchisors have not renewed a franchise at its termination – leaving the franchisee with nothing but their equipment. They can’t use the brand name, their clientele and not even their experience if there is a restraint of trade clause.

This, sadly, is correct. Franchising is a contractual relationship for a period of time. So successful is the franchising model that many franchisees end up with a mentality and expectation that it will go on for longer than they signed for, especially if they’re successful and making money. But it’s a contractual relationship. Franchisees should never have that expectation.

It’s like a lease

A franchise agreement equates to a lease. If you rent a place for ten years, you can’t go to the landlord at the end of the term and say, ‘You can’t lease this to anybody else.’ You leased it for a specific period of time – franchising is not much different.

Leases of course can be renewed by agreement, and so can a franchise – where trust has been created. Trust in turn is established by franchisees sticking doggedly to the standards required by the franchise agreement.

The relationship between the franchisee and franchisor boils down to a set of regulations and standards to define and protect the quality of the service or products to be provided by the franchisee to a consumer. The business that the franchisee owns is one which they are licensed to carry out strictly in accordance with the terms of their contract with the franchisor. The term of this contract may be as short as one year, but on average will be between three and five years.

What franchisees are signing up for in exchange for the advantages enjoyed by them by virtue of use of a tried and tested business model, is to abide by quality and standards. Franchisors are keenly aware of the adverse effect a bad franchisee can have on the whole of the franchised chain and its other franchisees.

It is to minimise this risk that franchisors impose standards. It is not meant to stifle entrepreneurship and innovation by franchisees – quite the opposite as many marketing, product or service innovations are in fact the result of ideas generated by one or more franchisees within the system.

What franchisors won’t tolerate

This essentially means the franchisor is the senior partner, and it will regard some franchisee defaults as incurable. For instance, the under-reporting of store sales is typically considered so serious that they go to the heart of the franchise relationship. Once trust has been broken in this regard, there is simply no going back and the relationship will be terminated.

The deliberate under-reporting of sales affects the royalties and marketing fees the franchisor is entitled to receive under the agreement – it is considered theft or fraud. It usually comes to light during franchise audits of reported purchases and reported sales, and by conducting ‘secret shops’ at the franchisee’s store, where the purchased item and the time are recorded. The secret shopper notes whether the sale was entered into the cash register, and the store’s POS data is subsequently examined to check if the sale was recorded.

In conclusion

Abiding by the franchisor’s systems goes to the heart of the franchising concept. No franchisor could reasonably be expected to retain a franchisee who deliberately deviates from those standards.