Take steps to avoid disputes with your franchisees

What can franchisors do to prevent disputes with franchisees? 

Franchising industry has, over the years, endured many high profile disputes between franchisors and franchisees.  In most cases, lack of communication together with poor selection of franchisees have been the contributing factors to many franchise disputes.

In Australia, there are numerous avenues available if a dispute arises in a franchise relationship, including mediation and formal legal proceedings. However, these are expensive and time consuming. Instead, parties should aim to avoid disputes, as prevention is always better than cure.

Why does conflict surface in a franchise relationship? There are many causes of disputes. However, in most cases, disputes arise as a result of one of potential triggers for a conflict, including:

1. Misrepresentations and overselling by the franchisor at the beginning of a franchise relationship;

2. Lack of profitability of the franchisee;

3. Misfit of the franchisee and the franchise system; or

4. Poor communication before the start of and during the franchise relationship.

Avoid misrepresentation

Before any franchisee signs on the dotted line, a franchisor must provide each potential franchisee with all the information needed to assess the franchise opportunity. Amongst the documentation required to be provided by franchisors is a disclosure document, format of which is contained in Annexure 1 of the Franchising Code of Conduct. The disclosure document outlines information which is vital to franchisees in deciding whether or not to enter into the franchise agreement and the viability of the franchise business.

It should be remembered that accuracy of information provided and transparency of communication are key to ensuring longevity of any franchise relationship. In turn, inaccurate information, misrepresentations or provision of false promises as to the profitability of the franchise business often result in disputes.

Franchisors should take great care as to what information they provide to franchisees to avoid future conflict. It is often recommended that franchisors do not to provide any earnings or profitability information to its potential franchisees, thus ensuring nothing can be misinterpreted, unless such information is actual factual data.

Franchisors may also benefit from ensuring that:

  • They are carefully selecting the right franchisees for their business
  • Franchisors’ sales staff are informed and trained in complying with franchising laws and are not making any misrepresentations

It is prudent for franchisors to develop selection criteria which will assist them in assessing all potential franchisees and whether they are a right fit for the franchise opportunity on offer.

Once the franchisees have been chosen and become part of a franchise system, franchisors should then ensure regular visits as well as making themselves available and approachable to discuss any of the franchisee’s concerns or questions. Such an approach can help foster a franchise relationship that allows for the development, or maintenance, of mutual trust and confidence.

Finally, franchisors need to create a clear and simple internal dispute resolution process that can cater for resolving smaller matters before they escalate. This will ensure both parties have the opportunity to deal with issues in a timelier and less aggressive manner. Most importantly, it will allow the parties to focus on the growth and prosperity of the franchise.