Do franchisees receive enough information to make an informed decision to acquire a franchise? The recent Consultation Paper released by the Commonwealth Government in connection to another review of the Franchising Code asks about the effectiveness and content of information made available to franchisees.
Some interested parties in the franchise industry consider that sufficient information is provided to franchisees and object to any further imposition of disclosure obligations on franchisors. We disagree in part because having acted in many franchise disputes and attended hundreds of mediations, a recurring almost inevitable issue that arises is these disputes is franchisee dissatisfaction with the level of support the franchisor provides or fails to provide the franchisee.
If the Code needs a change then the change should specifically target disclosure of information about precisely what support franchisees may expect from franchisors. This is needed to close what we call an expectation gap.
Complaints about lack of support by franchisees seem to primarily fall within the following broad categories:
1. Inadequate initial and ongoing training;
2. Unwillingness to allow for changes to the way the franchisee operates its business;
3. Failure to assist franchisees when they are experiencing financial difficulties;
4. Lack of response to requests for assistance.
These categories of complaints are aspects of what we call the expectation gap. This is the gap between what the franchisee expects by way of franchisor support and what the franchisor is contractually prepared to provide. It is a clear and ever present danger to the health of the franchisor and franchisee relationship.
The contractual clauses in franchise agreements are often very few and general in nature. In disputes, the support franchisors assert they provide franchisees may be limited to as little as providing the franchise model and responding ad hoc to some questions the franchisee asks of problems it raises. Providing a turnkey operation (which at best only truly describes some franchise formats) does not necessarily mean the franchisee is sufficiently trained and equipped to operate it.
Our experience of complaints within these categories is as follows:
Most franchise agreements provide for initial and ongoing training and, at least for initial training, but often for ongoing training there is a fee charged by the franchisor. The initial training usually happens before or in conjunction with a commencement date and may last for days or weeks.
The complaint by franchisees that the training is inadequate even if its lasts for weeks is common. On occasions the complaint is that the training before commencement does not equip the franchisee in the conduct of the business. The fact that the franchisor provides a comprehensive operations manual rarely seems to close the expectation gap of between the level of training the franchisee expected or at least what the franchisee expected it would achieve and the training that the franchisor provides and how well it equips the franchisee to competently operate the franchise business after its commencement.
Another complaint is that the quality of the training is poor, and the content is inadequate. The complaint is often made in hindsight after sufficient time has passed for franchisees to learn from experience how to conduct the type of business that the franchise system grants the franchisee a right to operate.
Franchisor inflexibility allowing changes
Franchisees generally understand the benefit of conformity of franchisees with their franchise system model and its importance to the reputation of the franchise system and its brand.
Franchisees become frustrated when the franchisor flatly rejects any change to the manner in which a franchisee operates its own franchise business, especially when the changes make business sense, and no good business reason is given for rejecting the change. The problem is more acute when the franchisee is struggling financially, and the franchisee perceives that the change is likely to increase income or reduce expenses.
This is a potential serious friction point in the relationship between franchisee and franchisor and effective communication around requested changes to how the franchisee’s own franchise business is operated should be a priority for franchisors.
Failure to assist franchisees when they are experiencing financial difficulties
Nothing brings into sharper relief the expectation gap than when the franchisee starts to struggle financially. Franchisors may be entitled to stand behind the contract and offer nothing extra and make no concessions on payment of royalties and other fees but doing so inevitably turns frustration into hostility.
Regardless of franchise agreement terms which almost entirely shift risk of business failure to the franchisee, it is trite that franchisees expect the franchisor to be invested in their success or failure. The consequences of lack of support by the franchisor to the franchisee’s financial plight can be serious internal reputational damages amongst franchisees in the franchise system, especially if several franchisees face the same financial difficulties.
Lack of response to requests for assistance
In an age of instantaneous communications responses from service providers in real time is a general expectation. It is more acute in the franchise industry where the franchisee obviously seeks a response to problems and information from the franchisor. After all, it is the franchisor’s system, and from the franchisee’s perspective who else should the franchisee turn to for such assistance regardless of what the franchise agreement requires the franchisor to do.
This problem is more acute is circumstances in which the franchisee is having problems with software or systems (e.g., a point of sale system) it is compelled to use by the franchisor, but which is not working properly and causing loss of time and disruption to the business.
The take-away for franchisors is that there is very often an expectation gap between what support the franchisor is contractually obliged to provide and what support franchisees expect to receive from franchisors. This generates serious friction points that franchisors need to manage as a priority to maintain a healthy reciprocal business relationship with franchisees.
The take-away for franchisees is that regardless of the information the Code requires the franchisor to provide to prospective franchisees, it is likely inadequate on the issue of the level of support franchisors are required to provide franchisees. This should not prevent the franchisee seeking as much further disclosure on this issue as it considers necessary to make an informed decision whether to acquire a franchise business.
By the time a dispute has reached mediation or litigation, the point has often been reached where the relationship has soured to the point of no return. The dispute needs to be avoided at the start. Franchisees when considering buying franchises, as part of their due diligence, should make more enquiries around what support (e.g. training) is to be provided or not provided by franchisors. Further, franchisors should make it clear in their documentation and go beyond the disclosure required by the Code. This will help close the expectation gap.
Bill Morgan has over 25 years experience in Commercial Litigation and Dispute Resolution with a focus on the franchise sector. He is a nationally accredited mediator and is a panel member of the Australian Small Business and Family Enterprise Ombudsman.
Bill Morgan | Director | Morgan Mac Lawyers | T: 07 3221 2221 | E: firstname.lastname@example.org | https://morganmac.com.au