The Legal Franchise Landscape: Navigating Franchisor/Franchisee Relationships
I am not going to mention 2020, that is well behind us now and I am pleased to say there seems to be remarkable resilience and confidence in business this year.
With many people being made redundant or having to look at a career change, this has led to many people being on the market as potential franchisees to secure a job and an income. There has also been a lot happening in the franchise sector legally with reforms not far away which will impact on franchisors requiring greater compliance and transparency.
The Australian legal landscape
We have gone through an unprecedented amount of change over the last three years with all sorts of Royal Commissions and Inquiries in the banking and franchise sectors impacting on business.
Although this is no time for business to be complacent, this has also opened up certain sectors who see franchising and or licensing as the suitable model for business growth.
This is despite the negative press and further regulation franchisors will need to meet.
Franchising remains a business model that provides a platform for new business operators and those that want independence from employment.
Franchisee expectations and complaints
When investing in a franchise, franchisees expect their franchisors to:
- be legally compliant and up to date with all legal requirements
- make sure the system works for the franchisee financially; that is, the franchise enables the franchisee to take a reasonable salary for their effort and cover their costs and loan commitments
- have invested in technology and product or service development
- be bold, but fair and transparent in dealings
- communicate and be interested in the franchisee’s wellbeing and financial health
- have a team of managers, business development officers’, recruiters and support staff that share the same supportive attitude towards franchisees
- be IT and AI smart in their operating systems and on line and digital technology
- have an established social media presence
- have established better deals from suppliers to help franchisees improve their margins
- share the risk with their franchisees – business is tough.
Over the past year, here are a few of the most common complaints we have received from disgruntled franchisees and our advice for improving the franchisor/franchisee relationship:
- “I am working incredibly long hours with minimal return on my effort and investment”
To turn this situation around the Franchisor may need to consider: renegotiating with key suppliers to give Franchisees better margins on sales or giving franchisees some part of the supplier rebates; re-evaluating the financial model including the royalties, marketing and other fees charged; and reviewing the financial model and adjusting it to make it more viable for franchisees.
With tightening margins for franchisees, the franchisor still gets their royalties on gross turnover, so franchisees perceive that there is no sharing of risk or pain by the franchisor when times are tough.
It is a big and bold step for a franchisor to review their financial model, but it may be a better option to rebuild confidence and trust in the model rather than ending up in disputes and an unhappy franchise system.
- “I am getting no real support or communication from the franchisor”
Franchisees complain about a lack of support and concern by their franchisor which leads them to feel they are being gouged for fees - again leading to an unhappy system. A lack of, or poor, communication is one of the key factors that can lead to dispute in a franchise relationship.
Franchisees want to feel they are part of a team not only with other franchisees in the system but also as a strategic partner with their franchisor, so franchisors need to bring their franchisees along with them for the ride.
This means communicating with them regularly in person, online, and via social media to share their plans, successes, failures and objectives.
- “I get nothing for my contribution to the Marketing Fund”
Marketing funds remain one of the greatest areas of angst and potential dispute, despite the Franchise Code requirements for franchisors to be more transparent and account in more detail for their marketing fund spend.
Recent decisions by the Court and ACCC guidelines make it clear that audited reports must contain meaningful information to franchisees and sufficient detail for franchisees to understand where the marketing dollar has been spent.
We are working with new franchisors on simplifying their model tailored to their industry sector, removing unnecessary obligations, fees and costs that cause disputes, and working on financial models that make entry into a franchise more attractive and affordable.
What’s HOT in franchising in 2021?
We are seeing continuing growth in online platforms that provide B2B solutions and services. The logistics and courier sector has seen huge growth over the past 12 months with online shopping increasing. Mobile franchises are increasingly on the rise offering flexible work hours and low overheads. Australia continues to be an attractive market for overseas brands in hospitality with innovative new fast-food offerings. And the ‘silver economy’ is one the rise as franchisors tap into the lucrative 50+ market with in-home IT support, maintenance and repairs in home health and wellness services.
Colin Crawford, General Manager of Wollermann Franchise Developments (WFD), a leading Australian franchise development consultancy based in Melbourne, has advised clients in the sector for over 30 years. He sees 2021 as a great year for growth in the following franchise sectors:
- home help services including aged and disability care support
- childcare and early learning programmes for pre-school children
- fitness and beauty
- hospitality with new and innovative food concepts.
All models and options should be considered when looking to commercialise a business system or deciding to take up a franchise right. Colin said it was surprising how often at the end of a business model analysis that the franchise model - or hybrid version known as a ‘branchise’/joint equity model - ends up being the best way forward for prospective franchisors.
Establishing a franchise system is one thing, however getting it out into the market and commercialising it takes enormous effort, resources, money and commitment so you need to have the right team supporting you – that is, franchise legal, financial and consulting specialists who know the market.
Robert Toth is a Partner of Marsh Maher Richmond Bennison Lawyers, with over 35 years’ experience in Franchise, Licensing and Distribution law acting for both local and International franchisors, franchisees and master franchisees and with expertise in dispute resolution.
Robert is an Accredited Commercial Law and Franchise Specialist, a member of the Franchise Council of Australia (FCA) and the International Franchise Lawyers Association (IFLA) and regularly writes for franchise and corporate journals online.
Contact Robert@mmrb.com.au or even call him on mobile 0412 67 37 57