Best Practices in Establishing Good Franchise Relationships

Q&A with Frank Zaid

Updated from the original article published in Canadian Franchise Business Magazine June 2018.

Q.  How can franchisors and franchisees work together to forge good franchise relationships and avoid litigation?

A.  A simple question with a fairly detailed answer! A key principle to keep in mind is that it is up to both parties – the franchisor and the franchisees – to work together to establish and maintain good relations. However, the franchisor must take the lead in setting up programs to further good relations.

Another key principle is that good communications are fundamental to maintaining good franchise relationships. Successful franchise systems are built on trust and solid relationships. However, there will always be variations in individual franchisee performance and expectations among franchisees. Experience has taught us that a lack of trust between a franchisor and its franchisees will arise at times of stress or upset.

How can the parties communicate and solidify their relationships? Communications can take many forms which are initiated at the outset and on an ongoing basis by a pro-active franchisor: newsletters, e-mail blasts, password controlled intranet, peer review boards, franchise advisory councils, town hall meetings, conferences and conventions, independent ombudsman programs, CEO private hotline, controlled social media, field visits, performance reviews, training sessions, and an online operations manual.

Progressive franchisors should know how important it is to listen to their franchisees. They should encourage suggestions and respond quickly and respectfully. Franchisees appreciate learning of improvements to the franchise system resulting from their suggestions. Many franchisors have reward programs for suggestions that are adopted as part of the franchise system and others establish incentive programs, like paid vacations, for franchisees who reach performance targets established by both parties.

Similarly, franchisors should react professionally and timely to franchisee complaints. Franchisees should be encouraged to voice their concerns but, if possible, suggest remedies which are practical and reasonable.

Timely and informative communications from a franchisor help to allay rumours and build trust. Keeping franchisees informed of important changes and milestones can prevent suspicion and rumours among franchisees. Here are some important franchise system developments that should be communicated early and often: management changes, succession, new competition, franchisee openings, consumer research or preferences, technology enhancements, industry regulations, system standards and changes, individual franchisee milestones and successes, graphic standards, social media and crisis management programs.

For many reasons franchise disputes are on the rise. With franchise legislation having been enacted in 6 provinces giving important legal rights to franchisees, and increased publicity of disputes through conventional and social media, franchisees are much more aware of their rights and a growing number of lawyers are more active in representing franchisees.

Conflicts can arise for a variety of reasons: franchisee unprofitability, franchise system growth, market conditions, new competition, inconsistent treatment of franchisees, and failure of the franchisor to disclose material information.

How can the parties avoid or resolve disagreements or disputes without litigation? What programs can a progressive franchisor institute to minimize disputes or disagreements at any early stage?

Early dispute resolution programs offer quick solutions at a low cost, help maintain the franchise relationship, minimize disruption, do not require lawyers, and can result in business solutions.

A very simple provision in a franchise agreement to negotiate disputes is not commonly used but is worthy of more consideration. Such a provision calls for a first level of negotiations within a short time frame, followed by a second level involving senior management if the first level does not result in a resolution. The negotiations are confidential but without prejudice to either party if there is no resolution. If no agreement is reached another alternate dispute resolution mechanism (e.g., mediation) can be invoked.

Some franchise systems involve their franchisees in franchise mentor programs. A new franchisee is partnered with an experienced franchisee to answer questions, explain various procedures and operations, and possibly clear up misunderstandings.

A few established franchisors have established peer groups or peer review panels to resolve disputes, particularly inter-franchisee disputes. The program requires formal rules and procedures including the composition of the panel. Franchisor management must endorse and promote the program. The details can be in the operations manual or in the franchise agreement or an ancillary document. All hearings before the panel are confidential and generic findings can be made available to the franchisee body. The key determination in these programs is whether the review process can result in a binding decision or a recommendation for timely consideration by senior management.

Another useful program for early dispute resolution is a CEO hotline. Leadership of a franchisor comes from top management. Accordingly, the CEO can establish a private hotline – a telephone number or an e-mail address – allowing franchisees to contact the CEO on a confidential basis, with no repercussions, and receive a quick and meaningful response. Sometimes a systemic change is introduced as a result of this form of communication.

A common topic of conversation among franchisors and franchisees is whether and when a franchisee advisory council or board, or a FAC, should be established. The answer is that most franchise systems should have some form of FAC, but only when the time is right. While it is difficult to generalize, key factors are the maturity of the system in terms of years and number of franchises. A properly established FAC will have a fair balance of franchisor and franchisee representatives and a defined set of rules and procedures. The FAC can deal with a variety of issues, but must be supported by the franchisor and the franchisee body in order to have creditability. Meetings should be held regularly and for mature systems regional FACs might be necessary. Minutes of meetings and decisions affecting franchisees generally should be made available regularly.

Finally, pro-active franchisors should also consider methods of resolving disputes externally without litigation if internal programs like those discussed above do not result in a resolution of disagreements or disputes. The major types of external programs are an independent franchise system ombudsperson, mediation, arbitration or a combination.

The key proposition to keep in mind was succinctly expressed many years ago in a Franchise Relations Handbook published by the International Franchise Association in the United States: “Resolving disagreements to the satisfaction of both franchisors and franchisees has become the hallmark of successful franchise systems.” True then and equally true today.

© Frank Zaid 2021