What Can I Do With A ‘Bad’ Franchisee?

Contents

A franchisor-franchisee relationship is one of mutual dependence and reliance. A strong relationship can generate strong benefits for both parties. However, like any business relationship, they can experience some bumps along the road.

It is sometimes easy to demonise or classify franchisees as ‘bad’ or ‘difficult’ due to underperformance or a difficult attitude, but this sort of thinking is reductive and can be unfair to your franchisees. Most franchisees are not inherently ‘bad’ or ‘difficult’. A lot of the time, some of these complications are within your control as the franchisor.

It is also worth noting that there is often a shared fear of failure among franchisors and franchisees that can contribute to an emotionally heightened and more stressful atmosphere. In such a space, blaming the other party is the easy option. A better course of action is to allow a specialist franchise lawyer to examine the root causes behind why your franchisee might develop a ‘difficult’ attitude or might become a so-called ‘bad’ franchisee.

Why Do Problems Arise?

An initial point to make is that many issues between you and your franchisees will likely result from differences in expectations. These expectations will usually be set out in the initial stages of negotiation before agreeing to a franchise agreement which legally states these expectations.

If the expectations required from both parties are clear and unambiguous, problems with expectations will be reduced. This is why it is important to have a lawyer review your franchise agreement before it is finalised.

Communication

Communication with your franchisee is also a crucial aspect of the business relationship, and breakdowns in communication can lead to a breakdown in the overall relationship. This problem is perhaps more common where a franchisor has many franchisees to communicate with.

If larger strategic or financial changes are made by the franchisor without being properly communicated or explained to each franchisee, they cannot voice concerns and have to react quickly to these changes without being fully informed. To avoid this, it’s a good idea to have direct informal access between franchisor and franchisee via a phone number or email address.

Before you announce any major changes, it’s always good to proactively seek franchisee input to reduce problems with communication. If you are unsure of the impact of a particular change, one of our specialist lawyers can provide some advice.

Franchisee Exposure

Although this may differ depending on the structure of your organisation, it is likely that the franchisee will own more franchises than the franchisor. As a result, franchisees will be the most exposed by poor decision making or ill advised changes.

Costs And Royalties

Essentially, franchise royalties are what your franchisees will pay you for the opportunity to buy and run their business. To avoid issues with your franchisees, the royalties should be closely aligned with your business as well as what you expect to provide your franchisees.

If they are too high, this can lead to franchisee stress and underperformance. They should also be tailored to the support you are willing to provide. If you are willing to supply ongoing assistance and support, a higher fee might be suitable.

We’ve written more about franchising royalties and costs in this article.

Issues With Technology

Technology is an important part of every business and its implementation is key to success. However, issues can arise where a change to technological practice is mandated by the franchisor.

Franchisees can become comfortable with a specific form of technology, and a large-scale departure can be confusing and stressful. Thus, before making such a change, clear rationale should be provided, alongside training and assistance with the new technology’s implementation.

This will help ensure a successful rollout that will lead to franchisee satisfaction and mutual benefit.

Corporate Standards

Although many of the previous problems largely place the onus on the franchisor, franchisees are not exempt from responsibility. Franchises depend on consistent standards, so if these are not being met by a franchisee, there is a problem.

This might be an unintentional accident, or a deliberate avoidance of responsibility. Regardless of the standard breached, it should be remedied. These standards should be closely monitored to ensure that they are being followed. If they aren’t, the franchisee should be informed.

Further, it is worth ensuring that your franchise agreement covers situations where a franchisee does not take the information onboard. For example, you may want to include a financial penalty or an option to terminate the agreement.

Disagreement Over Strategy

It is not uncommon for a franchisee to buy a franchise that later experiences significant strategic change post purchase. However, it can be disconcerting for a franchisee if they disagree with the proposed change. To overcome this, clear communication about the change and the long term vision behind it is crucial.

Lowering royalties for a period during the translation could also be a good strategy to ease franchisee stress. This will likely present itself during the franchisee-franchisor relationship at some point. Having clear plans that can be supported with evidence will help overcome disagreement.

Ultimately, it is likely to be your decision. But this doesn’t mean the franchisee shouldnt be consulted or helped throughout the transition.

How Can I Resolve These Issues?

Problems aren’t set in stone – they can be resolved. They aren’t set in stone once they develop. There are multiple resolution activities you can try to help ease tensions and restore the relationship. If you are looking for advice as to what you can do in the specific circumstances, contact one of our lawyers for some quick and easy assistance.

It is easy to overstep your ambit as a franchisor – after all, it is your business. However, it is important to remember that the franchisee also sees the franchise as their own. If you are constantly telling them what to do or trying to micromanage their performance, this will likely lead to issues.

So, an important aspect of the business relationship is clearly defining your role in the initial agreement, as well as taking a step back if you think you might be overstepping. This will help resolve conflict and prevent further issues.

It is also possible that you might be treating your franchisees unequally. If a franchisee feels unsupported or uncomfortable with this kind of favouring, it’s important to address this. This sort of preferential treatment will likely not be covered by the franchise agreement and will lead to issues with franchisees feeling left out.

As a last resort, you might consider initiating court proceedings. This is a costly and aggressive step and should only be considered if you have no other options. For instance, if a franchisee has paid no royalties for a number of months despite multiple warnings, court proceedings should be considered.

Our lawyers at Sprintlaw can help you understand this process as well as looking into whether it should be initiated.

Contract Termination

The termination of your contract should only be considered as a last resort. Terminating your franchise agreement is no small step. The process tends to be quite expensive and can lead to a potentially irrevocable deterioration in your relationship with the franchisee in question.

This article discusses the ways in which you can validly terminate your franchise agreement. However as previously stated, this is an option of last resort. You should first try to repair the relationship with your franchisee.

Key Takeaways

The franchisor-franchisee business relationship is one that requires mutual dependence. In such a relationship, it is never a good idea to declare a party ‘bad’ without first inquiring into the circumstances and potential problems they have experienced.

These issues have been laid out in this article, but an in-depth review of your business specific facts and circumstances by a Sprintlaw lawyer is a good starting point for any potentially ‘bad’ franchisee.

If the franchisee’s actions or state of mind is not due to any of these problems and the resolution activities have failed, the termination of your franchise agreement should be considered as a last resort.

Franchising Resources

Laws around franchising can be quite dense, and it is an area of law that requires expert legal help. We have a number of resources to guide you in various stages of the franchising process, such as:

Need Help?

In any case, hiring a specialist franchising lawyer is always a good idea before proceeding with any sort of legal action or closely examining any of the listed problems in your business’s specific circumstances. The relationship between you and your franchisee is crucial, and any step towards changing it should be closely reviewed.

If you need a hand with anything to do with your franchisees, you can reach out to us at team@sprintlaw.com.au or contact us on 1800 730 617 for an obligation-free chat.

Will Tinney

Will is currently completing his Juris Doctor at the University of Melbourne and is interested in helping to provide equitable and efficient access to legal resources.

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