PUBLISHED ON 2nd OF december 2014 ONLINE – FRANCHISING MAGAZINE
Franchising is a business relationship between a franchisor, who is the creator of a system or method of doing business within a particular brand, and franchisees, who are independent people or entities, licensed to operate the replicated version of such system.
One of the key factors for a franchise network to be successful is franchisee compliance with the franchisor’s policies and procedures. It is essential for a franchisor to be able to exercise significant control over their systems, including ensuring franchisee compliance and managing the poorly performing franchisee, in order for the franchise model to be effective and to protect their brand.
As a result, franchisors require all of their franchisees to enter into onerous franchise agreements, which govern the franchise relationship. From the perspective of the franchisor, the franchise agreement needs to ensure that there is no ability to remodel, damage, or operate the franchisee’s business in any manner which is contrary to the policies and procedures of the franchisor. Incorporation of the franchisor’s policies and procedures and the operations manual into the franchise agreement is vital in guaranteeing the ability to enforce franchisee compliance.
Franchisors must be able to dictate strict guidelines concerning the required structure and operation of each franchised business, including choice of location, signage, hours of operations, products sold and services offered, local marketing. At the end of the day, each franchise outlet should have the same look and feel as all other outlets within the same brand and system and provide the same customer experience. The need for uniformity requires the franchisors to constantly police the actions of franchisees within the system in order to protect their brands.
Strong franchise systems consider open communication between the franchisor and its franchisees fundamental in ensuring continuous growth, innovation and success of that franchise system. Moreover, franchisors of all successful franchise systems strive to ensure that their franchisees are well trained, well-motivated and well supervised in a franchise. Another measure of ensuring compliance employed by many franchisors is regular visits to franchisees by field managers to ensure compliance and to educate franchisees in relation to improving the business performance. In the current technologically advanced era, most franchisors deploy point of sale systems and web-based accounting and reporting programs that allow constant monitoring of franchisees performance without leaving their desk.
It is a general advice by most franchise legal practitioners that when potential franchisees are looking to buy a franchise, they need to undertake a thorough due diligence and financial analysis of the franchisor’s operations and the operations of the franchisor’s group as a whole.
In addition, each potential franchisee should consider the following questions before making the final decision to buying a franchise:
- What policies and procedures does the franchisor have in place and how closely are these followed?
- What initial and on-going training is offered by the franchisor to its franchisees?
- Does the franchisor have a compliance program in place?
- Has the franchisor registered trademarks of the brand?
- Has the franchisor taken actions against franchisees in the past to enforce its rights?
- In turn, have any franchisees taken actions against the franchisor?
- How does the franchisor manage underperforming franchisees?
- Have many franchisees being moved out of the franchisor’s system for non-performance?
- Does the franchisor rigorously enforce its policies and procedures?
In relation to gathering information about the franchisor’s management of franchisee compliance, potential franchisees should always speak with the current and past franchisees within that franchise system, as they are the best source of information about the way the franchisor operates. Searching the internet, ASIC, IP Australia, ACCC and other databases is also very useful in obtaining more information about a franchisor and a particular franchise system. Legal assistance by a franchise lawyer is highly recommended in gathering all the required information and assessing the opportunity.
It is important to note that a franchisee’s non-compliance with the franchise agreement enables the franchisor to terminate the franchise relationship, provided they follow the process compliant with the Franchising Code of Conduct. Compliance with the franchisor’s systems is a key factor to being successful as a franchisee.