Q&A With Frank Zaid: Mistakes to Avoid in Franchising

By Frank Zaid
November 6th, 2017

Q: What common mistakes do you see in franchising and how can they be avoided?

A: I have been involved in franchising in many capacities for nearly 45 years, as a lawyer, a mediator, an ombudsman, an arbitrator, an expert witness, an investor and a member of franchisors’ and franchise associations’ boards of directors and executive committees. Through this extensive involvement, I have seen many challenges commonly faced, though from diverse perspectives, and many mistakes commonly made. To tackle these challenges and avoid these mistakes, the key is to take a simple, pragmatic approach based on certain fundamental values.

Legal issues
From a purely legal perspective, there are many common challenges and mistakes in the franchising sector, including franchise agreements that are outdated, do not reflect adequate attention to detail or do not sufficiently capture the unique features of a particular franchise system, along with franchise disclosure documents that are deficient in one way or another. Other outdated or incomplete collateral documents may include leases, subleases, personal property security agreements, guarantees, intellectual property (IP) or software licences, intranet use agreements and social media policies.

Some franchisors define but fail to protect their IP, particularly trademarks, while others fail to enforce their system’s standards when dealing with non-compliant franchisees. In some cases, they even lack awareness of the business and industry standards that affect their type of franchise system.

It is essential for franchisors to stay well-informed and remain alert of any such issues. All of these matters can be addressed by retaining knowledgeable, experienced legal counsel. Franchise lawyers can proactively review and revise a franchisor’s documents on a national basis.

Business and financial issues
Franchise systems must also tackle common business and financial challenges. Undercapitalization of the franchisor, for example, can lead to an inability to service and grow a system, which in turn can cause discord among franchisees.

There may be a lack of a proper and detailed financing program for both the franchisor and the franchisees. And where there are incomplete and/or delinquent records and reports from the franchisees, these may be due to a franchisor’s failure to monitor and enforce franchisee performance.

Franchisees should be wary if their franchisor does not provide ongoing services and advice, collect sufficient funds to develop a successful national advertising program or negotiate the best possible terms with suppliers in terms of pricing, allowances, assistance and rebates.

These matters can be partially addressed by working with a business or financial advisor experienced in franchising, but the franchisor must also become familiar with industry trends and specific systems, including electronic point-of-sale (POS) and reporting systems. And the franchisor needs to be willing to provide financial and operational advice and assistance to its franchisees on a timely basis.

Other issues
Some of the other common challenges and critical mistakes that can lead to failure of the franchisor, its franchisees or the franchise system in general include failure to introduce and use new technology, insufficient monitoring and understanding of the competition, failure to introduce continual system changes and improvements, poor location analytics, lack of qualified and responsive head office support and failure to understand changes in the consumer marketplace.

Dispute resolution
As suggested, some of the aforementioned challenges and mistakes can lead to disputes between franchisees and their franchisor. And unfortunately, many franchisors do not have a program in place to deal with such potential disputes before or after they arise.

There are numerous ways through which franchise disputes can be avoided or, at least, resolved prior to litigation, including the implementation of a franchisee hotline, the formation of a franchise advisory board or peer review panel, the designation of a dispute officer or independent ombudsman, mediation or arbitration. Each option calls for experienced counselling before implementation. And whichever dispute resolution program is selected, it should be well-documented and openly disclosed among the franchisees.

Indeed, in my experience, the most common problem affecting franchise systems is poor communication between the franchisor and the franchisees. A successful business must be built on trust, so positive relationships between these parties are paramount.

Ups and downs in financial performance, the threat of competition and the level of consumer acceptance are all normal, but if the franchisor does not maintain an ongoing, informed and open process of communication with its franchisees, then a lack of trust can easily arise between the parties at times of stress or unrest.

Communications within a franchise system can take many forms, including newsletters, e-mail blasts, a dedicated intranet, franchise advisory boards, ‘town hall’ meetings, national and regional conferences and conventions, independent ombudsman programs, senior management hotlines, controlled social media, field visits, inspection reports, performance reviews, supplier announcements, training sessions and operations manuals, just to name a few.

Communication must be frequent, open, objective, direct, useful and honest. Franchisors should welcome suggestions and recommendations from their franchisees.

Any negative communication must be conveyed in a responsible manner, with appropriate rationale and expectations. Franchisees’ complaints should be dealt with in a professional and timely manner. And franchisors should not denigrate franchisees among one another, but should instead focus on recognizing good performance and encouraging success.

Some examples of topics and items that would merit communication with franchisees include changes in management, withdrawal of the founders, changes in the industry, arrival of new competition, consumer research and preferences, new technology, new governmental regulations, product recalls, enforcement of system standards, financial assistance programs, franchise advisory board reports, franchisee performance and milestones, ombudsman reports, renewal procedures, additional franchise policies, social media policies, new franchise openings, crisis management and, as referred to earlier, alternate dispute resolution (ADR) programs.

Many potential problems and challenges can be avoided with frequent, open and honest communications, with the franchisor exercising reasonable and responsive consideration for franchisees’ concerns. The key is to start ahead of time. When communications about a given challenge only begin after that challenge has already arisen, they are only likely to escalate the problem.

Some of the most highly publicized franchise class or group actions in recent years have involved systems in which communications were addressed. In some cases, the courts praised the franchisors’ communications and the franchise advisory boards in question, while in other cases, they were highly critical of them.

In any case, successful franchisors understand the value of strong communications, which can be seen in their excellent relations with franchisees and are also reflected in a high level of consumer acceptance and an absence of negative publicity. It is never too early to start.

“Many potential problems and challenges can be avoided with frequent, open and honest communications, with the franchisor exercising reasonable and responsive consideration for franchisees’ concerns.“

Frank Zaid practised franchise law for 40 years and has appeared as an expert witness in franchise disputes. Today, he is a franchise mediator, arbitrator and ombudsman with ADR Chambers in Toronto, where he chairs a special panel to resolve franchise disputes. He also operates his own business, Frank Zaid FRANlegal Support Services. For more information, contact him at (416) 322-8300 or (416) 362-8555 or via e-mail at fzaid@frankzaid.com or fzaid@adrchambers.com.

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