Franchisee-Franchisor Conflict Resolution

In 2011 the Canadian Franchise Association (CFA) published this very informative article about conflict resolution between Franchisees and Franchisors.

This article speaks in detail about the steps that could/should be followed to resolve issues within a Franchise business model.  Their recommendations can be summarized as follows:

  1. Set up a face-to-face meeting with Franchisor
  2. Bring your issues to the Franchisee Advisory Council (FAC)
  3. Try mediation (voluntary and non-binding)
  4. Try arbitration (binding and both parties agree not to go to court)
  5. Go to court

The CFA has a very optimistic tone in this article and we are glad that Franchisors around Canada have been able to work in this reasonable way.  However, we have received numerous reports from the Vancouver area that some Franchisors have operated in such a manner that the idea of ‘reasonableness’ is far from reach.  One Franchisee from a coffee Franchise in Vancouver has reported to us that their Franchisor has established an FAC that not only doesn’t actively do any meaningful work, but they were also not given the authority to change the unknown agendas of the Directors.  Therefore, options #1 and #2 in the suggestion list above are not possible.

If the Franchisor has demonstrated that they are not willing to work openly and transparently with their Franchisors, it is very difficult to imagine initiating the voluntary and non-binding suggestion of mediation in #3 above.  For these Franchisees, it seems that either settling their matter out of court (arbitration) or suing the Franchisor for damages are their only remaining options – options #4 and #5 respectively.

Whatever the case happens to be for your Franchise business, we at the VCSFA agree with these reasonable steps outlined in this CFA article as a procedural means whenever possible.

Another very interesting point to be taken from this article is that the CFA has a kind of Ombudsman program.  Although we cannot speak for this program it is certainly something we are going to look further into, and we hope that the public will also give us their feedback if they have used this program.  Here is a direct quote from the article:

If agreement still cannot be reached, there are options. The Canadian Franchise Association (CFA) has an Ombudsman program, a free program available to all franchisees and franchisors in Canada. The Ombudsman will listen to one or both sides and try to facilitate communication. All discussions are completely confidential and done informally by phone. Contact the CFA Ombudsman at 866-443-8255.

 

 

Great Educational Document about Franchisee Advisory Council (FAC)

We were very excited when one of our members came across this absolutely top-notch document produced by the International Franchise Association

If you are a franchisee and are part of a franchise system that has not yet started such an important legal entity, or, if you are in the process of starting one, it is absolutely crucial that you read through this document and understand how the organization should be setup, what it’s for and much more.

Here is a direct link to their PDF:  Direct Download to Franchise.org’s Franchise Advisory Council document

Download it.  Save it. Read it.  Don’t lose it!

Another huge thank you to the International Franchise Association for publishing this.

And for the road, here is another link we immensely benefited from and hope you will, too

Checklist to Evaluate a Potential Franchise with bonus VCSFA commentary

Thank you very much to our member who found this article on The Business Link website and recommended that we share it.  Indeed it is a great article and worthy of some VCSFA commentary.

It is likely a fearful thing to many franchisors that potential buyers would obtain this list and actually start asking these questions.  For many of them it would likely mean the beginning of the end of their reign of folly while for the solid ones further credibility and free word-of-mouth marketing to other potential buyers.

While all of these questions are worth finding the answers to, there are some that need further expansion.

  • Is there a franchisee association or council? Who belongs?

Comment: This is the most important question you need to answer.  All the rest of the answers can be found and worked through if there is an FAC.  If you don’t know what this is or need help starting one, we at the VCSFA are here to help.  Read this article for starters.

  • How many years has the franchisor been operating?

Comment: Do not be deceived into believing that just because an organization has been franchising for a long time and has many stores that it is healthy.  Just because a hamburger chain has thousands of locations doesn’t make the burgers healthy. It may have at one time been good and now rotten.  Do your homework.

  • How many units are corporately owned?

Comment: How many of them are there, why are they owned by corporate and if they were at one time owned by corporate or are currently, what happened to the previous franchisee?  Note that you probably want to look in much more detail at a store that has been owned by corporate especially if you find out that a previous owner just ‘disappeared’ – and they do – regularly.

  • What is the franchisor’s financial condition? Have you received its most recent audited financial statements?
  • Will the franchisor provide franchisees with a statement of the disposition advertising funds?

Comment: The VCSFA members and directors will all eat their hats if a coffee shop franchisor will provide you with this information.  They typically do not open their books even to their ‘franchise partners’.  We wish you all the best of luck with this one and please email us if they do this and we will give them front page advertising on our site for a week and all the directors can swing by for a free latte at member locations!

  • Is the franchisor a member of the Canadian Franchise Association?

Comment: You can find the search field here to check.  To our surprise we found one major Vancouver coffee shop franchisor in this list that we didn’t expect to find while its major competitor was not.  Membership in these kind of associations is a good indication but we now know that it is not a totally reliable guage.

  • Has the franchisor litigated with franchisees previously? What was the outcome of such litigation?
  • Is there any pending litigation against the franchisor? What is the nature of such litigation? The status? The likely outcome of the litigation?

Comment: You can learn how to get some fast information by reading this previous article called “Does your Franchisor Hang out at the Supreme Court” and this CANLII tool (We’ll do a separate article on this beauty soon!).  To our surprise, the big Vancouver coffee player that was a member of the Canadian Franchise Association was quite readily found in court while its competitor was not a CFA member yet absent from court documents.  Just do your own homework and consult the VCSFA for any help you need.

  • Does the franchisor have a recognition program for exceptional performance? What does it involve?

Comment: The only recognition most franchisees want is money so we would recommend asking ‘Who’s makin’ money here?” instead.

  • Does the franchisor have plans for expansion or diversification? What effect will these plans have on your dealings with the franchisor?

Comment: Very important.  We have heard rumours of one Vancouver coffee shop franchisor who is starting to consider opening tea shops.  Where will that tea come from?  Will it compete against the tea sold in their coffee franchises?  Will they merchandise it at grocery stores taking away sales from franchisees?  These questions are relevant especially in the coffee shop industry during a tough economy.

  • Has the franchisor introduced any innovations since it began its business?

Comment: Think of Research in Motion (RIM). You can only ride on the success of your past for so long.  This is a fact, not opinion.  You need not only look at whether a coffee shop franchise has launched innovative new products but also – and maybe especially so – whether they have done any creative marketing.  Or are they just doing the same ol’ same ol’ (ie. contra advertising in the free paper and event sponsorship? We would also recommend adding a further question to this “Do these innovations help the franchisor and hurt the franchisee?”  Some ‘innovations’ are merely created to create more revenue for the franchisor at the expense of the franchisee.

  •  Is your franchise territory exclusive? If not exclusive, is there any territorial protection? Will there be other outlets opening near your territory? Does the franchisor sell its products through other channels? If so, what are these channels? How will they impact on the profitability of the franchise?

Comment: As touched upon above, be careful that the franchisor is not in the middle of diluting the brand with similar businesses or distribution channels.  As mentioned, there is one Vancouver coffee shop franchisor that is rumoured to be in the middle of opening a tea shop (or more).  This is a definitely ‘similar business’ – in fact that’s the terminology used in the franchisor’s contract with franchisee in the non-compete section.  Make sure your franchisor is not planning to compete with you in the same way that you agree not to compete with them!

  •   Questions to Ask Current Franchisees

Comment: This ENTIRE section is worth reading.  If you can get the current franchisee to open up about these questions, you’ll learn a lot – probably too much.  Don’t expect perfection from any franchisor, but it’s reasonable to expect reasonable.  Reasonable is reasonable.

  • The Contract

Comment:  This section is also important to completely read and understand.  The contract is the ‘heart of the franchisor’.  You can learn a lot about their past as well as their future plans via the franchisee agreement.  One question I did not see listed which has caused enormous amount of pain for Vancouver coffee shop franchisees is “Do I have to renovate?  When?  How much will it cost? What are the details?”  If the answers are vague, run away.  Run fast.

 

Just Gimme the FAC! Starting your own Franchise Advisory Council

Something that most franchisees probably don’t ever think they’d need is a FAC – a Franchisee Advisory Council.  Though it sounds vaguely like  a dirty word, the smartest thing you could do is get yours going before it’s too late.

In a sense, the FAC operates like a restaurant health inspector and a union at the same time.  In the former role, it holds the franchisor accountable to do business in an fashion that considers the well being of the customers of the restaurant (in this analogy the franchisees) while in the latter role it makes sure that the ‘voices of the people’ are heard and not suppressed.

Without a formal body to hold the franchisor accountable, there are no limits to the abuses that could occur towards the franchisee, especially considering that many purchase their franchise without any former business experience.  Many franchisors know this and will simply have a lawyer write a letter to scare any franchisee that might get a little too ‘noisy’.

Without the FAC it is very easy for a franchisor to intimidate a franchisee knowing that they likely are not having quality dialogue with their fellow franchisees.

This article published by Canadian Business Franchise Magazine covers this topic and more and is definitely worth the read.

By joining as a member of the VCSFA, you will gain access to the people and tools to help form your FAC within your franchise.