What causes conflict in franchise relationships?

Conflict can occur in any relationship, and franchising is no different.

Franchisees seek to grow profitable businesses in their relationship with the franchisor, and franchisors seek to maximise their market coverage in their relationship with franchisees.

Both parties are drawn to the relationship for different reasons.

Separate studies of the causes of conflict between franchisees and franchisors find that there are several acknowledged causes of conflict in franchise relationships, but that the relative importance of these causes differ according to which perspective is considered.

These causes of conflict are listed in the following table and show their comparative ranking between the franchisee perspective, and the franchisor perspective.

Franchisee versus Franchisor ranking of Dispute Causes. Compiled from: Towards Conflict Resolution Australian Survey 2009 (Griffith University), and Franchising Australia Survey 2010 (Griffith University).

Lack of support from franchisor

(Franchisee ranking 1; Franchisor ranking 9)

From the franchisee perspective, lack of support from the franchisor is considered the main cause of problems in the franchise relationship, while franchisors rank this as the second smallest contributing factor to conflict.

Of all the causes of franchise conflict acknowledged by both franchisees and franchisors, the issue of support is one where both parties are poles apart.

According to the research, franchisees feel that the support they receive hasn’t met their expectations, or is too sparse to be particularly useful. In extreme cases, there is the sense of abandonment – that after the franchisee has invested their money with the franchisor, they are largely left to fend for themselves.

On the other hand, the research indicates that franchisors are relatively comfortable with the level of support they provide and don’t consider this to be a primary cause of conflict in the relationship.

This clash of perspectives often boils down to a mismatch of expectations by both parties prior to and at the commencement of the franchise relationship.

In their recruitment process, franchisors may make statements about the level of support provided which create a much higher expectation in the mind of the franchisee than the franchisor can actually deliver.

Alternatively, the franchisee themselves may develop an unrealistic expectation of the frequency and nature of the support available despite anything said by the franchisor.

Compliance with system

(Franchisee ranking 2; Franchisor ranking 1)

The second-greatest cause of disputes from a franchisee perspective is also viewed as the leading cause of disputes from a franchisor’s perspective.

This shows two sides to the same coin.

Franchisees feel that franchisors are too rigid in their enforcement of compliance, and would prefer a profitable business than a highly-compliant business.

Franchisors on the other hand feel that compliance is necessary to maintain the integrity of the brand, and in turn, should lead to higher levels of franchisee performance.

By “failing to follow the system” franchisors feel that franchisees are undermining their own investment in the franchise, as well as risking the brand promise across the network.

However franchisees feel that the system should be improved, or is downright deficient, and seek to develop their own standards and procedures that they believe work better than those provided by the franchisor.

Fees

(Franchisee ranking 3; Franchisor ranking 6)

The payment of fees, also known as royalties, is ranked as the third most significant factor leading to disputes according to franchisees, but is ranked much lower by franchisors. Again, the perspectives here differ significantly.

Franchisees often feel that they pay fees in return for certain services provided by the franchisor, especially support which we have seen is the number one cause of disputes from a franchisee perspective.

If support is below expectation, then franchisees may become unhappy with the fees and cease paying them, or argue for a reduction in fees. They might also cease paying fees if their business is financially distressed.

Franchisors treat the underpayment or non-payment of franchise fees as a major breach of the franchise agreement, irrespective of the franchisee’s satisfaction or otherwise over what they are actually getting for their fees.

Communication problems

(Franchisee ranking 4; Franchisor ranking 7)

The difference in relative importance associated with communication as a cause of franchise disputes, where franchisees rate it more highly than franchisors, is similar to the differing perspectives on fees.

On the one hand, franchisees can feel that they are not well-enough informed about the franchise, its operational requirements, and the direction of the brand as a whole, whereas franchisors may argue that franchisees fail to keep the franchisor informed by not submitting reports or providing other information.

Again, this common cause for conflict appears to come down to a mismatch of expectations, and the capacity or willingness of either party to meet the expectations of the other.

Misrepresentation issues

(Franchisee ranking 5; Franchisor ranking 2)

Despite franchisor perceptions about misrepresentation issues being the second-largest cause of franchise disputes, franchisees only rank it fifth in importance.

However it is possible that some of the issues which are more important to franchisees, such as support, compliance and fees, have the potential to arise from misrepresentations when joining the franchise (or misunderstandings of what was represented at the time).

Franchisor concerns about misrepresentations are typically centred around earnings claims that may subsequently prove to be inaccurate, whereas franchisees may be focussed on the necessary inputs to achieve the earnings, rather than the earnings target itself. (This might explain why support is ranked as the highest cause of disputes by franchisees, who may feel that if the support is sufficient, the earnings will follow).

Marketing issues

(Franchisee ranking 6; Franchisor ranking 8)

Marketing is viewed by franchisees as a key benefit of joining a franchise. Franchisees usually pay a contribution into a marketing fund, which then pays for some or all of the advertising and promotion to benefit the network.

While lower on the scale of causes of disputes, franchisees may become dissatisfied if the marketing campaigns that have been funded by their contributions have not produced adequate results, or if they feel that their contributions are being wasted or spent unwisely.

Franchisors may also be sensitive to these perceptions of the effectiveness of group marketing. While the perspectives on the issue of marketing are not always different, the importance of it to drive business to a franchisee’s outlet is not to be underestimated.

Profitability

(Franchisee ranking 7; Franchisor ranking 3)

Again the differing perspectives here make for an interesting comparison. While franchisors feel that a lack of franchisee profitability is a major cause of disputes, franchisees themselves rank profitability as less important than support, fees, compliance and so on. Perhaps the franchisee perspective here is that one is dependent on the other – which is that a lack of support may then lead to a lack of profitability.

Other issues

The remaining issues which are triggers of disputes from a franchisee’s perspective, include agreement and territory issues, deceit or excessive control by the franchisor, and stock issues.

Aside from territory issues, franchisors don’t rank these as major causes of disputes. For territories, franchisees may feel that the franchisor restricts their growth by keeping them in just one area, whereas franchisors expect franchisees to maximise their penetration of a given area rather than providing goods or services outside it.

What happens when conflict occurs

The research indicates that franchisors have a higher threshold before recognising a conflict than franchisees.

The Franchising Australia Survey indicates that the three most common methods of dealing with franchise disputes are (in order):

• Correspondence via solicitor.
• Mediation
• Litigation

Alternatively, the conflict research indicates that franchisees resolve disputes first by verbal negotiation, then written correspondence to the franchisor, then written correspondence by a solicitor.

Franchisees recognise verbal negotiation as their primary means of resolving conflict whereas franchisors appear not to attribute the same importance to this as a means of dispute resolution, and instead to prefer much more formal techniques such as legal correspondence, mediation and litigation.

Part of the reason for this difference in approach may be the franchise agreement itself. As the party which issues the agreement, the franchisor will be far more familiar with the provisions that deal with breaches of the agreement, and which lead to disputes.

The franchisor can revert to a strictly legal interpretation of the franchise relationship based on their rights and the franchisee’s obligations under the agreement, whereas the franchisee takes a far less legalistic view often as a result of not properly understanding the franchise agreement in the first place, and placing a greater emphasis on the “partnership” of the franchise relationship.

If discussions fail to resolve a dispute, particularly where the franchisee is not complying with their obligations under the agreement or the operational standards of the franchise, then the franchisor may have no choice but to issue a breach notice.

Unless a franchisee has previously received training about the nature and purpose of breach notices, once one is issued, the relationship is likely to become increasingly strained.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.