Will you ever look at your franchise agreement again? Four common mistakes franchisors make

Experienced franchisors commonly remark that although the franchise relationship ultimately boils down to the rights and obligations outlined in the franchise agreement, the agreement itself is a document that hopefully both parties will never need to look at again once it has been signed.

In other words, the parties develop a level of trust and respect for each other that makes it unnecessary for one to reassess their legal rights in relation to the other.

From a franchisee’s point of view, this is often a fruitless exercise anyway, as the franchise agreement is invariably written in favour of the franchisor in order to protect the integrity of the network.

Start-up franchisors rarely understand the complexity of the franchise relationship, and often make mistakes which they later regret.

The first mistake is to get a franchise agreement put together before they have fully tested their business across multiple outlets and therefore know what terms and conditions to impose on a franchisee.

The second mistake is to get this agreement drawn up by their family lawyer who has no experience in franchising, or worse still, to write the document themselves by cobbling together whatever agreements they’ve found on the internet.

The third mistake follows during the recruitment phase, when, through a lack of highly-defined selection criteria, the franchisor may recruit people who are unsuited to the franchise.

The fourth mistake is to make one-off changes to individual franchise agreements as an inducement for new franchisees, resulting in inconsistent obligations across the network.

In a small network, this is exacerbated by the high risk of the franchisor becoming friends with early adopter franchisees, who seek (or the franchisor offers) additional concessions by not enforcing parts of the franchise agreement.

(It should always be noted that the first premise of a franchise relationship is the business, followed by friendliness and courtesy only to the point where it adds value to the business relationship, rather than compromises it.)

Another significant risk to the quality of the relationship between the franchisor and franchisee is the relative performance of each other’s businesses. Franchisees who are successful may not always attribute that success to their franchisor, but at least they will be less likely to be openly critical of the franchisor. Franchisees with unsuccessful businesses, however, will look firstly to the franchisor and the business model itself as the reasons for their lack of success.

On the other hand, if a franchisor’s business is successful, it will be due in no small part to the contribution of the franchisees in the network. Should the franchisor’s business be unsuccessful, then the consequences to its franchisees’ businesses can range from mild to terminal.

Ultimately, the relationship is one of interdependence, where the parties are dependent on one another. The franchise agreement is the foundation on which this relationship is built, so the agreement needs to be written properly and enforced properly from the outset.

This may require one or both parties being reminded of its content, even if the commercial relationship is otherwise running smoothly.

So while experienced franchisors may say that they don’t look at franchise agreements after they’ve been signed, it doesn’t mean to say that they aren’t prepared to when necessary.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for more than 20 years at franchisee, franchisor and advisor level. He advises potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia. He also publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.