As with most commercial relationships that are based on a formalised agreement – in this case, the franchise agreement – parties can expect to have to comply with certain obligations. But just how difficult is it for the franchisor to ensure that the franchisee complies? In addressing the methods for ensuring franchisee compliance, let us first take a look at the parameters of the franchise relationship.
The franchise relationship is made up of two parties:
- The franchisor who is the creator of the system of business operations and owner of the brand; and
- The franchisee, which is typically an individual or entity that is licenced to use this established system and brand to make into a profitable business.
Why is franchisee compliance important?
For a franchise relationship to blossom, there needs to be franchisee compliance with the procedures and policies that the franchisor puts in place. It is very important that a franchisor is able to enforce these polices to ensure franchisee compliance. If a franchisee is not performing or meeting its obligations, the franchisor needs to be able to protect the interests of the entire network and protect the integrity of its brand.
To give themselves as much protection as possible, franchisees are usually required to enter into franchise agreements that contain strict compliance provisions. When the franchise agreement is constructed, usually by franchise lawyers, it needs to take into account the interests of not just the franchise business but the individual franchised outlets being run by every other franchisee within the network. The provisions of the Agreement need to be constructed in such a way that franchisees have no room to operate the business in any way that does not form part of the established system. To ensure franchisee compliance, or to make it easier to enforce compliance, the Franchise Agreement should incorporate the operations manual and the policies and procedures.
Franchisors have to be able to impose stringent rules regarding the established structure and operations of the franchised outlets. This includes things like allocated territories, what kind of signage and branding, opening and closing hours, product/service base, as well as any marketing expenditure. Ultimately, each franchised outlet is expected to provide its customers with an identical experience no matter which outlet they purchase their goods or services from. Uniformity is key. Without it, the franchise system becomes inconsistent and individualised, which can leave a bad taste in the mouths of consumers who expect to have the same quality of goods and services regardless of the branch from which they purchase them.
Methods for ensuring franchisee compliance
- One important ingredient to a resilient franchise relationship is communication. A good level of communication between franchisee and franchisor not only assists the franchisor to ensure franchisee compliance, but also is essential for on-going growth, profitability and the overall success of the franchise.
- Franchisee compliance is less daunting if the franchisees feel well supported within the network. This level of support is achieved through initial and ongoing training. This kind of training is useful both in supervising the practices of franchisees, as well as for keeping them motivated.
- Franchisee compliance is also achieved by regularly visiting the franchisees within the system. Field managers carry out these visits to improve franchisee compliance and to improve performance areas in which the franchisee may be lagging
- Another method of ensuring franchisee compliance is the installation of web-based accounting and point-of-sale systems. These and other reporting programs enable franchisors to constantly monitor their franchise network without having to physically inspect the various outlets.
What should franchisees ask before entering a franchise agreement?
There are a number of important questions franchisees should ask themselves prior to entering into any franchise agreement, including the following:
- Which polices and procedures are currently in pace, and how much importance is placed on them?
- Is there a compliance program that the franchisor uses to ensure franchisee compliance?
- To what extent are the trademarks of the franchisor being protected? Are they registered and does the franchisor subscribe to any trademark watching services?
- Are there any training requirements in the franchise agreement?
- Has any legal action been taken against previous franchisees in efforts to ensure franchisee compliance?
- What about franchisees taking action against the franchisor?
- How thoroughly does the franchisor enforce the policies and procedures?
- How is underperformance managed by the franchisor?
It is important for franchisees to determine the level of franchisee compliance, as this will undoubtedly affect the financial viability of the franchise itself. They should speak with current and previous franchisees as a source of information about the operation of the franchise. It is worth noting that the non-compliance of franchisees with the terms of the Franchise Agreement will ordinarily give the franchisor the right to terminate, as long as it adheres to the Franchising Code of Conduct. For legal assistance, contact LegalVision on 1300 544 755 to speak with an experienced franchise lawyer.