In Short
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- Online platforms offer opportunities for franchise networks but can create tensions between franchisors and franchisees.
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- Clearly outline the management of online sales, including territory rights, marketing, and financial benefits in franchise agreements.
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- Franchisors should ensure transparency in marketing fees and consider the use of third-party websites.
Tips for Businesses
To successfully integrate online platforms into your franchise, ensure agreements clearly define territory rights, revenue sharing, and marketing responsibilities. Franchisors should maintain brand control while allowing flexibility for franchisees in sales and marketing. Consider the impact of third-party websites and evaluate how marketing fees are utilised.
Online e-commerce platforms are transforming the way franchise networks operate in the market, while also introducing potential tensions within franchise relationships. These platforms often consist of a franchise’s website through which consumers purchase goods or services, coexisting alongside the franchisee’s physical storefront. In some industries, the franchisor’s online platform may inevitably compete with the franchisee’s brick-and-mortar business.
Franchisors and franchisees must understand how to leverage these platforms effectively for the benefit of the entire network. Franchisors also need to consider how to keep franchisees engaged in the value chain, either by involving them in fulfilling online orders or by distributing revenue from online sales.
This article highlights several key issues franchisors and franchisees should consider when integrating online platforms into their operations.
1. Disclosure Requirements
The Franchising Code of Conduct now reflects the increasing role of online platforms within franchising. Franchisors must explain how they process online sales in the disclosure document. This includes whether franchisees are permitted to sell goods or services online.
The document must also specify the conditions for online sales, such as whether franchisees may sell through third-party websites or supply goods and services outside their assigned territory. Additionally, franchisors must disclose any profit-sharing arrangements related to online sales.
2. Territory
While not all franchise networks grant exclusive territories, many operate on a model where the franchisee enjoys some exclusivity. However, with the ease of purchasing goods and services online, the certainty of geographic exclusivity is no longer guaranteed, and this may present challenges.
From a franchisor’s perspective, some common considerations include:
- how will online sales be managed (e.g. via a centralised platform);
- will it be possible to override a franchisee’s exclusive territory if an online sale occurs; and
- will the franchisor retain the right to serve customers who purchase online?
From a franchisee’s perspective, some common considerations include:
- will the use of online platforms for sales be permitted;
- if the franchisor controls the franchise’s online platform, will there be any benefit to the franchisee, such as commission or access to bookings and enquiries; and
- what percentage of the franchise’s overall sales are made online, and could online sales become the dominant sales channel? (This is particularly important for retail franchises).
3. Marketing
Some franchises do not permit franchisees to sell goods or services online. Nonetheless, online platforms such as Facebook and Twitter are increasingly used for marketing and promoting the franchise.
From the franchisor’s perspective, it is essential to balance maintaining brand consistency and allowing franchisees to explore innovative ways to reach potential customers.
In many cases, franchisors manage the entire online presence and do not allow franchisees to create localised pages. In such situations, franchisors must ensure the content is regularly updated and accurate.
This cheatsheet outlines franchisors’ legal marketing fund obligations.
4. Financial Benefit
When online sales are permitted, franchisors and franchisees must consider how the financial benefits will be distributed. For instance, two possible scenarios are:
- a retail food outlet allows online orders, with the franchisor retaining the right to fulfil the order and keep 100% of the sale; and
- alternatively, the franchisee fulfils the online order and retains 100% of the sale, less the standard franchise fee.
Franchisors should ensure that the distribution of online revenue is fair and that expanding these platforms does not disadvantage franchisees.
5. Third-party Websites
Franchisors and franchisees must also address the role of third-party websites in their operations. Some franchises may sell goods or services through platforms such as Gumtree, Airtasker, or Facebook.
The key issue is whether the franchisor intends to use third-party websites for promotion or sales and, if not, whether franchisees are permitted to do so. If franchisors have not yet developed a policy regarding third-party platforms, they should give this matter due consideration.
6. Fees
Many franchises require franchisees to either:
- spend a minimum amount on local marketing; or
- pay a fee directly to the franchisor to manage marketing for the entire franchise network.
If a franchisor collects marketing fees, these should be allocated to a marketing fund. Franchisees should evaluate how the franchisor utilises these funds and whether the marketing activities effectively promote online and offline sales. Engaging with current franchisees can provide valuable insights into the level of marketing support and their satisfaction with its impact.
Key Takeaways
Online platforms are transforming franchise operations, offering both opportunities and challenges. While they enhance consumer reach, they can also create tension by competing with franchisees’ physical stores. To navigate this, franchisors and franchisees must clearly define territorial rights, revenue distribution, and third-party platform policies in their agreements.
Franchisors must balance brand control by allowing franchisees flexibility in online sales and marketing while ensuring fair financial benefits. Transparent use of marketing fees and effective promotion strategies are essential for both online and offline success.
If you have any questions or need further assistance moving your franchise into the digital age, our experienced franchising lawyers can help. As part of our LegalVision membership, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
Online platforms, such as a franchisor’s website, allow consumers to purchase goods or services online, potentially competing with franchisees’ physical stores. Franchisees and franchisors need to agree on how to leverage these platforms to benefit the entire network, including revenue sharing and fulfilling online orders.
Under the Franchising Code of Conduct, franchisors must disclose how they process online sales in their disclosure documents. This includes whether franchisees are permitted to sell online and any conditions or profit-sharing arrangements that apply to online sales.
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