Operating your business has many benefits unlike being employed. Franchising is one of the best ways to grow or expand a sole proprietorship. The key players in franchise businesses are the franchisor and franchisee. Like in all business arrangements, disputes are likely to occur in franchising, however much cautious the transacting parties are.
The way franchise conflicts are resolved determines the overall success of a franchise business. That said, many franchise businesses hire a franchise dispute attorney to help them navigate potential disputes to promote healthy or thriving franchisor-franchisee relationships.
Major Causes of Franchisors-Franchisee Conflicts
Franchisor-franchisee conflicts occur when either party violates the terms of the franchise agreement, which regulates or acts as the constitution of franchises. Disputes should be settled before they escalate to unmanageable situations. Here are some of the primary causes of franchise disputes:
Lack of Due Diligence
In the context of franchising, due diligence is a two-fold obligation. A prospective franchisor does due diligence for compliance purposes while potential franchisees do due diligence for feasibility and appraisal reasons.
Simply put, due diligence is done for compliance and protection of business interests. Both parties can be guilty of a lack of due diligence, but franchisees typically receive more share of the blame.
Many prospective franchisees rarely do due diligence or seek advice. Additionally, they enter the scene with unrealistic expectations, demands, and inexperience—the perfect ingredients for potential conflicts.
On the other hand, a franchisor may think that their concepts or business models are ready for franchising when in reality it’s not. Inexperienced franchisors often recruit unqualified franchisees who become liabilities rather than assets.
Lack of Support
The fact that someone is ready to invest in the growth of your business means they consider it to be a going concern. Prospective franchisees pay a considering—franchise fee, in exchange for operating a business under the name of the franchisor.
A reciprocal or mutually beneficial relationship will be formed henceforth. Naturally, the franchisee, especially if they’re green, will expect the following forms of support from the franchisor:
- Marketing;
- Setting up the new outlet;
- Identifying an ideal location for the franchisee;
- Manpower recruitment and training, among others.
Franchisee Recruitment
The success of a franchise business is significantly dependent on the franchisee. While you call the shots as a franchisor, the implementation of your decisions and desires rests on the franchisee. Hiring the wrong candidate will catch up with you later. To avoid potential conflicts, franchisors should first determine the preferred qualities of a franchisee before recruiting one.
Recruiting franchisees through third parties can create conflict and contribute to franchisees’ dissatisfaction. Third-party recruiters get a commission, so they will do anything to get paid, including misrepresenting facts that may cause conflicts between the franchisor and franchisee down the road.
Poor or Lack of Communication
Research shows that you can avoid or mitigate the risk of potential disputes by keeping communication channels open. Franchising requires the effort of all stakeholders, including franchisors, franchisees, subordinates, and more.
As a franchisor, you’re the overall boss. However, you must always consider the input of your colleagues before making critical decisions, especially in matters affecting the franchisee. For instance, you can’t just change the business structures and functions without involving the franchisee.
Withholding Critical Information
We all know that information is power. Successful franchises leverage information to navigate changing times and conditions successfully. Franchisor-franchisee relationships are mutual as aforementioned, meaning both parties should safeguard each other’s business interests.
Withholding information signifies selfishness and the aggrieved party is justified if they adversely react. Franchisors are the usual culprits of withholding information on market competition and other issues that can impact the franchisee’s business or interests. Franchisees are subject to emotions and feelings because they’re human beings. Besides, you also stand to benefit when your business partner succeeds
Franchise Disputes Resolution
A good franchise agreement should include a dispute resolution clause. Such clauses define or set the rules for resolving potential conflicts.
Franchise disputes can be resolved in three ways:
- Franchisor-franchisee resolution.
- Third-party intervention, and
- Litigation.
Franchisor-franchisee Resolution
As the name suggests, the resolution is handled by the conflicting parties—the franchisor and the franchisee. The aggrieved party should schedule a meeting with the other partner to address the alleged grievances.
This option is ideal for minor disputes or when there’s still room to rectify things. Major disputes rarely resolve via this strategy, so third-party intervention may be necessary.
Third-party Intervention
This option involves mediation or arbitration. Mediation refers to using an impartial third party like a lawyer or a professional mediator to help conflicting parties solve disputes. A mediator should listen to both parties, review the facts, and give unbiased verdicts. However, their decisions are not binding.
Arbitration works like mediation, but an arbitrator’s decision is legally binding. In other words, arbitration verdicts can’t be appealed. Litigation is the last course of action in unsuccessful mediations. The aggrieved party files legal action as a last resort to address their grievances.
Disputes are common in franchisor-franchisee relationships. Fortunately, a franchise law attorney can help franchises resolve or mitigate the risk of potential conflicts