Carrot or Stick?

Sitting on both sides of the fence acting for both franchisors and franchisees in Commercial Dispute Resolution we often get a no holds barred insight into the root cause of problems, or at least the perceived cause of problems, when things go wrong.

The BFA has recently debated the question of how to get the most out of franchisees with contributors favouring both carrot and stick approach. There is no easy answer and sometimes a combination of both may bring about the best results but we should pick up some of the issues we’ve come across, particularly when acting for franchisees. 

One notable case resulted in us being instructed by three franchisees, all with largely similar issues. All three had been absolutely committed to making the franchise a success and had all run very successful businesses before buying in. 

The key complaints were lack of support and access to knowledge and information which all three separately believed they had been promised. Our instructions were to pursue a claim for misrepresentation and even though ultimately an out of court settlement was reached, we believed there was a strong claim.   

The problem seemed to stem from the fact the franchisor had clearly over-egged the pudding in its marketing literature to new franchisees. Various booklets and training sessions were promised with access to established franchisees for knowledge sharing but very little materialised. Leaving aside the possible misrepresentation claim, the support the franchisees had asked for did not seem unreasonable to us and would have cost very little for the franchisor to provide. These individuals did not want their hands holding or for someone to run their businesses for them, they just wanted access to technical knowledge and basic support regarding the business.  

Leaving aside the fact that the franchise businesses were not doing as well as they could have due to lack of knowledge, by the time we were instructed all three franchisees had simply had enough and were not prepared to put their full energies into the businesses anymore. 

It was a clear case where little support from the franchisor, some of which would have been fairly cost neutral, could have resulted in at least three of the franchises being much more successful, resulting in a greater income for the franchisors both in terms of direct fees and a general boost to the brand. 

In another case a large franchise business had strict terms within its franchise agreements regarding the regular replacement of vehicles which had to carry the franchisors livery. External economic factors meant the significant up front capital involved in replacing and branding the vehicles simply wasn’t available. The situation was forecast to improve but despite the fact the franchisee had replaced any vehicles which were starting to show their age, the franchisor was quick, perhaps too quick, to pursue a claim in relation to those (perfectly serviceable and presentable) vehicles which had not been replaced. 

Technically, the franchisor was well within its rights to pursue the claim but the franchisee appeared to be doing everything it could to improve the situation. The result of the aggressive stance taken was a very demoralised and unmotivated franchisee whose previously successful business started failing. 

Here was a case where the stick had been used with detrimental effects but in our view the franchisor missed an opportunity – the breach could have been raised in a much less aggressive manner and the franchisor could also have taken the mitigating factors into account and allowed some leeway bearing in mind the background and the steps the franchisee had taken.   

The flip side of course is the risk that allowing too much leeway could open the flood gates and there will always be times when it is unfortunately necessary to act fast to enforce the terms of an agreement. 

In summary, there is no easy answer – spending too much time on providing support or ignoring breaches can cost a business dearly but there will be times when it is sensible to take a view after bearing in mind the whole picture. Franchisees after all are not just working to improve their own business, but are part of a larger network and also play a part in improving the franchisor’s business. 

 

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