New guidance on franchisor's kickbacks

The British Franchising Association (bfa) periodically publish technical bulletins which provide advice and guidance on best practice in franchising. Whilst the bulletins do not constitute compulsory guidelines for non-members, it is important to ensure that you are aware of the current position, as they provide a helpful framework to all involved in franchising to ensure that franchises are operated as fairly as possible.

The latest bulletin deals with the topic of ‘kickbacks’ also known as supplier incentives, or ‘backhanders’, and specifically, disclosure of ‘kickbacks’. The bulletin gives two examples of how a ‘kickback’ can arise; however in short, a ‘kickback’ may arise in any situation where a franchisor receives a financial gain due to the franchisee having used a particular supplier or service provider. This leads to the issue of whether a franchisor can be considered to provide impartial guidance, and ensure that the franchisee receives a fair deal, if the franchisor will receive some form of incentive to recommend a particular individual.

Recommending a specific supplier allows the franchisor to ensure consistency and uniformity across its full network, and receiving a financial inventive in the process is clearly attractive to some franchisors. However, it is important that franchisors are open and transparent with franchisees about any such arrangements which may be in place, so that they can make a fully informed decision.

The bfa’s bulletin refers to their guide to best practice, ‘The Guide to the Code of Ethics’, which states:

“As a general rule no franchisor should have secret sources of income from the operation of the system by franchisee, e.g. hidden commission or kickbacks. These are in essence payments by franchisees, since they do not result in the passing on to franchisees of the cost benefits of membership of the bulk purchasing power of the network and can indeed increase the costs to the franchisees.”

In the bulletin, the bfa have further clarified their position, stating:

“Whilst the bfa does not like the general principle of kickbacks, its objection is restricted to the question of transparency and disclosure.”

The key takeaways from this bulletin are the importance of transparency and disclosure. It is good practice, in the interests of fair trading, to ensure that a franchisee is fully informed, and can make an independent decision on this basis. The ending paragraph of the bulletin summarises this:

In the end it comes down to transparency and disclosure. It is the nondisclosure of such kickbacks that the bfa considers to be a breach of franchising ethics, rather than the actual kickbacks themselves. The bfa expects its members to declare the existence of any kickbacks together with a clear indication of the level of such kickback to ensure fair dealing.”

 As mentioned above, this bulletin is simply advisory for those who are not members of the bfa. It does, however, provide useful guidance on the matter, and is certainly something that franchisor’s should be mindful of.

If you would like advice on your individual franchise, please contact our specialist franchising team who will be happy to assist you further.

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