ADVERTORIAL
ranchising has experienced a period of strong growth in the UK despite the recession but as the recovery gains momentum there is a danger that the industry could fall prey to unscrupulous operators attracted by the idea of selling franchises as quickly as possible with little thought to building a sustainable network. Ethical franchisors that are operating robust proven business systems and are genuinely supporting their franchisees risk a loss of reputation when news of such ‘cowboy’ franchisors falls under the media spotlight. Perhaps rather obviously, there appears to be little appetite for statutory regulation among many franchisors. This makes it even more important that the franchise industry wholeheartedly embraces the spirit of ethical franchise practice and does not merely pay lip service to the concept. The words ’ethical franchising’ are used widely in the industry but I sometimes wonder if franchisors (and on occasions their advisors) have really given thought to its practical implications in their own business? All members of the British Franchise Association (bfa) are governed by the European Code of Ethics for Franchising, including the extension and interpretation adopted by the bfa (the ‘code’). The bfa has just over 300 members, which represents a third of all franchise systems thought to be operating in the UK. The code sets out a definition of franchising along with guiding principles and makes reference to the manner in which franchise opportunities are to be advertised and franchisees recruited. It also specifies the principal points to be included within the franchise agreement itself. Much of the fear surrounding statutory
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regulation comes from concern about the financial and management burden of mandatory pre-contract disclosure obligations. It may come as a surprise to some that the code requires each prospective franchisee to be given a copy of the code ‘as well as full and accurate written disclosure of all information material to the franchise relationship, within a reasonable time prior to the execution of a binding document’. It would be interesting to know how many franchisors routinely supply prospective franchisees with a copy of the code, let alone full and accurate written disclosure of all information that would objectively be regarded as ‘material’ to evaluating the opportunity. I doubt that all franchise brochures could be said to constitute ‘all information material’ to the business. Many
franchisors look to the bfa to perform the role of industry watchdog but the bfa has limited resources and cannot keep a 24/7 watch on all of its members, let alone the industry as a whole. A concern for franchisors is to avoid claims of misrepresentation. A well-drafted disclosure document could provide valuable evidence to support the franchisor’s defence. Rather than simply accept the limitations of the current situation and wait for some external force to take action, perhaps now is the time for all franchisors to re-examine the information they provide to their own franchisees and ensure that prospective franchisees are furnished with comprehensive information to enable them to make a truly informed decision. The code places an obligation on franchisors to select and accept as franchisees only those who ‘upon reasonable investigation, appear to possess the basic skills, education, personal qualities and financial resources to carry on the franchised business.’ A common-sense approach to recruitment will usually avoid what will undoubtedly be expensive disputes when the franchisee proves totally unsuitable and has to exit the business. The days of recruiting those who expressed sufficient interest and had the requisite funds are long gone for many, but sadly not for all, franchisors. Quality not quantity should be the goal for ethical recruitment.
“Perhaps now is the time for all those committed to raising standards to act, regardless of the political climate”
Many franchisors are quite understandably keen to avoid statutory intervention in their business structures. In an era of a new Conservative government, even one with a small majority, the risk of legislation to regulate franchising may have receded. As can be seen by the recent election results, we live in surprising times and perhaps now is the time for all those committed to raising standards to act. Whether the political climate is less likely to regulate or not, franchisors should take a long hard look in the mirror and examine the way in which they operate. Is ethical practice in the DNA of your franchise business? Are the requirements of the code considered at all when changes are introduced to the network? Ethical franchising could be summarised simply
Jane Masih
as good business practice. If the system doesn’t make money for all participants, it will ultimately fail. If misleading and ambiguous recruitment advertising is used, the wrong franchisees will be attracted. If the franchisor has not operated the concept as a successful business for a reasonable time and in at least one pilot unit before starting the franchise network, can the system really be said to be proven? Mature franchise networks are not immune to ethical considerations. Implementing change to long-held operating practices, however, can be a difficult and frustrating process for all concerned. Franchisees do not always welcome new ideas, and in particular resist changes to the franchise agreement even where the document is seriously out of date in terms of current franchise practice. In such a situation, it is tempting for a franchisor to issue a threat of ‘sign up or leave’ when franchisees resist the new agreement at the time of renewal. The key to a happy network is good communication and careful explanation of the commercial rationale for change.
The code places an obligation on both parties to exercise fairness in their dealings with each other. There is an express instruction to resolve complaints and disputes ‘through fair and reasonable direct communication and negotiation’. Those franchisors that can keep a cool head and maintain channels of open discussion and respect for their franchisees will ultimately be successful. Litigation is a very expensive business and should be avoided wherever possible. The adoption of ethical franchising into the heart of the franchise could be just the approach required to build a valuable network for both the franchisor and all of the franchisees. n
JANE MASIH
OWEN WHITE SOLICITORS
www.owenwhite.com jane.masih@
owenwhite.com
Franchisor News | 31
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