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Dec, 03 2014

How to smoothen the franchisor-franchisee bond

The major reasons of dispute between the franchisors and franchisees have been listed in the following table. The franchisor and franchisee usually rank the following on different scale of importance.

Lack of support from franchisor: From the franchisee perspective, lack of support from the franchisor is considered the main cause of problems in the franchise relationship, while franchisors rank this as the second smallest contributing factor to conflict.

Of all the causes of franchise conflict acknowledged by both franchisees and franchisors, the issue of support is one where both parties are poles apart.

Compliance with system: Franchisees feel that franchisors are too rigid in their enforcement of compliance, and would prefer a profitable business than a highly-compliant business.

Franchisors on the other hand feel that compliance is necessary to maintain the integrity of the brand, and in turn, should lead to higher levels of franchisee performance.

Fees: The payment of fees, also known as royalties, is ranked as the third most significant factor leading to disputes according to franchisees, but is ranked much lower by franchisors. Again, the perspectives here differ significantly.

Franchisors treat the underpayment or non-payment of franchise fees as a major breach of the franchise agreement, irrespective of the franchisee's satisfaction or otherwise over what they are actually getting for their fees.

Communication problems: The difference in relative importance associated with communication as a cause of franchise disputes, where franchisees rate it more highly than franchisors, is similar to the differing perspectives on fees.

On the one hand, franchisees feel that they are not well-enough informed about the franchise, its operational requirements, and the direction of the brand as a whole, whereas franchisors may argue that franchisees fail to keep the franchisor informed by not submitting reports or providing other information.

Misrepresentation issues: Despite franchisor perceptions about misrepresentation issues being the second-largest cause of franchise disputes, franchisees only rank it fifth in importance. Franchisor concerns about misrepresentations are typically centred around earnings claims that may subsequently prove to be inaccurate, whereas franchisees may be focussed on the necessary inputs to achieve the earnings, rather than the earnings target itself.

Marketing issues: Marketing is viewed by franchisees as a key benefit of joining a franchise. Franchisees usually pay a contribution into a marketing fund, which then pays for some or all of the advertising and promotion to benefit the network.

Profitability: Again the differing perspectives here make for an interesting comparison. While franchisors feel that a lack of franchisee profitability is a major cause of disputes, franchisees themselves rank profitability as less important than support, fees, compliance and so on.

Other issues: The remaining issues which triggers the disputes from a franchisee's perspective include agreement and territory issues, deceit or excessive control by the franchisor, and stock issues.

Suman Dutta is a Senior Consultant-Strategy, Francorp India

Response (Cause of dispute)      Franchisee Ranking         Franchisor Ranking

                                                    of Dispute Cause              of Dispute Cause

Lack of support from franchisor             1                               9

Compliance with system                      2                               1

Fees                                                  3                                6

Communication problems                    4                                 7

Misrepresentation issues                    5                                  2

Marketing issues                               6                                   8

Profitability                                        7                                   3

Franchise agreement issues               8                               No ranking

Territorial issues                               9                                     5

Deceitful franchisor behavior              10                              No ranking

Too much control imposed by the franchisor 11                   No ranking

Stock issues                                  12                              No ranking

Other causes of dispute                   13                                 10

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