Seasoned Trial Attorneys, Exceptional Results

  1. Home
  2.  » 
  3. Commercial Litigation
  4.  » Common disputes between franchisors and franchisees

Common disputes between franchisors and franchisees

Starting your own business can produce some of the most rewarding feelings you could experience, but it requires a lot of work. Many problems can arise. One way you might leverage the business experience of another, opening a franchise location, provides you with many ready-made aspects, but you can experience franchisor and franchisee conflicts.

You might think that purchasing a franchise protects you from problems. It does not. It simply changes the problems you could experience.

Six major causes of franchisor/franchisee conflict

Look for these six major causes of conflict and stop problems before they start developing. While some conflict between franchisor and franchisee can produce product change, in general, you want the two groups to get along, says Dr. Lorelle Frazer of the Asia-Pacific Center for Franchising Excellence.

Lack of due diligence

Both sides prove guilty of a lack of due diligence, but franchisees often receive more than their fair share of the blame. The less experience in business a franchisee has, the less likely they are to seek out business advice before investing in a franchise. Their lack of knowledge, experience, and unrealistic expectations cause them to clash with the franchisor. What gets little discussion, says Frazer, is the lack of due diligence on the part of the franchisors. They poorly judge their own business model, deeming it suitable for franchising when it is not. They utilize poorly developed recruitment methods, obtaining ill-prepared franchisees. These franchisors also typically provide inadequate support services due to their own insufficient resources. Finally, they provide ineffective support systems due to a lack of reasonable expectations of the time and financial costs required to design such support systems.

Third-party involvement in franchisee recruitment

A key problem with franchisee recruitment includes the inclusion of third parties in the process. This creates conflict and contributes to dissatisfaction on the part of the franchisees. Involving third parties dilutes the recruitment message. Franchisors need to hone their recruitment message to best attract knowledgeable franchisees.

Lack of communication

Lack of communication causes franchise conflict, too. Franchisors need to create mechanisms to actively involve their franchisees. This process minimizes conflict by:

  • creating franchisee efficacy,
  • facilitating acceptance of the change.

Withholding changing market conditions information

Withholding information on market conditions creates conflict and contributes to franchisee dissatisfaction. When franchisors withhold information, such as local increases in market competition, it negatively affects the franchisee’s opinions about and relationship with the franchisor.

Franchisee economic demands

Franchisees expect a finite investment in the franchise. Those without a proper business background might underestimate the financial demands of running a business, even one that provides a supportive parent company. Misleading information about the personal demands of running a franchise can also cause conflict. Third parties or franchisors may exaggerate the franchisee’s lifestyle. When they do not learn of these exaggerations until after purchase, it is too late, and this factor reduces their loyalty. Some marketing techniques, such as buy-one-get-one-free, can negatively impact the franchisor/franchisee relationship. It draws more total customers to the stores or restaurants and raises brand value but cuts into the bottom line of each location if the coupons or offers do not result in value-added sales or up sales. The former benefits the franchisor while the latter hurts the franchisee if the up sales or value-added sales do not occur.

Lack of Franchisee Business Education

A lack of franchisee business education and experience causes conflict. Without prior business knowledge, they lack understanding of underlying precepts. Third-party recruiters may take advantage of this. A pre-entry education program for potential franchisees could help, said Frazer. Those with existing business education, whether from a business school, vocational school, or college, fare better and experience fewer conflicts with their franchisor.

Knowing the causes of conflict between franchisors and franchisees can help avoid conflict. Foreknowledge allows you to better prepare on both sides. This can lead to reduced litigation and improved collaboration.