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Managing exits a challenge for franchisors

Managing exits a challenge for franchisors

Sometimes franchisors and franchisees are better off parting ways, but franchisors must tread carefully.

The ongoing public dispute between Subway and a disgruntled former franchisee highlights the need for franchisors to take care when recruiting franchisees and when transitioning them out of the network.

Without taking sides or delving into the details of the dispute, which continues to cause reputational damage to all involved, there are several lessons for new and existing franchisors.

Franchisors are usually conscious of protecting their brand and intellectual property from copycats and disgruntled customers, but they also need to protect against actions by franchisees, regardless of their merits.

Conducting detailed due diligence on prospective franchisees is crucial, whether it is outsourced or conducted in-house. Financial due diligence is just one aspect of this process, and is relatively easy to determine. Temperament is harder to ascertain: is the person capable of running the business? Is the person a good cultural fit? Franchisors should develop robust recruitment policies and take the time to get to know franchisees before signing them up.

There will be times, for various reasons, when a franchisor will want a franchisee out of the network. In some cases, this will be due to major breaches of the franchise agreement, and in others it may be consistent operational breaches and an irreparable relationship.

When considering termination, franchisors must ensure there are solid grounds. If the breaches are not clear-cut, it can come down to establishing a chain of evidence illustrating the franchisee’s poor performance over time.

For this reason, franchisors should have clear internal policies for dealing with poor performing franchisees, so a fair process can be followed every time, ideally without emotion or personal conflict.

Franchisors should also keep detailed records of all dealings with the franchisee, to show there was clear communication and the franchisee was given a genuine opportunity to lift its game.

In some cases, franchisors may need to consider sharing some of the pain. If it is obvious that the franchisor made a mistake in recruiting a franchisee, it may be best to strike a deal for an orderly exit, perhaps with some compensation. Even if there isn’t a legal obligation to do so, it may help avoid a backlash like we have seen in the Subway dispute.

The proposed changes to the Franchising Code of Conduct include the introduction of a statutory duty of good faith and penalties for non-compliance. These two measures will bolster the need for franchisors to act carefully when terminating franchisees.

Having strong policies and procedures in place for recruitment and termination, and getting expert advice at the right time, will help franchisors avert financial and reputational damage.


*Original Article by Brice McFarlane: