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The key to resolving a franchise dispute in your favour

Updated: May 16, 2023

Regardless of whether you are a franchisor or a franchisee it is important to be realistic about your strengths and weaknesses and have realistic objectives. Also to consider what may incentivise the opposing party to agree to settle the dispute on your terms.

Historically the franchisor has held most of the power in the relationship. Franchise agreements are heavily weighted to give the franchisor the power to control the network and protect the brand, for the benefit of all. A franchisor usually has greater financial resources and business experience, a management team and specialist franchising legal representation. A franchisee probably has less money, little business experience and no professional back-up.

At first glance one might assume that in view of all this it would be a simple matter for a franchisor to shut down a dispute by simply enforcing the terms of the franchise agreement. Indeed, until a few years ago that was pretty much what used to happen. It also sent a message to the rest of the network that any dissent or non-compliance would be firmly dealt with. What has changed is the advent of social media and the rise of populism.

An oft-quoted example of this is the case in 2009 in which United Airlines baggage

handlers damaged a guitar. United initially refused to offer compensation but were forced to do so by a tidal wave of negativity resulting from the posting on-line of a song about the incident. This caused huge and far reaching damage to United that far outweighed what it would have cost them to willingly compensate the owner of the guitar. And as we all know, social media has come a long way since 2009 and the old truism ‘mud sticks’ is now stronger than ever. The power that a franchisee can wield with social media should not be under-estimated and more than levels the playing field.

The development and maintenance of a franchise network requires continual recruitment; not only to open more branches but also to replace retiring or non-renewing franchisees. Recriutment income is also an important factor for franchisors and the resulting cash flow plays a vital part in business planning. A good reputation and public image is therefore essential. Prospective franchisees are naturally cautious about where they will invest and there are plenty of opportunities. Due diligence is easy and negative on-line or social media traffic will impact badly on a recruitment rate. Large and continued amounts of on-line negativity can cause new sign-ups to grind to a standstill.

The internet also provides ways in which dissatisfaction can develop within a network and damage a franchisor. Nowadays many franchisors, some unknowingly, suffer from secret WhatsApp and Facebook groups that are a breeding ground for discontent. One of the largest pizza delivery franchises is currently having to contend with a group of disgruntled franchisees who are so powerful that they even have their own website.

Franchisors should also be mindful of two high court cases in the last ten years in which a franchisor took legal action against a franchisee. In both cases the franchisee won their counterclaim causing massive reputational damage and huge financial cost to the franchisor. We are now in a world where the balance of power in a franchise relationships is far more evenly weighted.

So how does this relate to resolving dispute in your favour? If you are a franchisee the benefit that you can offer to the franchisor in exchange for agreeing to your terms is non-discolsure and radio silence where social media is concerned. This will cost you nothing but is very valuable to the opposition. If you are a franchisor, in view of the change in the balance of power in the relationship, described above, it is best to take a long term view, avoid legal expenses and the risk of the dispute escalating. This is obviously as long as the franchise model is not compromised. Influencing a re-sale is often preferable to terminating because it provides continuity for the business in the territory and exits the franchisee in a more ethical manner. Adopting a longer term strategy may also including giving the franchisee notice that a renewall will not be granted.

As always, the devil is in the detail. Disputes arise when one or both of the parties believes that the other is failing to do what has been agreed. Resolving in your favour involves identifying and leveraging on weaknesses in the opposing party's position.

Key takaways are:-

Franchisors must act ethically, and be seen to be doing so.

Franchisees now wield considerable power but much of that will be lost if the grievance is widely promulgated through Facebook, Twitter et al or if solicitors are involved.

If a dispute does end up in court the outcome is far from certain and for one of the parties will most probably be catastrophic. History is littered with plenty of examples where both sides lost. A pyrrhic victory is of no use to anyone.

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