Consistency is key in franchising. You have developed a proven business model for success through your brand and product recognition.
Franchisees have seen this success and chosen to partner with your brand. They have entered an agreement for the long run and handed over a large element of control to forgo operating independently. This exchange of give and take has arisen because they have:
- invested most, if not all, of their available resources into this business venture;
- observed the potential for value and their own success; and
- importantly, placed their trust in your hands.
Being asked to change the original deal may not be received lightly.
A franchise system must be adaptable. Markets and consumer trends change overnight in our fast-paced world. Your system has succeeded because you identified an opportunity in the market and made the most of it. There was a need for your goods and services. Your ingenuity gave your business model such an edge that you chose to replicate it through franchising.
Just like that original market opening allowed your franchise system to grow and thrive, there will always be new openings. If you don’t fill them, a competitor will. You may lose customers if you don’t keep up with the latest trends. You understand that for your model to continue to be responsive to market changes, you must adapt. But do your franchisees understand this and share the same vision?
How you sell change to your franchisees is key, together with having the right mechanisms in place to facilitate this. You won’t get far if your franchise agreement does not permit you to introduce change.
Unfair contract terms
The franchising industry is currently facing significant changes itself. A government taskforce was recently convened to examine the sector following the release of the Parliamentary Committee report “Fairness in Franchising”. Conduct of franchisors is under the spotlight. You don’t want to be the next news headline.
This examination may soon result in unfair contract terms becoming illegal. The ACCC strongly backs this. At present, it may not be unlawful for your franchise agreement to contain an unfair term, but you may be prevented from enforcing that term if challenged in court.
The Australian Consumer Law contains strict criteria for what constitutes an unfair contract term and when it will be unenforceable. This won’t necessarily apply to all franchise agreements. Generally:
- one party to the agreement must be a small business;
- the agreement was entered or renewed after 12 November 2016; and
- the provision:
(a) causes significant imbalance between the parties’ rights and obligations;
(b) is not reasonably necessary to protect the legitimate commercial interests of the stronger party advantaged by the provision; and
(c) would cause detriment to the weaker party if enacted.
If all criteria are satisfied, a court can declare that provision to be unenforceable. The remainder of the agreement will continue untouched.
In the context of a franchise agreement, this means that even if your agreement contains a provision permitting you to introduce change into your franchise system, a franchisee could challenge you. If a court viewed the provision as unfair, then you can’t enforce it and can’t introduce your change. Trying to bypass this by instead amending your operations manual could also be captured.
A court will also take into account whether you gave your franchisee a genuine opportunity to negotiate the agreement before signing. If you told your franchisee “take it or leave it”, the franchisee might be in a stronger position.
If the laws are changed, it may then be illegal for a franchise agreement to simply contain an “unfair” provision.
Unfair contract laws are not your only consideration.
The Franchising Code of Conduct (Code) imposes the obligation for both parties to a franchise agreement to act in good faith towards each other. This will not prevent you from acting in your own legitimate commercial interests, but you must act reasonably and have regard to how your actions and decisions may affect franchisees.
Failing to act in good faith can result in legal action or ACCC penalties.
Selling your idea
So, even though your franchise agreement may give you flexibility to introduce change in your franchise system, whether it be a re-brand, new logo or different products and services, how do you enforce this in light of stringent laws? Reasonableness and communication.
Inherent to the laws is acting reasonably. It must be in your own genuine and legitimate business interests to make the decision to enforce a change. This must be a carefully considered decision.
This means do your homework, build a convincing case, and then sell it to your franchisees. Do this in person. The sale may not be easy as people generally resist change. Think about how you would sell a new product or service to a customer, then apply the same sales pitch to your franchisees.
Use the carrot rather than the stick. Avoid simply quoting the section of your franchise agreement entitling you to enforce the change. Don’t market it as something that will improve your own bottom dollar.
Entice your franchisees by demonstrating how the change will benefit each of them personally. If they can’t see a direct benefit, where’s the incentive? Give them that incentive. Ensure they understand the necessity of this change.
Reinvigorate a franchisee by selling the potential to grow their business. Convince one, and they will spread the word to others.
Not everyone may be convinced, and that is when you may need to take a more forceful, but considered, approach.
Numbers matter to franchisees. They spent substantial funds acquiring their business. If they are being asked to invest more, they will naturally be hesitant.
Be mindful of the restrictions under the Code for directing a franchisee to incur an item of significant capital expenditure. You are permitted to make this direction if:
- details are disclosed in your disclosure document (which is why your disclosure document should contemplate these scenarios); or
- it will be incurred by a majority of franchisees and they have approved it; or
- it is necessary to comply with legal obligations; or
- the franchisee agrees to it; or
- you give the franchisee a written statement with a rationale for making the investment, the amount, the anticipated outcomes and benefits, and the associated risks.
Whilst the law gives you a degree of flexibility to enforce change, having the cooperation of willing franchisees will always be preferable.
Have a clear franchise agreement, treat your franchisees as respected business partners and make reasonably informed decisions. That will put you on the right path for introducing change to your business model when there is a reasonable basis for doing so. Importantly, it will ensure your franchise system continues to hold its position in the marketplace.
By Luke McKavanagh
Luke is an Associate with Stone Group Lawyers and a member of the Queensland Law Society Franchise Law Committee.
This article was originally published on page 44 of the October edition of The Franchise Review, the Official Journal of the Franchise Council of Australia. You can access a full copy of Issue 59 Edition 3 2019 here: