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Creating a Franchisee Association

Disclaimer: This article is for information purposes only and should not be considered as legal advice.  It is strongly recommended that any prospective entrepreneur consult a lawyer in order to make informed decisions that could involve legal matters.

Consider this scenario: you are a franchisee, part of ABC Franchise, and have just heard from fellow franchisees that your franchisor plans to make major changes to the franchise system, directly impacting your business. This decision seems to have been made without consulting the franchisees. Your choices seem bleak—either implement the changes (and lose a lot of money) or ignore them, and default on the franchise agreement. As an individual franchisee, how can your concerns be communicated to the franchisor? Even if you do so, can you stop the changes? One option is to join forces with other franchisees and collectively resist implementation of these changes. When this choice is made, the seeds of a nasty confrontation will be sown.

Such conflicts between franchisors and franchisees can be avoided with good relations and open channels of communication. Good relationships are built up over time, as mutual trust and respect grows between the parties—this cannot be forced through contracts or legislation. In the start-up years of a franchise, there naturally exists a free flow of information and ideas between the franchisor and its first few franchisees. This close knit relationship becomes difficult to maintain as the system grows and becomes more regimented. However, formal structures can be put in place that will not only improve relationships but also ensure quick response to potential issues. These are the franchise advisory council (FAC) and the independent franchisee association (IFA).

Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 approaches the relationship between the franchisor and franchisees by allowing franchisees to associate. Under the act, a franchisor cannot prohibit, threaten, penalize or restrict the right of the franchisees to do so. An increasing number of start up franchisors are make provisions for FACs in their first franchise agreement drafted and by doing so, they encourage the development of FACs early on. In other cases, it is left to franchisees to create either an FAC or IFA. Either way, the mere existence of a FAC or IFA should be of significant interest for new and existing franchisees.

 

Franchisee advisory councils

Franchisee advisory councils are usually formed by franchisors as a means of improving communication with franchisees. They can range from informal committees of selected franchisees, having only advisory powers to fully structured associations, separately incorporated and wielding real authority over franchise programs such as advertising. Franchisors typically form FACs to remove the need for franchisees to form their own associations (IFA’s) which the franchisor has much less, if any, control over. Franchisors can use their franchise agreements to outline the FAC terms, such as who is represented and what amounts are charged to franchisees.  Typically all franchisees are represented in the FAC and charges are limited to reimbursing actual expenses incurred by the FAC.

 

Independent franchisee associations

Franchisors that can’t effectively communicate through FACs are likely to be confronted with a newly-created IFA. Generally, IFAs are independent organizations created and controlled by the franchisees.  Independent Franchise Associations are usually funded through member dues and can operate very independently from the franchisor.  IFAs can be structured very different from each other, but tend to operate through an elected group of franchisee members who represent the interests of all of its members.  These associations retain their own advisors and commission reports that the franchisees might not be able to afford on an individual basis.  

An Independent Franchise Association does not automatically represent the interests of all the franchisees in a system.  At a minimum, the elected body of an IFA will speak for the concerns and interests of its member paying franchisees, although these concerns and interests are often very similar to those of the non-member franchisees in a system.  Collection of any member dues or fees is carried out by the elected body of the IFA and the franchise members may demand an accounting of IFA expenses if they are expected to pay monies to support the IFA.   Franchisors are usually not involved in any matters pertaining to the operation or decisions of IFAs and typically view them as being adverse to the franchisor’s interests.  While IFAs need not always oppose the franchisor, they are a perceived challenge to its authority.

 

Thinking ahead

Making a provision for the formation of a FAC or IFA in the franchise agreement should be a goal for most franchisors. One of the greatest strengths a franchise system can have is the sharing of ideas between franchisees and franchisor.  Franchisees can often find solutions to problems the franchisor has struggled with, or quickly troubleshoot the implementation of a new idea.  Creating a positive environment for franchisees to express themselves, such as an FAC, will encourage franchisees to share their ideas and solutions with the franchisor.   FAC members can also help the franchisor by selling and explaining the franchisor’s new initiatives or changes to all of the franchisees in the system. However, franchisors should not expect the establishment of a franchise advisory council to be the answer to all their concerns. FAC members can not be expected to endorse every idea or initiative brought down from above. The objective should be to improve communication and efficiency of the franchise system.

 

The FACs laid out

Since the structures of Franchisee advisory council tend to be more defined than IFA’s we will discuss FAC’s more below.  Franchisee advisory councils are structured in one of three ways:

1. The franchisor arranges everything, appoints the FAC members, sets meeting dates, creates the agenda and chairs meetings.

2. The franchisees organize everything for themselves. They may or may not invite the franchisor to attend some of the meetings.

3. The franchisor and franchisee jointly organize, sharing duties and responsibilities.

This third option is the recommended method for creating an FAC, since, during early development of a franchise system, franchisees and their franchisor are typically learning about the system together.

Whatever structure is used, it must be clearly set out in advance, and understood by all involved. A proactive approach will define the FAC’s role in the operating manual, but this role must be allowed to evolve and broaden as both it and the franchise system mature. Most FACs assume a consultative role to the franchisor; however, in the absence of early clarification, franchisees may believe it has the power to make decisions, whereas the franchisor regards it as purely advisory.

A well-functioning FAC needs a well-defined set of rules, which can answer the following questions:

· Who can belong, and how are they selected?

· What are the objectives of the group?

· Who can be officers and what are their roles?

· When and where are meetings held?

· Who conducts meetings and sets agendas?

· Who records minutes, does paperwork and handles logistics?

· Who pays for the various costs incurred?

Before all the rules are set, the parties should agree on what areas of the franchise system the FAC will become involved in. Most FACs influence four main areas being:

· Marketing and advertising;

· Franchise operations;

· Supporting services (insurance, suppliers, etc); and

· Financial or cost-related issues (conventions, increasing fees, etc).

Although franchisors may not want to be seen sharing authority on these sensitive areas, they will benefit from input and advice from concerned franchisees during FAC meetings, and avoid potential confrontations with franchisees later on. To obtain maximum benefit from these FAC meetings, the franchisor’s senior management should participate in the FAC meetings where decisions can be made directly with the franchisee representatives.

 

Paying the bills

All franchise advisory councils involve costs, whether it be paperwork, taking minutes, travelling or arranging meeting facilities. The big issue is who will pay. Some FACs set fees to be charged to all franchisees, while others are supported entirely by the franchisor; still others combine these approaches. While there is no one way that fits all, the best arrangements involve some cost sharing between the parties, though a combination of fees charged to all franchisees and a contribution from the franchisor’s funds. Franchisors often offer their boardroom/meeting rooms for FAC meetings, saving the franchisees additional expenses.

Ultimately, the FAC should be seen as a neutral forum in which the main parties can meet at regular intervals to discuss ways of advancing the franchise system. As such, the franchisor and the FAC members must act on any undertakings made during the meetings in order to maintain their credibility to one another and the entire franchise system. If a franchise advisory council is to survive long term, the franchisor must show high regard for it, and take its business seriously. This is an excellent way for the franchisor to prove itself to the franchisee community, and should result in more involved and loyal franchisees. Finally, franchisors should be realistic with the results they expect from establishing an FAC as franchisees will naturally be uncertain of its purpose and look to franchisor to set the standards of behaviour before committing themselves to the arrangement.

Conversely, franchisors that do not open effective lines of communicating with their franchisees (such as FAC) are likely to be confronted by a more adversarial type of franchisee association. Where effective communication does exist between the franchisor and its franchisees, whether it is an FAC or IFA, both sides will reap the benefits of improved communication in the decision making process as well as better endorsement of the franchisor’s initiatives from franchisees.

 

David Gray is a lawyer with Macdonald Sager Manis LLP.  He has significant experience in the areas of franchising, licensing, intellectual property and commercial and corporate disputes, and regularly advises clients on franchise-related matters. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. or (416) 364-4596.

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