Extensive studies have revealed that a large percentage of disputes that arise between franchisor and franchisee occur over the same stages of what has become known as the ‘E’ Factor – a simulated model which identifies specific stages that every franchisor-franchisee relationship goes through.
The model was developed by Greg Nathan, a corporate psychologist who studied the behavioural patterns of new franchisees and found that all of them tended to go through similar phases.
The reason for calling the model the ‘E Factor’ is fairly self-explanatory when you consider the six stages of the progression:
1. The ‘Glee’ Stage
2. The ‘Fee’ Stage
3. The ‘Me’ Stage
4. The ‘Free’ Stage
5. The ‘See’ Stage
6. The ‘We’ Stage
What to expect
Each of these six stages is characterised by certain franchisee attitudes towards the franchise and the franchisor.
- The Glee Stage: You are extremely happy with your new purchase and are looking forward to building your future. You are incredibly obliging to the franchisor because you are able to acknowledge that the franchisor is providing you with a great opportunity.
- The Fee Stage: You are happy because you are making money, but you find it hard to part with the royalty payments because it ultimately leaves you with less money in the till.
- The Me Stage: You start convincing yourself that your success has only come through your own hard work. You believe that you can run the business more efficiently without the franchisor’s input.
- The Free Stage: The novelty has well and truly worn off. You constantly complain about franchise restrictions and standards, question the validity of the operations manual, and generally try to run the business your way to prove a point to the franchisor.
- The See Stage: You begin to acknowledge the part played by the franchisor and the franchise system. You begin to see the value of having a proven and standardised system to work with, and you realise that you been making things difficult for the franchisor in recent times.
- The We Stage:You are comfortable with the fact that the two of you need to work together in order to achieve personal and managerial goals. You pass on ideas to the franchisor for consideration and ask for assistance in areas that you are unsure of.
As you could probably guess from that progression, most disputes arise during the middle two stages – ‘Me’ and ‘Free’. It is during this time that franchisees are hard to get along with because of the frustration with the restrictions placed on their ability to operate the business.
The system has always been in place, but a certain stage is reached where perceptions of the system shift from positive to negative. This can lead to big problems and franchisors have to know how to deal with disgruntled franchisees.
The ‘E Factor’ model is a simple way to understand the sequence of emotions that a franchisee experiences, and gives franchisors the opportunity to plan for each separate phase.
The After-Purchase Relationship
The Franchising Code of Conduct applies to the franchisor/franchisee business relationship offering certain protection and remedies. Having entered into the franchise agreement there are certain steps a franchisor must take in the ongoing relationship.
Lease: A copy of the lease must be given to the franchisee within one month after the lease or agreement to lease has been signed
Marketing fund: Prepare an annual financial statement within three months of the end of the financial year. Have the statement audited by a registered company auditor within three months of the end of the financial year. Give a copy of the statement to a franchisee within 30 days of the request. The franchisor does not need to comply if 75 per cent of franchisees agree to waive this right.
Ongoing disclosure: The franchisor must disclose materially relevant facts to franchisees or prospective franchisees in writing, within 60 days after the franchisor becomes aware of a matter.
Disclosure: A franchisor must give a franchisee a current disclosure document within 14 days after a written request by the franchisee. However, this request can only be made once in 12 months.
Transfer of a Franchise: A franchisor must not withhold consent, unless there are reasonable grounds for not doing so such as the proposed transferee does not meet a reasonable requirement of the franchise agreement, for the transfer of a franchise.
Dispute resolution: Adhere to the complain handling procedure outlined in clauses 29 and 30 of the Franchising Code.
Association of franchisees: A franchisor must not induce a franchisee not to form an association or not to associate with other franchisees.
Release from liability: A franchise agreement must not contain or require a franchisee to sign, a general release of the franchisor from liability towards the franchisee.
Termination: Where a franchisee breaches a franchise agreement, the franchisor must not terminate the agreement without reasonable notice, instead telling the franchisee how the situation can be remedied and allowing the franchisee reasonable time (within 30 days) to remedy the breach.
Where a franchisee has not breached the franchise agreement, the franchisor must give reasonable written notice of the proposed termination and reasons for it to the franchisee. In specials circumstances (clause 23 of the Code) a franchisee does not have to comply with clauses 21 or 22 of the Code.
Dispute resolution
An issue that hopefully won’t arise during your time as a franchisee, but a very important one to understand all the same, is dispute resolution.
Even though you may have analysed every aspect of the business before deciding to purchase, there is always a chance that conflicts will arise, no matter how much you try to avoid them. Managing your franchise relations is equally as important as managing the franchise business.
Without exception, every conflict that occurs between franchisee and franchisor can be blamed on a breakdown in the communication chain. Ironically, formal communication between the two parties has emerged as the most effective way to resolve disputes.
Common causes of disputes between franchisor and franchisee include the following:
- Inadequate training of franchisee, leading to inability to run business efficiently.
- Inability of franchisor to manage system properly.
- Franchisees not complying with the operations manual.
- Inadequate guidance and support provided by the franchisor.
- Problems with rent, leasehold improvements and site issues.
- Franchisor unhappy about franchisee commitment and standards.
- Franchisee unhappy with restrictive standards.
- Default or non-compliance of the terms and conditions contained in the franchise agreement by either party.
The best way to avoid getting involved in potentially harmful incidents like these is to build a mutually trusting and understanding relationship with the franchisor.
Suspicion about the motives of each other, and the inability to appreciate the needs and expectations of the other party will only cause trouble. This is why it is so important that you analyse the franchisor just as vigorously as you analyse the business.
Even if you find the perfect franchise, if you don’t see eye-to-eye with the franchisor it might be wise to back out, or you could end up regretting the move.
Dispute warning signs
Signs that may indicate a clash is on the horizon, which apply to both the franchisee and the franchisor, include the following:
- Making mountains out of molehills.
- Reluctance or inability to answer questions.
- Scape-goating or blaming individuals for bigger issues.
- A drop in the level of commitment displayed.
- Questionable motives.
- Recurring problems linked to behavioural patterns.
- Lack of trust.
- Ignorance of needs and wants of other party.
Frequently asked questions
The following is a list of frequently asked questions concerning possible disputes that may arise between franchisors and franchisees.
Can the period of tenure of my franchise agreement be altered? What recourse do franchisees have if the franchisor seeks to shorten the franchise agreement?
The question of whether the length of the franchise agreement can be altered will be set-out in the franchise agreement. As the original franchise fee is usually based on the duration of the agreement, an attempt to change it may constitute unconscionable conduct.
If during the term of the franchise agreement the franchisee is concerned with variations to the franchise agreement or to the franchise system, what approach should he/she take?
Firstly, concerns regarding the operation of the franchise system should be taken up directly with the franchisor. If the franchisee’s concerns are not addressed, he/she should consider taking the matter up with the franchise council that represents franchisees.
Can a franchisor seek access to the financial records of a franchisee of the franchised business?
Yes. A franchisor can seek access to the financial records of a franchisee that relate to the obligations of the franchisee under the franchise agreement.
Can a franchisor object to the price for which a franchisee sells its products? Are franchisees able to offer discounts to customers in order to promote their business?
Franchisors are not able to stop franchisees discounting, but they are able to set maximum prices. Specific legal advice should be sough on pricing matters.
