Franchisees start to exert more power

A new trend is emerging in Australian franchising which gives franchisees a greater say in how their businesses operate.

While it is often assumed that franchisors hold all the power in a franchise relationship, there is a growing realisation that franchisees can also wield substantial influence.

Franchise agreements are often criticised as one-sided documents that favour the franchisor, even though they must in order to maintain standards and consistency across a network.

However, if power is defined as the ability to allocate and prioritise resources, then franchisees can often have the upper hand in the franchise relationship.

For example, franchisors expend large amounts of time, effort and funds on recruiting franchisees, whose relative scarcity effectively determines how those resources are allocated.

(Franchisees are often unaware of the level of influence they have with franchisors during this recruitment phase).

During the course of the franchise relationship, franchisees hold a position of power due to their ability to influence the allocation of organisational resources via their levels of business performance, system compliance or other factors.

Franchisors with low-performing franchisees will mobilise additional resources to support and improve the performance of that business. Whether they are aware of it or not at the time, underperforming franchisees have power because they can influence the reallocation of resources away from other parts of the franchisor’s business.

High-performing franchisees (including multi-unit franchisees) on the other hand are more likely to be aware of the influence they wield with the franchisor. This might be due to their economic size and impact on the franchisor’s financial performance, or because the franchisee is seen as a leader within the group by other franchisees. Either way, high-performing franchisees also have the ability to influence the allocation of the franchisor’s organisational resources, and will consciously do so to protect their interests.

At the conclusion of the franchise relationship, franchisees still maintain significant power. Again, they can influence the allocation of the franchisor’s resources by the timing and nature of their departure (e.g. by planned sale to an unproven buyer, or unplanned rapid exit).

Even after exiting their business, franchisees can still exert influence over the franchisor through their status as ex-franchisees. The Franchising Code of Conduct requires franchisors to provide a disclosure document to potential franchisees, which includes a list of contact details of ex-franchisees who have left the network in the previous three financial years.

When this requirement to disclose ex-franchisees’ contact details was added to the Code in 2010, some franchisors were concerned that their recruitment efforts would universally fail at the final stage because ex-franchisees would discourage potential franchisees from joining. While this might occur from time to time, it has not led to a universal avoidance by potential franchisees.

So while it can be shown that franchisees have the ability to influence franchisors before, during and after the franchise relationship, it is the “during” stage where franchisees are often most motivated to proactively influence the franchisor.

This proactive influence will often be sought via both informal and formal channels.

Informally, a franchisee may seek to influence a franchisor by attempting to convert their business relationship to an interpersonal relationship, and as a friend, discreetly offer counsel to the franchisor on the operation of the network. This approach may also apply for other staff in the franchisor’s organisational hierarchy, particularly for those higher up the chain than the staff with which the franchisee must deal on a daily basis.

Formal structures to influence franchisors typically start with the field representatives who deal with the franchisees on a daily basis, and through them, up to higher levels in the management chain.

But in addition to this, franchisors also adopt other structures to capture franchisee feedback that may influence the allocation of the franchisor’s resources.

These include regional meetings and workshops, national conferences, online discussion forums, surveys, mystery shopper programs and Franchise Advisory Councils, among others.

Franchise Advisory Councils (FACs) in particular are seen as an opportunity to provide valuable feedback to the franchisor that can influence the allocation of resources in a network.

FACs are considered to be an essential best-practice element of any maturing franchisor. For the uninitiated, a FAC is a committee of franchisees which provides advice and suggestions to the franchisor on ways to improve the network as a whole.

The FAC engages the operational expertise of the franchisees and their experience of dealing with the brand’s target market, with the brand custodianship and managerial skills of the franchisor to produce recommendations for improvement that the franchisor is advised to consider.

Well-run FACs are seen as representative of the network, have clear guidelines within which to operate, and which are taken seriously by their franchisors will produce jointly beneficial outcomes for both franchisees and franchisors.

However, many FACs struggle and often fail due to a perceived lack of purpose, a lack of transparency, a lack of guidelines, or where its recommendations are consistently ignored by their franchisor.

FACs also provide a formal recognition by the franchisor of the influence that franchisees do have in a network. In extreme circumstances, franchisees will form their own FAC if one does not already exist in a network, or where one does exist but is considered to be dysfunctional.

The existence of a FAC recognises the ability for franchisees to influence the allocation of resources within a network. It is a forum for franchisees to exercise their power in a proactive and collaborative manner, and should be at the heart of decisions affecting the network.

Through Franchise Advisory Councils, franchisee power can be a force for good.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level.