Franchise Relationships Beyond the Contract

Adapted from a keynote presentation by Greg Nathan, managing director of the Franchise Relationships Institute (Brisbane, Australia), at the 32nd Annual American Bar Association Forum on Franchising in Toronto, Canada, on Oct. 14-16.

Franchising creates a relationship ' a personal relationship ' between a franchisor and a franchisee. This is an obvious statement, but it's easily forgotten or underestimated, especially during the daily challenges of managing a franchise system.

Attendees at the 32nd Annual ABA Forum on Franchising were given a timely reminder of the importance of relationships in franchising during a keynote presentation by Greg Nathan, managing director of the Franchise Relationships Institute (Brisbane, Australia). He presented strategies for improving the franchisor-franchisee relationship, gained from the Institute's more than 20 years of research and consulting in the field.

“While the global culture of franchising has been largely defined and shaped by legal frameworks, particularly in the U.S., the relationship between a franchisor and its franchisees is influenced by a range of factors which go beyond legal contracts. A contract may signify the presence of a relationship, but the contract is not the relationship,” said Nathan. “The franchise relationship actually exists independently of the legal contract in another form, a type of 'psychological contract,' defined in this context as: 'A set of beliefs or expectations around the reciprocal obligations of franchisees and franchisors.'

“Relationships also have the power to create or destroy ' in business and in life. The quickest and surest way to wreck a marriage or make a sports team, business partnership, or organization vulnerable to failure is to create an environment of poor communication, conflict, and mistrust.”

Attorneys are expert at putting everything that could affect the franchisor-franchisee relationship in writing. Legal documents protect the rights of franchisors or franchisees and ensure that decisions do not expose the parties to unnecessary risk, said Nathan.

Yet, although legal documents are crucial in franchising, they do not capture everything that is at stake. “It is in not writing down or discussing our most important mutual obligations that make them so important and powerful as agents of influence,” said Nathan. “'They should have known better!' we say when someone breaks their part of a psychological contract. This, often unfounded, assumption that people understand what they expect from each other in their relationships, is the cause of much confusion, disappointment, and conflict in relationships, including the franchise relationship. In other words, the franchise relationship includes franchisors and franchisees meeting a set of implied or implicit obligations that are not written into the franchise agreement.”

The Institute's research shows that franchisee satisfaction and business performance in franchise networks are influenced as much by elements of the psychological contract as by legal contracts or commercial factors. Franchisees look for franchisors who “have integrity, are concerned for their success, and are competent to run things,” said Nathan.

Solutions to Conflict

Unfortunately, when a franchisee and franchisor reach a disagreement, each side has a tendency to contact attorneys. The attorneys focus on the written agreement and relevant law to protect the rights of their client ' quite sensible actions, but not necessarily the best way to arrive at a solution. “An inherent dilemma here is that lawyers traditionally encourage their clients to take a defensive stance and prove their position is right, which, of course, makes the other party wrong,” said Nathan. “This 'rights-based paradigm' can exacerbate an already strained franchise relationship, even if this is not the intention.”

To avoid having difficult situations get out-of-hand, Nathan suggested a series of steps that franchisors can take to improve communications, demonstrate leadership, strengthen the culture of the system, and select good franchisees. Among the highlights:

• Reduce stress. In one in-depth survey of 890 franchisees, the Institute found that the largest number of them said that they bought a franchise in order to improve their work-life balance (31%) and many said that their motivation was having greater control of their work environment (15%); by comparison, building wealth was the primary motivator for only 22%. “This goes against the accepted wisdom that franchisees are only interested in making money,” he observed. “It is also a reminder for franchisors not to underplay the realities of long hours and hard work when building a business as this may lead to later disappointment and resentment, factors that can only demoralize a franchisee and undermine their performance.” The solution, Nathan suggested, is to monitor the stress that franchisees are facing and to make sure that the franchisor's staff is available to help franchisees achieve work-life balance, even in the context of working hard.
• Manage change. Change is inevitable in the business world, but franchisors and franchisees often see a system change very differently, said Nathan. A franchisor is choosing to make the change, whereas the franchisee is being told to change. Therefore, to get franchisees to react positively to change, franchisors need to communicate in advance about the need for the change and the benefits that it will bring. They must respond to franchisees' questions about the change, not brush them off as irrelevant. They should conduct pilot programs and tests so that they can ensure a smooth rollout. And they should not assume that silence on the part of franchisees is acquiescence to or agreement with the change.
• Monitor profitability. It's been long assumed that profitable franchises are happy franchises. The Institute's data bear this out ' to some degree. But the inflection point where a franchisee's satisfaction is significant seems to be in the upper 40% of revenue for the system, which means that mid-range performers are not much more satisfied than low performers. Nathan recommended starting by benchmarking franchise performance and sharing that information throughout the network (backed by coaching and support), so that moderate and low performers can improve.

“Healthy franchise relationships and franchisee satisfaction [are] linked to financial performance,” Nathan concluded. “The data also show that franchisee satisfaction is influenced by a range of other factors, especially confidence in leadership, optimism for the future, and a sense of natural justice.”

Kevin Adler is the associate editor of LJN's Franchising Business & Law Alert.

Adapted from a keynote presentation by Greg Nathan, managing director of the Franchise Relationships Institute (Brisbane, Australia), at the 32nd Annual American Bar Association Forum on Franchising in Toronto, Canada, on Oct. 14-16.

Franchising creates a relationship ' a personal relationship ' between a franchisor and a franchisee. This is an obvious statement, but it's easily forgotten or underestimated, especially during the daily challenges of managing a franchise system.

Attendees at the 32nd Annual ABA Forum on Franchising were given a timely reminder of the importance of relationships in franchising during a keynote presentation by Greg Nathan, managing director of the Franchise Relationships Institute (Brisbane, Australia). He presented strategies for improving the franchisor-franchisee relationship, gained from the Institute's more than 20 years of research and consulting in the field.

“While the global culture of franchising has been largely defined and shaped by legal frameworks, particularly in the U.S., the relationship between a franchisor and its franchisees is influenced by a range of factors which go beyond legal contracts. A contract may signify the presence of a relationship, but the contract is not the relationship,” said Nathan. “The franchise relationship actually exists independently of the legal contract in another form, a type of 'psychological contract,' defined in this context as: 'A set of beliefs or expectations around the reciprocal obligations of franchisees and franchisors.'

“Relationships also have the power to create or destroy ' in business and in life. The quickest and surest way to wreck a marriage or make a sports team, business partnership, or organization vulnerable to failure is to create an environment of poor communication, conflict, and mistrust.”

Attorneys are expert at putting everything that could affect the franchisor-franchisee relationship in writing. Legal documents protect the rights of franchisors or franchisees and ensure that decisions do not expose the parties to unnecessary risk, said Nathan.

Yet, although legal documents are crucial in franchising, they do not capture everything that is at stake. “It is in not writing down or discussing our most important mutual obligations that make them so important and powerful as agents of influence,” said Nathan. “'They should have known better!' we say when someone breaks their part of a psychological contract. This, often unfounded, assumption that people understand what they expect from each other in their relationships, is the cause of much confusion, disappointment, and conflict in relationships, including the franchise relationship. In other words, the franchise relationship includes franchisors and franchisees meeting a set of implied or implicit obligations that are not written into the franchise agreement.”

The Institute's research shows that franchisee satisfaction and business performance in franchise networks are influenced as much by elements of the psychological contract as by legal contracts or commercial factors. Franchisees look for franchisors who “have integrity, are concerned for their success, and are competent to run things,” said Nathan.

Solutions to Conflict

Unfortunately, when a franchisee and franchisor reach a disagreement, each side has a tendency to contact attorneys. The attorneys focus on the written agreement and relevant law to protect the rights of their client ' quite sensible actions, but not necessarily the best way to arrive at a solution. “An inherent dilemma here is that lawyers traditionally encourage their clients to take a defensive stance and prove their position is right, which, of course, makes the other party wrong,” said Nathan. “This 'rights-based paradigm' can exacerbate an already strained franchise relationship, even if this is not the intention.”

To avoid having difficult situations get out-of-hand, Nathan suggested a series of steps that franchisors can take to improve communications, demonstrate leadership, strengthen the culture of the system, and select good franchisees. Among the highlights:

• Reduce stress. In one in-depth survey of 890 franchisees, the Institute found that the largest number of them said that they bought a franchise in order to improve their work-life balance (31%) and many said that their motivation was having greater control of their work environment (15%); by comparison, building wealth was the primary motivator for only 22%. “This goes against the accepted wisdom that franchisees are only interested in making money,” he observed. “It is also a reminder for franchisors not to underplay the realities of long hours and hard work when building a business as this may lead to later disappointment and resentment, factors that can only demoralize a franchisee and undermine their performance.” The solution, Nathan suggested, is to monitor the stress that franchisees are facing and to make sure that the franchisor's staff is available to help franchisees achieve work-life balance, even in the context of working hard.
• Manage change. Change is inevitable in the business world, but franchisors and franchisees often see a system change very differently, said Nathan. A franchisor is choosing to make the change, whereas the franchisee is being told to change. Therefore, to get franchisees to react positively to change, franchisors need to communicate in advance about the need for the change and the benefits that it will bring. They must respond to franchisees' questions about the change, not brush them off as irrelevant. They should conduct pilot programs and tests so that they can ensure a smooth rollout. And they should not assume that silence on the part of franchisees is acquiescence to or agreement with the change.
• Monitor profitability. It's been long assumed that profitable franchises are happy franchises. The Institute's data bear this out ' to some degree. But the inflection point where a franchisee's satisfaction is significant seems to be in the upper 40% of revenue for the system, which means that mid-range performers are not much more satisfied than low performers. Nathan recommended starting by benchmarking franchise performance and sharing that information throughout the network (backed by coaching and support), so that moderate and low performers can improve.

“Healthy franchise relationships and franchisee satisfaction [are] linked to financial performance,” Nathan concluded. “The data also show that franchisee satisfaction is influenced by a range of other factors, especially confidence in leadership, optimism for the future, and a sense of natural justice.”

Kevin Adler is the associate editor of LJN's Franchising Business & Law Alert.