What causes franchise disputes?

Franchise relationships are formalised through contracts. These are known as ‘relational contract’ and are left incomplete on purpose. This is because it is impossible for either party to know all the issues they will have to deal with over the course of a relationship that could last for many years. In a franchise system, the franchisor makes most of the strategic decisions – particularly those that affect the brand. Master franchisees may make local decisions but the unit franchisees themselves often have little input. The success of a franchise system partly depends on balancing competing franchisor and franchisee objectives. Franchisors seek to maximise their market coverage, while franchisees seek to grow profitable businesses.A common misconception of new franchisees is that they believe becoming a franchisee will allow them to be their own boss and incorporate their own entrepreneurial flair in their business. In reality, as franchised systems are highly standardised, there is typically little opportunity for franchisees to change the processes or product/service offerings.Common causes of disputes that arise between franchisors and their overseas franchisee include:

• Miscommunication: the franchisor tells the master franchisee area developer franchisee one thing but master franchisee/area developer/franchisee hears what they want to hear.
• The franchisor wants to continue to improve the brands competitive position by making system changes. The franchisees resist change because of the implementation costs.
• The franchisor wants to maximise system market coverage and promote competition between stores. The franchisee resists intra-system competition.
• The franchisor wants system-wide uniformity. The franchisee resists because they believe this will not improve their profitability.
• The franchisor does not provide adequate ongoing training and support.
• The franchisor makes representations that do not come to fruition.
• The franchisee exits the system and works in a similar business, leveraging off their experience and insight into the franchisors business, possibly in breach of post- term covenants.
• The development schedule is not complied with by the master franchisee/area developer.
• There are disagreements over the quality of inputs and stock. Franchisees want to source cheaper products while the franchisor wants standardisation of quality which may require more expensive inputs. There may also be difficulties in importing products from the franchisor’s home country to the target country. While in some instances, the target country may stipulate that local products must be used.