A Franchisee Association: What is it? - Advantages & Disadvantages

Author: f.alepin@alepin.com

Date: MAY 3rd, 2012

Topic: Industry Experts

As the name indicates, an association of franchisees is, for all practical purposes, a grouping of franchisees. This kind of association will occasionally be recognized by the franchisor, or even encouraged by the franchisor. In other cases, a franchisee association may be perceived by the franchisor as a threat or simply as a vehicle to channel the complaints of franchisees to the franchisor. One must be aware that franchisee associations are not regulated by any specific law and that we must, therefore, refer to the general rules of Civil Law to analyse the creation and the functioning of franchisee associations.

Legal nature:

An association of the franchisees of a network not required by the franchisor, may group together some or all of the franchisees. There is, for example, no obligation such as that which exists in Employment and Labour Law for an employee to be part of a union simply because he works for an accredited unit which has decided by majority to form a union. I must, at this time, point out that using the term «union» or «employee» is not at all appropriate when discussing independent entrepreneurs such as franchisees, and that the utilisation of these terms is only to permit the reader to understand the fact that franchisees are in no way obliged by law to join an association of franchisees, unless their franchise contract so stipulates specifically.

Why franchisees should associate:

As already discussed above, certain franchisee associations exist because they are either encouraged or required by the franchisor, but other franchisee associations form in a more discreet manner. Therefore, for example, in a network containing 20 franchisees, four or five of the franchisees may meet occasionally to discuss how their businesses are operating or the fact that they are not very satisfied with some aspects of their relationship with the franchisor. In certain cases, these four or five franchisees summon all the other franchisees to a meeting in order to share with all the franchisees the subject of their discussions as well as to discuss the advantages of exchanging information. Therefore, you have the beginning of an informal association of franchisees to the extent that the said franchisees agree on the fact that it is a good idea to work together or even to form a board of directors or a committee to represent them in discussions with the franchisor.

In other cases, a franchisee association may be created spontaneously based on a need that arises. For example, consider the case where the fact that the franchisor has decided to create a network of points of sale parallel to those already in existence, to sell similar products or partly similar products to those sold via the original network. In such a situation, the franchisees may believe that the franchisor does not have the interest of the franchisees at heart and may wish to work together to set down in writing a clear position to be presented to the franchisor via the representatives that the franchisees will choose. Quite often, these spontaneous associations will commission one or more of the franchisees to retain the services of legal advisors in order to assist them in preparing the steps to be taken and a strategy that will be successful in putting forward their claims to the franchisor, because the legal advisor will also take account of the rights and obligations of the franchisees and franchisor as set out in the franchise contract or other agreements that may exist between the parties.

Advantages and disadvantages:

1. Here are some of the advantages related to the existence of a franchisee association:

    1.1 The franchisees can discuss amongst themselves the challenges inherent to operating their franchises;

    1.2 The franchisees can verify how various promotions are functioning in different sales territories;

    1.3 Franchisees can discuss motivational tools used to attract and keep key employees;

    1.4 The franchisees can discuss the relations with various suppliers, for example, delivery delays, back orders, etc..;

    1.5 The franchisees can discuss the possible interpretations of various clauses of the franchise agreement;

    1.6 The franchisees can discuss the possibility of offering to themselves, because they are associated, the services of specialized professionals in the area of franchising, for legal services, for accounting and for marketing. This will assist in the perspective of presenting requests to the franchisor as well as permitting to analyse, with full knowledge, the impact of changes to the franchise agreement or interpretations made by the franchisor of the franchise agreement. The advantage is that the cost related to the intervention of such specialists will be shared among the association of franchisees rather than being completely assumed by a single franchisee;

    1.7 The franchisees can be reasonably secure in knowing that the advantages granted to certain franchisees can be requested by other franchisees from the franchisor;

    1.8 Being associated with other franchisees necessarily has more of an impact on the franchisor than when a franchisee is required to present its demands to the franchisor by himself, no matter how legitimate the said demands may be;

    1.9 In certain cases the franchisees may form a purchasing group in order to purchase certain goods or services that are not mandatorily purchased from the franchisor or a supplier authorized by the franchisor as provided contractually in the franchise agreement;

    1.10 The franchisees can save time. In essence, rather than being responsible for the creation and analysis of a file to be discussed one-on-one with the franchisor, the franchisee will confer to a committee the responsibility of analysing and reporting to all of the members of the association, which will certainly constitute a significant saving of time;

    1.11 It will be easier for any franchisee maintaining good relations with other franchisees to sell his franchise either to another franchisee or to an acquaintance of the franchisee. In the case that it is sold to another franchisee, it will be more difficult for the franchisor to not approve the purchaser, unless the potential purchaser is in default pursuant to his franchise agreement or is financially incapable of supporting two businesses or more.

2. Here are some of the disadvantages related to the existence of a franchisee association:

    2.1 Because they are no specific laws regulating the existence of franchisee associations, whether they are formal or informal, the franchisor may consider that the franchisee association as well as all of the franchisees that participate in the said association are a threat to the proper functioning of his network;

    2.2 The franchisor may attempt to invoke the fact that he signed a franchise agreement with each franchisee individually so that he does not want to deal with any sort of a committee of franchisees;

    2.3 It will be difficult to be certain that, among the members of a franchisee association, whether formal or informal, that there is no franchisee who is communicating directly with the franchisor (a «mole»). In effect, this kind of situation may make it difficult to put in place a proper strategy;

    2.4 It is possible that the franchisor, being aware of the existence of a formal or informal association of franchisees, will try to undermine its functioning by negotiating directly with certain members of the association, especially those that are on less solid financial footing, so as to encourage them to cease to be a member of the franchisee association under threat of there being a more strict application of the franchise agreement with respect to such franchisees;

    2.5 On the other hand, the franchisor may decide to grant certain disproportionate advantages to certain franchisee members of the association in order to persuade them that they will obtain better results by negotiating directly with the franchisor rather than participating in the franchisee association. This is a concept which, many years ago, I dubbed the «little prince» created by the franchisor. In effect, the concept of the «little prince» applies as well for the disadvantages discussed in paragraph 2.4 hereinabove.

Conclusion:

A franchisee association, whether formal or informal, should, in my humble opinion, include the following characteristics:

    1. Be formed by franchisees who are motivated to work together for business considerations;

    2. It should not be merely a tool serving to transmit complaints to the franchisor. To the contrary, the relationship with the franchisor should, as much as possible, be clearly established as one where the franchisor and the franchisees work together, and their rivals or competitors are outside of the franchise network;

    3. It should be organized in such a manner that the franchisees do not waste their time because they do not know where the association is headed;

    4. Clear objectives regarding the existence of the association should be defined as quickly as possible in order to maintain the purpose of meetings, the frequency of the meetings and the discussions conducted during said meetings as well as the mandates conferred on the representatives of the franchisee association;

    5. The association should also be able to exclude or expel a franchisee whose behaviour may tarnish the image and credibility of the association, in particular, those franchisees whose behaviour is notoriously unacceptable.

I hope that these informations have been of use to you and it will be my pleasure to further discuss your needs as well as further details regarding franchisee associations.

This article contains legal information of a general nature and cannot replace legal advice given by a lawyer who will examine the details of your particular situation.