Dominant Challenges In An Existing Franchisor-Franchisee Relationship: Example Essay By An Expert Writer To Follow

1.0 INTRODUCTION
According to Ekelund (2014, p. 76-77), the franchisor-franchisee relationship is far more complex than the traditional supplier-retailer relationship. First, the franchisor retains the ownership of the brand or the trademark, which the traditional supplier did not over its products. Second, the relationship is subject to conflicts, directly arising from the independent power of the franchisor and the franchisee as well as the interdependence of both. These factors create a flash point in the relationship, which if not effectively managed can destroy the relationship and economically impact on each other as a consequence of the relationship.
In this sense, the relationship between the franchisor and the franchisee is a relationship of symbiosis wherein the success or failure of one results, or at least eventually results, to the success or failure of the other. Their outcomes apply equally both to the franchisors and the franchisees (KordaMentha, 2015, p. 10). The strength of this symbiosis makes the franchisor-franchisee relationship of no comparison among current business structures, not even the legal unity of investments in joint ventures and partnerships, which are both legally single entities. In contrast, the franchisor-franchisee relationship is a bond between two legally independent business entities with no cross-investments existing other than the agency of the franchisee to do business under the franchisee’s brands and system.
Understanding the nature of the challenges expected in the franchisor-franchisee relationship provides an interesting study into the unique properties of this unique organizational system. Knowing these challenges is a significant step at effectively managing the franchising relationship. That is essentially the purpose objective of this paper.
2.0 RELATIONAL TENSIONS AND CHALLENGES
2.1 Drive for the Best Commercial Deal
There is an inherent tension existing between the franchisor and the franchisee, which centers upon each party’s understandable desire to derive the best business deal for their companies and the necessity of preserving a degree of mutual trust in the relationship (Abell and Hobbs, 2013, p. 1). To what extent, for instance, can a franchisor validly exploit, either in the legal provisions of the contract (e.g. disproportionate apportioning of contractual obligations) or the level of organizational support or anything else, the weak judgmental skills, inexperience, or vulnerable economic status of the franchisee for the franchisor’s organizational benefits? In dealing with a weaker franchisee, will it be ethical or even legally unacceptable to drive for a more favorable deal than the franchisor normally obtain from stronger franchisees?
However, business benefit is just one area wherein the franchisor-franchisee objectives diverge, potentially causing friction within the relationship. The other areas of challenges or tensions include the disagreements over franchisee autonomy and the franchisor control as well as the replication objectives of the franchisor and the innovation framework of the franchisee.
2.2 Scope and Limits of Fiduciary Duty
Different countries have different legal doctrines in defining the fiduciary duties of the franchisor to the franchisee (e.g. advisory, instructional, and supervisorial obligations) and of the franchisee to the franchisor (e.g. the protection of the franchisor’s business secrets) (Abell and Hobbs, 2013, p. 2-3; Kestenbaum, et al., 2013, p. 4). In cities, for instance, wherein multiple exclusive areas are defined and both the franchisor and the franchisee operate their respective businesses under one franchised brand, a tension will exist between the franchisor’s fiduciary obligations to advise the franchisee on the manner the business must be managed in order to improve revenues and profitability or ensure that the branded processes of the franchisor are faithfully implemented.
However, when not properly handled or the legal rule is not clear, the franchisee may view the franchisor’s supervisorial obligations as an act of encroachment. The situation can be straightforward between the franchisor and a single franchisee. Moreover, where there are many franchisees involved and with diverse or even opposing understanding on what constitutes an encroachment, the franchisor’s situation can be complicated, performing an act in the pursuit of its fiduciary duty that will be interpreted by one franchisee as necessary and appropriate and by another as a serious encroachment of their prerogative to manage the business without that much ‘interference’.
The same threat hangs on the franchisor when the franchisee claims that the franchisor is interfering so much in the franchised business (Levinson, 2015, p. 10). This is not only real in the United States, but also in many countries in Europe.
The confusions or misunderstandings surrounding the mutual fiduciary duties between the franchisor and the franchisees can be counterproductive to the individuals involved. The franchisors, who are committed to fulfill its fiduciary obligation in ensuring a higher service quality in the franchisee, product quality, or customer experience, may feel restrained in their support for fear of overstepping their supervisorial limits. Conversely, those who expects more franchisor involvement may accuse the franchisor of negligence. Either way, the combined effect of these inconsistent, and even contrasting, franchisee demands can paralyze the franchisor to the disadvantage of the franchising system.
2.3 Entrepreneurial Autonomy and Operational Compliance
There are cases wherein the franchisee’s approach towards their markets differ significantly from the operational standards of the franchisor. This situation, which is a paradoxical conflict between autonomy and control, is particularly common in cross-cultural relationships between a local franchisee and a global franchisor wherein the franchisee and the franchisor differ in their business approaches essentially due to their differences in culture, markets, and on-going businesses (e.g. multi-brand franchisees), among others. The case of ESAP International (Viedeman, 2013, p. 48), for instance, encountered challenges in the knowledge transfer process due to serious differences in the cultural contexts of the franchisor and the franchisee.
Vihula Manor Country Club & Spa, a full-service manor resort in Northern Estonia, hired the England-based ESPA International to manage its boutique spa, Vihula Manor Eco-SPA, which is located in its peaceful countryside location. The Eco-SPA is the only spa in Estonia that offers the ESPA brand of spa services (Viedeman, 2013, p. 29-30). However, the ESPA spa brand is only one of four brands offered in Eco-SPA. The other brands include the Estonian Harmoonikum, the French Fleurs, and the Karin Herzhog.
One serious difficulty, for instance, occurred during training because the ESPA trainers could not speak Estonian and only one of the many spa staff knows the English language, ending her up as the training translator (Viedeman, 2013, p. 46). Because the training materials were also in English, the English-speaking spa staff because the effective mediator between the ESPA knowledge sources and her spa colleagues. The language barrier resulted to a highly limited transfer of specific brand servicing knowledge and skills. In fact, she became the hub in the internal communication process between the English-speaking Eco-SPA manager, the weekly ESPA newsletter, and other information from the ESPA website and the Eco-SPA spa employees.
The case of Vihula Manor illustrates another paradox in the franchisor-franchisee relationship, which is closely related to autonomy versus control. This paradox involves the opposing orientation between the franchisor, which is standardization oriented, and the franchisee, which is adaptation oriented. Essentially these two orientations are complementary to each other. The franchisor’s goal is to maintain a standardized process across the franchising system, which can only happen when the franchisees value adaptability to the standardized system unless the franchisee prefers to look for models outside the particular franchise system.
Under the auspices of the franchising agreement, Kestenbaum, et al. (2013, p. 4) the loss of entrepreneurial independence may be inevitable, particularly when there is a contractual obligation for the franchisees to strictly follow operational standards of the franchisor. Any innovation from the franchisee has to be approved by the franchisor before it can be legally implemented.
Thus, in this situation, the replication goal of the franchisor directly opposes the innovative orientation of a franchisee. Moreover, there is the risk of losing the originality of this innovation to the franchisor, which can spread the innovation to other franchisees as if that innovation is an original initiative of the franchisor often without additional benefits to the originating franchisee.
2.4 Franchise Brand Goodwill and Franchisee Performance
The flipside of the restriction, or even surrender, of the entrepreneurial autonomy of the franchisee is the increased risk to the franchise brand’s goodwill upon granting the contractual permission to allow the use of the brand in the franchisee’s business. In effect, operating through the franchisee, the franchisor run its business more vicariously (KordaMentha, 2015, p. 10). There are many reasons for the underperformance of a franchisee’s business even with the established goodwill of the franchise brand.
However, whatever the reason, a failed franchisee will hurt the consumer reputation of the brand. This is so because, in the eyes of the consumers, the franchisor and the franchisees are one under the common brand. The standardization of the franchising system and the uniformity of the brand-based appearance conveys that unity (Terry and Huan, 2013, p. 388).
Moreover, any serious issues in the management of the franchisee’s business (e.g. serious lack of competent customer service, inconsistent service delivery, etc.), for instance, may negatively impact upon the franchisor’s brand image with hardly reversible, if not irreversible, damage (Kestenbaum, et al., 2013, p. 4). A franchisee that failed to meet the turnaround time of an order of a cheeseburger at a McDonalds franchised outlets would be easily and expectedly generalized to the paltry customer service of the entire McDonalds system.
Furthermore, most franchisees are inherently financially weaker than the franchisors; thus, their decision to engage in a franchised business model instead of starting it from scratch. Starting a new business is more expensive and risky than getting a franchised business from a highly successful franchisor. Such franchisee weakness makes the franchisor highly vulnerable to the negative impact of a failed franchise outlet, for instance.
In a sense, when external conditions intervene, such as a global financial crisis or a local natural calamity damaging the business assets irreparably, the franchisees can be very vulnerable and may eventually fail (KordaMentha, 2015, p. 10). A failed franchise is not a good news for the franchisor’s brand image though, particularly in retail brands where public exposure is very high (KordaMentha, 2015, p. 19). In this situation, the highly effective marketing campaign of the franchisee can easily reverse into a highly effective disenchantment to the brand the franchisee represents.
On June 11, 1999, the Wall Street Journal reported the withdrawal of 2.5 million bottles of Coke from the Belgian market after 41 children became ill and hospitalized after drinking the soft drinks at school (Brannigan and Richter, 1999, n. p.). Coca-Cola Belgium later insisted that its investigation revealed that the problem was not a health issue, but a quality issue. Expectedly that incident will have an expected effect in increasing uncertainty in the minds of the Coke consumers to purchase Coke, especially before the recall took effect. Although the involved bottler Coca-Cola Enterprises was not exactly a franchisee of Coke, but a joint venture company, situations like this can likely occur in franchisees.
2.5 Ensuring Mutual Success
As indicated in the Introduction, the symbiotic relationship between the franchisor and the franchisees are closer than many observers could expect. Essentially, “their fortunes are intertwined” (KordaMentha, 2015, p. 19). Although the brunt of the franchise failure rests economically on the franchisee, the franchisor, too, is often exposed to the failure through the outstanding debts of the failed franchisee. It is inherent in the franchisor-franchisee relationship that the franchisor has an obligation to provide the franchisee with the franchise’s branded products and even equipment, sometimes initially on credit or as an ongoing collectible from the franchisee’s business.
Thus, when a franchisee encounters an irrecoverable business problem and has to close shop, the franchisor often retains the franchisees payables for delivered and yet unpaid supplies and equipment before the closure happened. Since the better option to outright closure of the franchised outlet is not to close it but instead to transfer the remaining years of the franchise agreement to an interested individual or business enterprise, the franchisor normally does not liquidate the franchisee assets and carry over the bad debts to the transferee. It is intended to maximize the transferability of the assets to the new franchisee. That carryover debt can take some time to be paid by the transferee (KordaMentha, 2015, p. 19). In effect, the franchisor has an inherent interest in the success of the franchisee.
Moreover, in addition to debt and brand exposures, the franchisor can also be exposed to lease liabilities, such as when landlords demand that the franchisors guarantee the franchisees ability to pay the rent when the franchisee has limited financial resources (KordaMentha, 2015, p. 19). When the franchisee failed, the franchisor is left with an obligation to pay off the remaining lease on the property.
Conversely, franchisees can also be exposed to failed franchisors. For instance, small franchise networks, those with less than 20 franchisees in the system, does not have the advantage of the economies of scale and have to struggle to be sustainable (KordaMentha, 2015, p. 16). That makes the small franchising system highly vulnerable to local economic downturn.
If, for instance, a franchisee joins this system, the franchisor’s failure can destroy the franchisee’s business, which, even if it remains reasonably profitable, will be left orphaned by the franchisor. Moreover, if the franchising business fell under a new management through a merger, there will be a reasonable chance that the new owner will change the franchise’s brands into the parent company’s brands.
3.0 CONCLUSION
Essentially, the central issue in the challenges being faced by franchisor-franchisee relationships involves the inherent conflict of individual interests between the franchisor and the franchisee. Where the franchisor expectedly aims at getting more contractual advantages or concessions from the franchisee, the franchisee, too, wants to get the same contractual bounty. Some countries, which insist on upholding the signed franchise agreement, may consider that action as fair under the presumption that the franchisee’s signature indicates his acceptance of the disproportionate assignment or claims of benefits from the contract. Other countries will not rely so much on the written document over clear behavioral signs of unfair practices.
Despite potential legal support, the franchisor must look farther into the future to understand the franchisee’s situation, build a strong business relationship, and one that may be reliable in the future when the time of demand comes. The franchisor should not forget that a sound franchisor-franchisee relationship strengthens the franchise system more than it can be threatened.
4.0 REFERENCE LIST
Abell, M. and Hobbs, V. (2013) The Duty of Good Faith in Franchise Agreements – A
Comparative Study of the Civil and Common Law in the EU. International Journal of Franchising Law, 11 (10) pp. 1-16.
Brannigan, M. and Richter, K. (1999) Coca-Cola Recalls Product in Belgium after Soft Drink
Sicken 41 Children. Wall Street Journal. Available at: http://www.wsj.com/articles/SB929018147410811623.
Ekelund, C. (2014) “Franchisor-Franchisee Relationships: An Interaction Approach.” World
Hnuchek, K., Ismail, I., and Haron, H. (2013) Franchisor’s Relationship Marketing and
Perceived Franchisor Support on Franchisors’ Performance: A Case of Franchise Food and Beverage in Thailand. Journal of Economics, Business and Management, 1 (1) pp. 117-122.
Kestenbaum, H., Zaid, F., Hurwitz, A., Mody, Z., Wormald, C., Koch, D., Ilas-Panganiban,
D.P.V., Echarri, A., Bond, J., Lauer, R.A., and Toth, R. (2013) “Round Table: Franchise Law 2013.” Corporate Livewire, pp. 1-21.
KordaMentha. (2015) Franchising: An Entwined Relationship between Franchisors and
Franchisees. Melbourne, Victoria: KordaMentha Partners.
Levinson, M.A. (2015) Money for Nothing: Problems with Holding Franchisors Liable for the
Negligence of Franchisees. GDLA Law Journal, pp. 10-28.
Terry, A.L. and Huan, J.L. (2013) Franchisor Liability for Franchisee Conduct. Monash
Viedeman, T. (2013) Internal Communication in a Spa Franchising Relationship: The Case of
ESPA International. University of Tartu Master Thesis, pp. 1-87.