What every Franchisor should know about Franchisee Advisory Councils and Franchisee Associations – Part 1

There are many challenges in the relationship between franchisees and franchisors. Franchise associations and franchisee advisory councils can serve as a useful interface in the franchisor / franchisee relationship. In general, both types of organisations can play a useful role as communication vehicles and sounding boards if properly structured and utilised. Conversely, poorly organised and led franchise associations and franchisee advisory councils can lead to conflict or futility.

A. What are the key differences between advisory councils and franchisee associations?

Franchise Associations

Franchise legislation in the Provinces of Ontario, Alberta, British Columbia, New Burnswick and Prince Edward Island accord franchisees a statutory right of association i.e. the right of franchisees to associate with each other without interference or penalty from a franchisor. For the most part, franchisee associations are created by franchisees and exist independent of the franchisor. Membership is voluntarily and rarely represents all franchisees in a system. Their purposes include improving communication between franchisees and the franchisor, collecting information of interest to all members, and negotiating with the franchisor. Associations have no authority to make decisions binding on a franchisor, though the collective will of an effective association may be difficult for a franchisor to ignore. The franchisor typically has no official role within the franchise association and is not present for association meetings.

Franchise associations are funded by franchisees who wish to join the association. These associations formulate their own governing rules and constitutional documents, and retain independent legal and financial expertise. Franchise associations are best advised to organise themselves in corporate form, without share capital, in order to take advantage of the limited liability of incorporation. Limiting liability may be of particular concern for those assuming an organizing or leadership role in the association. Incorporation as a not-forprofit corporation will not lead to personal liability for directors of the corporation so long as the directors of such a corporation fulfill their fiduciary duties and abide by corporate laws.

There are many different catalysts for the formation of an independent franchisee association. They often form as a crystallization of prolonged frustration that a franchisor has not been listening to franchisee concerns or is unwilling to address specific issues. The formation of an association can be triggered by a perceived threat to franchisees arising as a result of a franchisor that is viewed as incompetent, unreasonable, or self-serving in its intentions and actions. Associations are sometimes formed as a result of inside or outside agitation or political forces, for example, franchisees having a personal grievance against a franchisor and taking it upon themselves to “bring down” the system.

Advisory Councils

The lines between what is a franchise association and what is an advisory council may be blurred at times. Some franchisors, for example, are given membership privileges and voting rights in a franchise association. Independent franchise associations may also be subsidized by franchisors. However, a common feature of a franchise advisory council is that it is created by the franchisor and exists only with the franchisor’s continuing support.

The franchisor retains a significant amount of control over the activities of the council and its decision making authority. The franchisor will usually prepare the council’s governing documents, establish a method for selection of members (e.g. appointment, election according to regions, etc.) and require certain conditions for membership (e.g. that a franchisee not be in default under its franchise or sub-lease agreements). The International Franchise Association notes that approximately 90% of advisory councils constitute their membership through election, rather than appointment by franchisor.

Advisory councils have existed since the 1960s and have been used by franchisors as a means of communicating to franchisees important developments, such as the introduction of system-wide changes. The advisory council typically meets with the franchisor quarterly or semi-annually. Rarely would the council have veto rights over franchisor decisions, but it is equally rare that a franchisor would ignore the recommendations of its council. The topics discussed by the advisory council can vary considerably and may include discussion of the manner in which goods and services are provided within the system, equipment selection and financing, approaches to advertising, corporate policy, and communications.

There are a number of factors that contribute to a successful advisory council. On the one hand, there is a risk that the council can become a form of “management by committee”, raising the possibility of a system becoming listless and unfocussed. Similar to the complaint that is made of direct democracy, when council members are elected, rather than appointed, there is the possibility of creating a fractious council composed of a disproportionate number of disgruntled members. One of the behavioural dynamics of franchisees within a system, as in most other aspects of organized systems, is that those who are satisfied will more likely be complacent, and thus, displaced by more agitated franchisees. Thus, a council can become a forum providing greater stature and credibility for a vocal minority than might otherwise be possible.

Another aspect in evaluating the success of a franchise advisory council is the extent to which consultations between franchisor and council slow the process of decision making. Additionally, franchisees may become disappointed or disillusioned by an apparent lack of tangible successes by the advisory council. There may also be disagreement over how much decision making authority the council enjoys.

Successful advisory councils have the following characteristics. First, they are chaired by a competent member who keeps discussions focused on relevant issues, and is able to encourage an open but constructive dialogue among other council members. Second, not only must there be involvement by the franchisor at the most senior levels of management, but the franchisor must be prepared to listen and take action on legitimate concerns. The council should not be used as a forum for “divide and conquer” by the franchisor or to subvert the resolution of challenging issues affecting the system. Third, there should be involvement of mature, commercially minded franchisees, who respect the rights and responsibilities of the franchisor and are genuinely motivated to enhance the value of the franchise brand. Those driven by personal agendas do not contribute to the smooth operation of an advisory council. Fourth, aligning messages between the advisory council and the franchisor is important, so as to avoid inconsistencies and confusion among franchisees. Finally, topics of discussion should be of interest to both parties, who should adopt an interest-based attitude to problem solving, rather than the more adversarial, “winner takes all” approach of positional bargaining.

B. Why are advisory councils and franchisee associations formed?

Franchisee associations and advisory councils are usually formed to unite franchisees in acting together to deal with common issues, to lobby more effectively for greater collective rights, and to acquire a greater say in the operation of the franchise system. Moreover, these organisations provide opportunities to fill vacuums which are created because the franchisor charges too much for ancillary services or doesn’t provide these services at all, ie health insurance, utility services, legal services, and local marketing and advertising.

There are a number of reasons why franchisee associations and councils form, including:

1. Declining sales or margins which are not acknowledged or addressed by the franchisor.

2. Inappropriate use by the franchisor of discretionary funds, such as marketing funds.

3. Unilateral changes to franchisee contracts which are seen as unfairly disadvantaging franchisees.

4. Franchisors not sharing the benefits of purchasing programs with franchisees, especially if the franchisor is seen as benefiting from rebates from suppliers at the expense of franchisees. This problem is particularly acute when the administration of rebates lacks transparency.

5. Concerns relating to a franchisor’s oversaturating of a market, and encroaching on the businesses of existing franchisees.

6. System expansion and a franchisor’s competence in overseeing expansion, while providing adequate support to existing franchisees.

7. Failed product or marketing initiatives or a lack of clear marketing strategy and direction.

8. Changes to the brand, leadership and culture of the company that undermine a franchisee’s sense of identity.

9. Concerns over the financial viability of the franchisor. For instance, reports of a drastic decrease in market share, or report that a franchisor has gone into receivership.

10. The franchisor company going public, with fears of a subsequent drive for profit at the expense of franchisee profitability.

11. Franchisor leadership behaving indifferently or arrogantly to franchisees, or treating them as though they are employees.

12. Overcharging the franchisor for ancillary services or where the franchisor does a poor job in providing these services (e.g. provision of health insurance, utility services, legal services, or local marketing and advertising). The association or council may fill the vacuum and become a competitor to the franchisor vis a vis a preferred supplier.

13. Providing a forum given the human predilection to express one’s views and have grievances recognized, promote collective rights, and assert a group identity. Many franchise disputes are exacerbated, if not caused, by franchisor ignorance of these factors.

In the next issue, we will explore the roles of franchise associations and advisory councils and the franchisor’s reaction to, recognition of, and involvement with them.