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Exploring the franchise sector's moral compass

Written by Kate Legg on Wednesday, 05 April 2017. Posted in Legal

Ethical franchising is a term often used in the industry but what does it actually mean?

Exploring the franchise sector's moral compass

Most people try to ensure their behaviour adheres to a certain ethical standard. But the problem with deciding whether something is ethical or not is that everyone has a different view of what ethical conduct looks like, depending on their own standards and judgements. And this is only exacerbated in the case of franchise agreements, which are inherently biased toward the franchisor. Fortunately, the European Franchise Federation (EFF) and British Franchise Association (bfa) have issued codes and guidance that set a minimum standard of ethics in franchising and which all bfa members are required to comply with.

The overriding principle in both the European and bfa codes is that the franchisor and franchisee should act fairly in all dealings with each other: they set out obligations for both franchisor and franchisee that make it clear that ethical behaviour is a two-way street. For franchisors, the obligations include that the franchisor must have a track record of operating a successful business. Attempting to franchise a concept that’s not been properly tested and proven wouldn’t pass ethical muster. Similarly, the franchisor must provide initial training and ongoing support throughout the term of the agreement. Failure to provide that would breach the code of ethics.

This is still quite subjective. While most people would agree that it wouldn’t be ethical to collect ongoing fees from franchisees without giving something in return, most people will have different views on how much support should be given. Things become even more complicated when you consider that the needs of the franchisee are not consistent over time. Most franchisees need a lot more support when they’re just starting out and are new to the network than they do when they’ve been operating for some time and have become very familiar with the business.

On the franchisee’s part, ethical conduct includes endeavouring to grow the business and to maintain the reputation of the brand and their network. Similarly, it would be unethical – not to mention a breach of contract – for a franchisee to disclose the franchisor’s know-how and confidential information. On top of this, franchisees are also required to provide management data and accounts to the franchisor to enable them to monitor performance and provide ongoing support and guidance.

But it’s not all about protecting existing franchisees: ethics are also vital when recruiting new ones. Both the EFF and bfa are hard at work preventing franchisors from exaggerating claims about the profitability or turnover of the business. It’s easy to include figures and projections in advertising material but unless they’re supported by a very clear explanation, potential franchisees can easily be misled by the information. Operating a franchise, as with any business, carries a risk and future performance can never be guaranteed. Any claims that appear to suggest otherwise would be misleading and breach the ethics test.

When a franchisee indicates they’re ready to sign on the dotted line, the franchisor must make responsible choices in selecting only those individuals they believe possess the skills and personal qualities needed to run a successful franchise. Selling a franchise without regard to whether the budding franchisee has the wherewithal to be able to operate the business successfully is a breach of the code.

Occasionally, it may not become apparent that a person is unsuitable until they attend the initial training. In that case, the franchisor is expected to be fair both in terms of deciding whether to terminate the franchise agreement and, if they do, in respect to refunding the initial fee paid by the franchisee – although they are allowed to retain part of the fee to cover their reasonable costs.

Whilst the law and ethics are often not the same, franchise lawyers who are bfa members are required to uphold the code of ethics and ensure that any franchise agreements they draft comply with it. It goes without saying that the franchise agreement must comply with all applicable laws, as well as clearly setting out the rights and obligations of the parties and all material terms that govern the franchise relationship. Those rights and obligations must also comply with the overriding requirement of fairness.

Generally speaking, there’s no legal obligation to comply with the ethical practices, although there are lots of good reasons why you should. Complying with minimum, ethical standards is not just the right thing to do but it also makes good business sense. For example, recruiting somebody the franchisor knows doesn’t possess the right talents or character to be successful fails the ethics test and will inevitably cause problems for them further down the line. Similarly, a franchisee who fails to protect the brand not only breaches the ethics test but also damages their own business.

For anyone, franchisee or franchisor, who’s serious about building a successful and sustainable business over the longer term, ethical conduct is a must.

About the Author

Kate Legg

Kate Legg

After more than a decade advising other business owners, Legg has recently fulfilled a long held ambition and become one herself. Now the founder, director and CEO of Komerse, a legal practice specialising in commercial law and franchising, Legg is clearly practising what she preaches.

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