Is Your Franchise Ethical?

It is one thing to run a Franchise business in accordance with the law; however, this will not as of right make the business operation ethical. A good franchisor will do both. It is in their interest to make the franchise offering as attractive as possible to new franchisees. We set out a number of points which we consider should be taken into account. However, this is not prescriptive. The franchise concept should be viewed as a whole. If any one point is not considered, the franchise may still be ethically run.

1) What is the approach to negotiation on a franchise agreement?

• Whilst uniformity across the network is a fundamental aspect of franchising, giving certainty and consistency, are there exceptions?
• Side letters can be a valuable tool for varying the franchise agreement in the right circumstances to benefit the smooth and effective operation of the franchise business
• The balancing of interests between franchisor and franchisee. Recognise the need for balance and the limits

2) Is there a clause in the franchise agreement that requires both parties to act fairly and reasonably?

3) Are the calculations for costs of the franchise clear and certain. Is it a profitable system? Is there an element of profit in the franchise fee?

4) Consider how payment of income from the franchise network is structured.

• Continuing franchise management fees that are a percentage of turnover are more ethical than fixed or minimum franchise fees. Not all franchise models can sustain this however
• Franchisors with an interest in supporting franchisees will ensure ongoing success of the brand

5) Are franchisees obliged to purchase products from the franchisor?

• If so, ensure that franchisors do not seek to make a secret profit on these purchases as well as collecting continuing management fees.