How to Handle Franchisee Disputes Professionally and Legally

If you are dealing with issues with your franchisees, you aren’t alone. Disputes between franchisors and franchisees are pretty standard. Conflicts can arise over all sorts of things, from miscommunication and misaligned expectations to financial or performance issues. Your handling of the dispute is the most important thing. As a franchisor, you should tread carefully when dealing with internal conflicts, as a simple mistake can land you in hot water.

In this article, I’ll go over common causes for conflicts between franchisors and franchisees and offer tips for the best way to approach them.

Key Takeaways

• When franchisors and franchisees clash, it’s usually over a breach of agreement, a fee-related dispute, performance issues, or a lack of support from the franchisor.
• Keep an eye on early warning signs of trouble with your franchisees, which include poor or declining performance, negative feedback from customers or employees, and roadblocks to communication.
• When franchise disputes happen, respond professionally, set clear expectations, and use your franchise agreement as a guide. If all else fails, you may need to escalate the issue.
• If conflicts start to negatively affect your brand, it’s crucial to show that you can maintain service quality and brand consistency, even in the face of challenges.

Common Causes of Franchisee Disputes

No matter how well-oiled your operation is, you will occasionally have friction in the ranks. As always, it’s best to be prepared. Let’s take a look at some of the most common reasons franchisors get into franchise disputes with their franchisees. Knowing these triggers in advance will help you spot the problem before it gets out of hand.

Breach of Agreement

Breaches of agreement between franchisor and franchisee are one of the biggest causes of tension in the relationship. Contract breaches can also get you embroiled in legal headaches.

You’ve likely already negotiated a solid franchise agreement with the franchisee, so you can use this contract to help you navigate disagreements.

If you or a franchisee breaks the agreement or fails to meet certain expectations, it can cause a legal dispute. Here are some examples:

• Failure to pay royalties or marketing fees
• Breaking brand guidelines
• Engaging with a competing business that violates non-compete clauses
• Attempting to sell or transfer the franchise without prior approval
• Disclosing confidential information or trade secrets to third parties
• Altering brand marketing materials without approval

The terms themselves help iron out ambiguity while clearly stating your rights and the rights of your franchisees. Many franchisors also include different ways to remedy tension in the franchise agreement.

It’s good to exercise a bit of diplomacy in these situations. Before dragging in lawyers and escalating the situation, I recommend meeting franchisees face to face. You’ll often find that you can come to a resolution and avoid a long-drawn-out dispute.

Fee-Related Disputes

In any business arrangement, money is a common source of conflict. Your franchisees usually pay pretty hefty sums to gain access to your business model. If a franchisee falls behind with their ongoing royalties or other payments, it can quickly sour the relationship. 

Before you jump the gun and escalate the dispute, it’s important to understand the cause of the situation. Late royalty fees could be a simple organizational issue that can be easily fixed.

Is the franchisee struggling financially? Are they deliberately withholding royalties because they feel that you aren’t upholding your end of the agreement? 

Performance Issues

Disputes often arise when franchisees aren’t hitting sales targets or are underperforming in another way. Monitor franchisee performance carefully so you can spot issues quickly and before they turn into much bigger problems. Naturally, you can’t let recurring underperformance slide, but an underperforming location isn’t always cause for terminating an agreement.

There is often a significant learning curve, especially for first-time franchisees, so you can’t expect every unit to meet your expectations right away.

If you notice a franchise is struggling to meet expectations, offer more support or give your franchisee an extended deadline. However, if you continue to notice performance issues after having several discussions with the franchisee, you may need to consider other options. That said, if you plan on terminating an agreement, reducing territory size, or making another change to the contract, I recommend working with a franchise attorney to avoid any legal missteps that could lead to a lawsuit.

Not Enough Franchisor Support

One of the most common reasons that franchisees file disputes against franchisors is due to a lack of support or training. Honestly, it’s often a fair complaint. When franchisees purchase a franchise, they are not only investing in your name or established business model, they are also expecting to receive support to help them get off the ground running.

If you fail to deliver the promised level of support, a franchisee likely has grounds to sue you or request compensation.

You’ll need to provide the support you’ve promised in your franchise agreement. At the end of the day, training your franchisees and helping them learn your operations is in your best interest. A successful franchisee will likely make more sales, which means more money in your pocket.

When franchisees feel like they haven’t been trained well or haven’t received the resources they expected, they will become frustrated. If you don’t address their concerns, this frustration can quickly multiply and turn into a full-fledged dispute.

Early Warning Signs of Franchisee Issues

As you can see, there are a number of things that can cause a dispute between you and your franchisees. But, luckily, you can generally prevent disputes from escalating.

Keep an eye out for some of the following red flags so that you can catch issues before they escalate into full-blown conflicts.

Poor Performance

If a location’s performance starts slipping or doesn’t take off when it really should, take a look at what’s happening. Sometimes it’s just normal market trends or a snag in the road, but it could also signal the beginning of something bigger.

Unfortunately, there’s a ripple effect sometimes: if your franchisee is struggling to keep up with targets or profits aren’t coming in, they might neglect other work too. Due to the stress of hitting targets, they may start taking shortcuts with staff training or skimping on marketing efforts. It’s best to try to catch stagnant or declining performance early, so you can help your franchisee turn things around before they get worse.

Negative Feedback From Customers or Employees

A franchise unit may catch your attention because it’s getting below-average feedback, or worse: all-out complaints.

If a lot of negative feedback is centralized from one spot, you might need to keep a closer eye on what’s happening there. Customer experience is key for just about any business, so it’s important to ensure your franchise locations maintain the same standards.

Another red flag is if you are receiving negative feedback from the franchisee’s employees. This could point to poor management skills or a toxic work environment. When employees are unhappy, it can impact performance and eventually spill over into customer experience.

It can be that the franchisee is struggling to keep up with work demands, failing to implement quality consistently, or just managing their sites poorly. Whatever the issue is, it’s important to address it as soon as possible. If you let the situation deteriorate further, it could damage your overall brand reputation and lead to a major conflict with your franchisee.

Communication Troubles

If there’s one thing I’ve learned after years in the franchising industry, it’s that communication is key to success.

It’s important to establish clear lines of communication and keep them open. Regular, honest check-ins go a long way in keeping problems from piling up.

Don’t ignore franchisees going too quiet or suddenly not responding promptly. Sure, franchisees may be under pressure, but if communication channels are blocked when issues arise, it’s going to be a lot harder to fix things.

How to Effectively Respond to a Franchisee Dispute

Here’s the thing: Franchise disputes are going to happen. While there are plenty of things you can do to prevent conflicts from blowing up into litigation, you should be prepared to respond to them effectively.

My recommendation? Create a response protocol. A step-by-step approach geared towards resolving the conflict as quickly and efficiently as possible. Here are my key steps for responding to franchisee disputes.

Always Respond Professionally

Stay calm and stay professional. I know, it’s common sense, but in the heat of a dispute, it’s easy to forget. Be prepared for your franchisee to be angry, defensive, and maybe even make unfair accusations. Sometimes your patience will be tested. But if you are prepared for this to happen, you’ll be less likely to make poor, knee-jerk decisions with lasting consequences. Where appropriate, I recommend keeping all important communications in writing (or making a record). Doing so can protect you legally if the situation escalates. Having your dispute in writing also helps mitigate misunderstandings and keep high tensions at bay.

Start with Communication

Many franchise conflicts can be resolved through communication and open dialogue, rather than rash or drastic action. In fact, according to CPR’s Franchise Mediation Program, about 8 out of 10 franchise disputes settle through mediation when franchisees actually agree to take part.

In many cases, franchisees are struggling and may feel they’ve been misunderstood or undervalued in some way. Opening up a conversation with the franchisee and listening to their concerns can help you resolve the conflict much more easily.

This shows that you are committed to resolving the issue, rather than jumping to accusations or punitive measures.

Set Clear Expectations for Next Steps

A lot of franchise conflict stems from ambiguity or misaligned expectations. As mentioned, if a franchisee is underperforming, you should provide feedback and support to help them meet your expectations. However, if your franchisees don’t understand what’s expected of them, it’s going to be very difficult for them to improve. Don’t leave anything up for interpretation. Be transparent with your franchisees and lay out specific timeframes and performance expectations.

I urge you to put these expectations in writing (for example, in a follow-up email) so there’s no room for confusion.

Here are some examples of the type of language you should use when setting expectations:

• “We expect sales to increase by 10% over the next quarter. We’ll revisit your performance on (give a specific date). In the meantime, we will provide marketing support.”
• “Please bring your royalty payments up to date by (give a specific date). If needed, we can discuss a short-term payment plan to help you catch up.”
• “Based on recent feedback, we need to see a reduction in customer complaints by 50% over the next 30 days. You’ll begin using the new customer feedback form starting next week, and we’ll review progress at the end of the month.”

Use Your Franchise Agreement as a Compass

Your franchise agreement is your best bet in navigating franchisee disputes.

The agreement outlines your rights and responsibilities as well as those of the franchisee. These agreements also often include remedies and protocols for resolving disputes.

Franchise agreements eliminate ambiguity in the face of a conflict. In most cases, the legally binding contract can keep disputes grounded in facts.

That said, your franchise agreement isn’t a foolproof way to resolve conflict. If a clause in your agreement isn’t worded clearly, it can leave room for interpretation or misunderstanding on the franchisee’s side. This is why it’s important to make sure your agreement uses clear and explicit language that is impossible to misinterpret.

If All Else Fails, Escalate the Dispute

I’ve been recommending diplomacy and staying calm in the face of conflict, and for good reason. But let me also make it clear: do not live in fear of escalation.

I’ve seen this happen. Sometimes franchisors are too scared to consider serious escalation, and end up hoping in vain that things will magically work themselves out. If you have gone through the mediation and arbitration processes but still have failed to resolve the dispute, you may need to escalate to litigation.

The fact is, sometimes, more severe action needs to be taken. In many cases, it’s the best way to protect yourself and your business, and if you put it off too long, you can only make things worse.

How to Protect Your Brand Identity During a Dispute

As a franchisor, your brand reputation is precious. This is why it’s important to protect your brand identity at all costs during a dispute.

Franchisees who are unhappy or disgruntled in some way might lash out against the brand, or their poor performance might end up impacting it negatively. Here are some of my recommendations for safeguarding your franchise brand while settling a conflict with franchisees.

Consistency Matters

Stay consistent. Don’t let the pressure of the conflict seep into the rest of your work. Just because there’s tension with one franchisee doesn’t mean the rest of your system should feel it.

Even when things get messy behind the scenes, it’s crucial to continue delivering the same product and customer support quality.

Respond Publicly If Necessary

If a franchisee’s behavior ends up damaging the brand, either through malicious intent or simply poor customer experience, you’ll need to assess the impact.

In some cases, you may be able to rein in the franchisee and prevent further hiccups. But if the damage was bad enough, you may have to respond publicly.

This could be as simple as publicly recognizing the incident and reinforcing your brand standards. However, in other cases, a longer statement may be necessary, and it can be helpful to get additional support from a PR expert. Either way, if you feel that the franchisee has damaged your franchise’s reputation, you should communicate with your customers to mend your brand image.

Moving Forward: How to Improve Your System After a Dispute

As I’ve said, disputes with franchisees are inevitable in some shape or form. It can be challenging, but a good business owner learns from challenges and adapts to prevent them from occurring again. Often, these difficulties help you do better in the future by identifying risks and strengthening your conflict resolution skills.

Franchise disputes don’t have to be catastrophic. In fact, there are many cases where handling a conflict leads to an improved working relationship with the franchisee in the long term. 

Here are some of my tips for improving your systems in the aftermath of a franchisee dispute:

• Determine what you could have done better. Be honest with yourself. Could you have done something differently or avoided the issue entirely? Work with your team to determine the cause of the conflict and how to prevent it from recurring.
• Review and tighten your franchise agreement. As I said, your FA is the most crucial tool you have on hand to settle disputes. If there is some unclear language in the document, make sure to tighten it to avoid having franchisees misinterpret it.
• Improve your communication. If I’m being completely honest, communication usually plays a role in disputes. Maybe you need to listen better or a clearer channel for franchisees to raise concerns.
• Adjust your onboarding and training. An effective franchise training program can help prevent conflict. Make sure your onboarding programs include thorough training on your company’s performance expectations and brand standards.

Need help navigating a dispute or strengthening your franchise system? At Franzy, we work with franchisors to solve tough challenges and build stronger operations. If you are dealing with a franchisee conflict or just want a second opinion, Franzy is your trusted partner!