Printer Friendly

Franchise management--the people make the difference: while franchising is a very effective way to expand an enterprise, it comes with its own challenges. Choosing the right franchisees is one of the biggest and most important.

Franchising has become a multi-billion dollar industry in Canada. Currently, over 48 cents of every retail dollar is spent in a franchised outlet.


Although franchising is usually associated with restaurant and retail chains, the application of this business model has expanded substantially to include many other specialty sectors. What once appeared to be the preserve of retail businesses is now a viable alternative to corporate growth in almost every business sector. Franchisors should, however, be mindful that the franchise model presents particular challenges and opportunities for managing and protecting core business assets.

Every successful franchisor understands the importance of protecting and promoting the value of its core assets. Branding is typically protected through the development and registration of trademarks, as well as through copyright. Specialized software, products, designs and equipment can be protected by both copyright and patents. Business methods and other proprietary information are usually protected by restricting access to confidential information, imposing strict contractual obligations on those who do have access to it and, in some cases, by the registration of patents covering information that is proprietary but not confidential.

Unfortunately, many franchisors overlook both the challenges and the opportunities that exist for managing what is perhaps their most important asset--their people and, more particularly, their franchisees.


It's about resource allocation

Some franchisors become so focused on growth, and particularly quick growth, that they fail to appreciate the importance of selecting the right kind of franchisees for their systems. When franchisors admit franchisees who don't 'fit', who don't possess the qualities needed to operate a successful franchise within the system, they effectively reduce the overall success of the system, and have to devote extra resources either to try to help a struggling franchisee survive or to try to manage and control a franchisee who does not comply with the franchise agreement, manual and policies. In addition, they inevitably have to deal with high rates of turnover. This results in increased application of resources to problem-solving and dispute resolution, diverting them away from initiatives aimed at achieving growth and greater profitability.

Poor human resource management can undermine the success of any business and this is particularly true in the franchise sector. It is therefore critical that a franchisor carefully analyze its human resource needs and develop a comprehensive system for attracting and selecting people who possess the qualities needed to achieve success in the franchised business.

Screening processes--the options

On a corporate level, a franchisor must have an internal staff equipped to find, select, train, support and manage franchisees effectively. On a system-wide level, a franchisor must develop a system to ensure that the franchisees who become part of the system have the particular qualities that are essential to success in the franchised business. Finally, measures must be taken to ensure that each franchisee's front-line workers will serve the system properly.

To create such a proper franchisee selection and screening system, a franchisor will have to:

* Learn from success -- Select a successful franchisee from the system (or a similar system, if necessary) and analyze the reasons for that individual's success to develop a profile of the 'ideal franchisee' for the franchise system in question;

* Think outside of the interview -- Implement behavioural interviewing procedures, personality profiling and/or experiential assessments to determine whether a candidate possesses the qualities needed for success in the system;

* Learn to say no -- Select franchisees only from those who truly match the profile and reject those who do not; and

* Weed out the weak -- Identify those franchisees currently in the system who do not match the profile and, over time, remove them, either through termination or through non-renewal of their franchise agreements.

There are a variety of commercial services and programmes available to assist a franchisor in establishing an appropriate screening process. Advice and assistance should be sought from a company or consultant specializing in franchisee selection and screening.

The benefits--risk reduction & increased profitability

By creating and implementing a proper screening process, a franchisor can:

* Minimize franchisee failure and turnover (both of which are costly and injurious to goodwill) and increase success and profitability of the system as a whole;

* Minimize the prospect of, and losses resulting from, a franchisee's wrongful conduct toward the franchisor;

* Minimize exposure to legal liability for a franchisee's wrongful conduct toward customers or others;

* Reduce the franchisor's exposure to legal claims from unsuccessful franchisees and reduce the chances of having to pursue legal claims against errant franchisees;

* Dedicate resources to proactive business planning and management instead of to problem-solving and dispute resolution; and

* Protect and develop the goodwill of the system overall.

The avoidance of legal action is important for any franchisor, because litigation is costly, time consuming, disruptive to the franchisor's business and usually bad from a public relations point of view. Avoiding such claims is particularly important in jurisdictions such as Ontario and Alberta, though, because franchisors active in those jurisdictions are legally required to provide detailed written information about all lawsuits in disclosure documents that they must provide to prospective franchisees. The disclosure of litigation between a franchisee and current or former franchisees will, obviously, complicate the sales process and may deter individuals who would be successful franchisees from entering the system.

The front line worker

In addition to implementing a proper franchisee selection and screening process, a franchisor must identify the specific human resource concerns that apply to the people who will work for the franchisees.

Screening and selection of front-line workers may, in the context of many franchise systems, not appear to be a high priority. Consider, though, the fact that, in many systems, front-line workers:

* Have access to customers' sensitive personal and financial information (including home addresses, credit card numbers, bank accounts, etc.);

* Perform personal services for customers (eg. the preparation of tax returns, provision of child care or personal assistance, the performance of cosmetic services and even provision of medical care); and

* Attend at or are given access to customer's homes, either when customers are present or when they are not (eg. to provide landscaping services, deliver and install carpets or furniture, perform electrical or plumbing services, etc.).

Liability for acts and omissions of franchise employees

So, whether a franchise provides home inspection services, real estate sales, accounting services, spa services, or even fast food delivery, franchise customers, whether they realize it or not, will usually be in a potentially vulnerable situation. That vulnerability may result in a franchisor (and not just the franchisee) owing a specific duty of care to its customers. Where such a duty of care exists, the law will impose liability on a franchisor that fails to meet it.

There is a reasonable expectation on the part of any customer that individuals employed in a franchise system (both at the franchisor and the franchisee level) have the knowledge, skills and integrity to do their jobs safely and effectively. In addition, if a franchise sends its employees to people's homes for deliveries or to provide other services, there is a reasonable expectation on the part of customers that the person coming to their house is not a dangerous person, and that they will be safe with such a person in their home. Because these expectations exist, if a franchisor does not implement an appropriate screening system and require its franchisees to follow the same, it could be held liable to a customer who is injured or suffers damages due to the acts or omissions of franchise employees.

For instance, in situations in which employees are sent to customers' homes for any purpose, including something as simple as fast food delivery, a franchisor may have a legal obligation to conduct a criminal record check before hiring such a person. If a franchisor fails to do so, and it turns out that an employee with a criminal record commits a criminal act against a customer or other third party, the franchisor may find itself liable to pay damages to the aggrieved party.

Similarly, in the context of professional service franchises, prospective employees may be screened for any regulatory offences or disciplinary decisions issued by the body that governs their profession. In the absence of such screening, a customer who suffers damages due to an act or omission constituting negligence on the part of the employee may have recourse against the franchisor.

Note that, contrary to popular belief, it is not illegal to ask a prospective employee if he or she has a criminal record or has been convicted of certain provincial offences if such a record is relevant to the job for which he or she is being considered. Legal advice should, however, be obtained to determine precisely what a particular employer can and cannot require from an applicant in this regard. If an inappropriate question is asked, an employer may be exposed to a complaint under human rights legislation.

A franchisor should therefore identify the skills and other qualities required for, and the risk factors associated with, the services to be provided by each category of employee, from the perspective of both the franchisor and the customer, to determine what type of screening process is necessary and appropriate for the same.

Next, the franchisor must identify means by which to ensure that employees possess such skills and qualities, and reduce such risks. For example, the franchisor can implement internal and system-wide policies requiring that its human resources department and its franchisees conduct a criminal background check before hiring certain types of employees, as well as carefully checking references, and verifying academic credentials, employment histories, professional standing, etc.

The franchise agreement

A franchisee's obligations with respect to employee selection and screening should be set out in the franchise agreement between the franchisor and franchisee. In addition, the franchisee's reporting obligations should include the submission of evidence that the screening and selection process is followed consistently (e.g. by submitting copies of criminal background reports or completed employment application forms concurrent with the hiring process) and the franchisor's audit rights pursuant to the franchise agreement should expressly address the review of franchisees' records about the screening and selection process.

Can you afford not to?

A number of difficult lessons have been learned in the franchise sector in the past several years. More sophisticated approaches to franchisee development and employee hires appears to be a burgeoning trend. While some believe that they can't afford the expense of such an approach, the costs and losses that result from poor franchisee and employee selection far outweigh the cost of institutionalizing a selection and screening process. In addition, a good process will likely realize results in greater efficiency, profitability and valuable goodwill.

Franchisors in the process of creating their systems would be well advised to build a good screening and selection process into their initial model.

Those who have already made some mistakes in this regard will likely see the importance of implementing a strategic human resource management plan, but may also think that it is too late for them to do so. It probably isn't. Franchisors who have made mistakes can start by identifying what has and has not worked in their franchise systems and determine what makes an 'ideal franchisee' in that context. Once a profile has been created, a franchisor can identify not only which franchisees to bring into the system, but which ones will have to be removed. With some good professional advice, a franchisor can gradually replace unsuccessful franchisees with successful ones, while minimizing costs and conflict.

Maureen T. McKay, B.A., LL.B., ( is a member of Pallett Valo, LLP's franchise law group, in Mississauga, Ontario.
COPYRIGHT 2005 Society of Management Accountants of Canada
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2005 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:McKay, Maureen T.
Publication:CMA Management
Geographic Code:1CANA
Date:Feb 1, 2005
Previous Article:Corporate social responsibility--where do we really stand? A recent summit on CSR in Canada and abroad suggests that Canadian firms still have a long...
Next Article:Inevitable chaos: every business goes through periods of stability and instability. Some change is unpredictable and some can be managed. Either way,...

Related Articles
Selecting the "right" franchise.
Are you ready to go global? As challenging as entering the international franchising market can be, the rewards can be substantial.
Territory development: the ABCs for Zees.
Master Franchising in Canada: while master franchising can be a very profitable way to expand in this country, there are critical areas that must be...
Too many leads, too little time: having a definitive development process will help with the challenge of "too many leads, too little time.".
Score trade show touchdowns in 2007: there's more to it than you might think.
Franchise appreciation day activities strengthen industry congressional relationships.
Locating the best vendors for your franchise: partnering franchisees with the right vendor is a winning proposition for everyone.
Making a franchise system attractive to multi-unit franchisees: a company's failure can be directly correlated to poor strategic planning, and to...
Canadian franchise legislation: finding the balance.

Terms of use | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters