Growing Goodwill: The Devil is in the Detail
In light of the public exposure of the 7/11 wage price scandal and the likelihood of further investigations by ASIC , franchisors must implement effective measures to ensure a positive culture of compliance and to quarantine the goodwill in their system.
Successful implementation of this following 5-Point Strategy can mitigate the risks of breaching the good faith provisions and create fertile soil to grow the goodwill of the system for both franchisor and franchisee.
1. The Devil is the Detail:
Ensure your franchise agreement is well drafted to balances each party’s economic and legal risks with the least amount of contractual discretion. A franchise agreement must clearly outline the obligations of both franchisor and franchisee including the renewed obligations of good faith enunciated as part of the changes to the Franchising Code of Conduct.
2. Mind your Language:
Manage your departure from plain language agreements towards a return to clearly defined franchise agreements. Franchisors must be detailed and specific about their intentions in doing whatever is necessary to protect their legitimate commercial interests. Whilst this might reduce the information asymmetry between franchisee and franchisor, there will be an added complication to the franchisee during the due diligence process. To the extent that legal and financial advice sought will have to be based on a more complex and lengthy set of documentation.
3. Fortify your Financial Model:
Greater thought and care needs to be exercised by franchisors when structuring their franchise arrangement. The common practice based approach of setting upfront fees, ongoing fees and exit fees need to be more robust and defensible. The issue of goodwill- what it is, who owns it, how to value it and when it exists becomes a key consideration for new, emerging and existing franchisors. Conceivably, while the conception and implementation of the necessary response to this problem might be within the reach of resource rich franchisors, sadly those marginal franchisors (and there are many) may find this problematic and therefore exposed to a greater level of risk.
4. Conscious Communication:
The abject obsession of airing grievances and conflicts on social and digital media platforms is increasingly become a battleground for unhappy franchisees. Franchisee complaints are rife, online and otherwise and franchisees must understand that the good faith provisions apply to them also and that they have an obligation not to unjustly devalue and denigrate the franchisor’s brand. A practical compliance system coupled with appropriate education for your staff, franchisees and their respective obligations under the Code will reduce risk.
5. Deliver Strong Support:
Reassess the role and function of your field support staff (monitoring and advising). Everything that is said in conversation, advice that is given (verbally or written) and actions taken are now being scrutinised through the lens of good faith. This extends to advice in relation to operational matters such as marketing, stock procurement, disputes, and staffing. Again, well-resourced franchisors are progressively adapting their processes and training their staff, but non resourced franchisor are literally swimming against the tide.
Even though the outcome of 7/11 wage price scandal appears to focus fault on the franchisees, in the future franchisors could be accused of breaching their good faith obligations under the Code if they single out a particular franchisee.
The recent amendments to the Code makes it clear that investigation around good faith can be reviewed in every circumstance. Every franchisor should take time to ensure that its obligations of good faith have been met under the new rules, as the wash up of the 7/11 wage price controversy may broaden compliance with Australia’s 79,000 Franchise units in operation in Australia.
Rather than improving the symbiotic relationship between franchisor and franchisee, the initial impact of the good faith provisions appears to unintentionally drive a bigger wedge between the parties fuelled by the need to ‘manage risk’. This means more systems, more procedures, more disclaimers and acknowledgments to sign, more risk management and less risk sharing.
Growing goodwill is often a case of better the devil you know. If in doubt about your compliance obligations under the franchising Code of Conduct, always seek the advice of a specialist to ensure a healthy culture of compliance in your organisation.
Dr Maurice Roussety is a Consulting Strategist for DST Advisory and Lecturer in Small Business, Franchising and Entrepreneurship at Griffith University in Queensland, Australia. He has worked with leading organisations such as Queensland Transport, IAG, Westpac, Australia Post, Coles Myer, Red Rooster, Commonwealth Bank, ACCC, and Optus. Maurice holds a PhD in Intellectual Property and Franchise Goodwill Valuation. He also holds a Master’s degree in Leadership and in Business Administration. He is available for consulting and public speaking engagements and can be contacted further at maurice@dstadvisory.com or you can visit him at www.mauriceroussety.com.au
