The importance of a professional franchise association

The need for franchisee representation

Franchisees and franchisors enter a long-term contractual relationship. However, this does not mean that their economic motives are entirely the same. Typically, a franchise agreement involves a disproportionate allocation of rights between the franchisor and the franchisee, where the franchisor naturally holds more rights than the franchisee. The franchisor, as the owner of the formula, is the one who drafts the franchise agreement.

Conflicts can arise when contractual parties have differing visions on, for example, the strategy to be adopted or operational policy. A common example of such a difference in insight is the emergence and implementation of e-commerce. Due to the disproportionate distribution of rights and these potential sources of conflict, there is a need for well-structured consultation bodies that can advance the relationship between parties and promote knowledge and information exchange. Additionally, it can help build trust between franchisees and the franchisor.

Franchise councils and franchise associations

This need can be fulfilled through franchise councils and franchise associations. A franchise council is an elected or selected group of franchisees that meets with representatives from the franchisor to advise and discuss topics of interest to all franchisees.

On the other hand, a franchise association is a group of two or more franchisees within a system who come together, without profit motive, to collectively advocate their interests within the system and promote communication between the franchisees and the franchisor. Although these entities may seem very similar, as they both focus on representing franchisees, there is a difference. A franchise association is independently organized by the franchisee, while a franchise council is initiated and supported by the franchisor.

Moreover, the members of the franchise council are approved or chosen by the franchisor. This is not the case with a franchise association. Despite existing forms of representation, most of such bodies lie somewhere between fully dependent and fully independent. Both forms have their pros and cons.

Since franchise councils are initiated and supported by the franchisor and because the members of the franchise council are approved or chosen by the franchisor, the franchise council is sometimes seen by franchisees as an extension of the franchisor. On the other hand, a franchise association can be completely independent and therefore might not receive any input or even recognition from the franchisor.

A combination of a franchise council and a franchise association can also occur. In such cases, there is both a council and an association, and the board members of the association also serve in the council as representatives of the franchisees. For the remainder of this article, we will focus on franchise associations. Many of the recommendations below are also somewhat relevant for franchise councils.

Why is it important to professionally organize a franchise association?

Let's first consider what professionalism or professionalization actually entails. Professionalization is a concept that is difficult to define and does not have a single clear explanation in general use. In management literature, a professionalization process is often explained as a transformation from a loose, entrepreneurial condition to a more structured and formalized state. This process can involve many different aspects, such as the development of governance structures, the realization of formal control systems, and/or the implementation of different organizational structures. However, this also depends on the context and circumstances.

Complexity

Within franchise associations, professionalism is becoming increasingly important due to several factors. First, this is driven by the rapidly changing franchise landscape and the increasing complexity seen in this world.

This complexity is partly caused by the introduction of Dutch franchise legislation and other European laws and regulations such as vertical agreements, like the revised Vertical Block Exemption Regulation (VBER) and corresponding European guidelines. The rise and evolution of e-commerce also play a role in this. Franchisees often do not have the right expertise when these subjects are on the table.

Additionally, it is a trend within franchise associations, as with many other associations, that it is difficult to find board members and committee members. Subsequently, it is challenging for the found board and committee members to find time and focus, alongside running their own franchise units, to fulfill their roles efficiently and effectively within the franchise association. This scarcity of board and committee members, combined with limited focus and knowledge of running an association, leads franchise boards to focus too much on operational matters and too little on shaping policy and setting strategy with an eye to the future.

This is important because the franchise association represents many (or all) franchisees within a system and thus has a certain influence that it can exercise within the system. It is then important that this is done in a thorough and professional manner.

Many of these challenges and issues could be addressed by professionalizing the franchise association to advocate for the interests of the affiliated franchisees in an efficient and effective manner.

The importance of a professional franchise association to the franchisor

It should be realized that franchisors also greatly benefit from a professional consultation structure and a professionalized and well-functioning franchise association. This can, for instance, serve as a serious dialogue partner with the franchisor. This has become even more important with the introduction of Dutch franchise legislation.

For example, when a franchisor needs approval for a proposed change in the formula (Art. 7:921 BW), it is often much quicker and more practical to have a workable relationship with a professionally operating franchise association than to go to each individual franchisee to gain approval.

Moreover, franchise is genuinely a collaboration model where franchisees and franchisors are inextricably linked and dependent on each other. The entire system, and thus the franchisor, benefits from a good balance between the professional franchisor and the franchise association. This desired balance arises by bringing the franchise association to the same level of professionalization as the franchisor.

What should a professional association look like?

One of the most important factors that can help an association professionalize is involving external management in organizing the franchise association. This could, for example, be in the form of an external manager, director, external board member, or board advisor, possibly in combination with a secretariat.

This is particularly important when the association and the franchisor are at odds. An external (non-franchisee) is not emotionally involved and is not dependent on the franchisor. An external can also provide objectification to the board, while franchisee-board members also have their own interests and dependencies on the franchisor.

Additionally, an external manager, director, board member, or board advisor can ensure continuity, momentum, knowledge, and diplomacy and thus prevent a shortage of board members. However, clear agreements must be made with this external professional about their task package and responsibilities. It is also strongly recommended to include the franchisor in this process.

It is important to mention that the positive effect of external management partially depends on the level of professionalism in other dimensions. This means that sufficient professionalism must also be present on other dimensions to enable an external to function well. Simply appointing an external manager or director will not result in the desired professionalism. More is needed here.

Statutes

Firstly, for professionalism, it is important that the association clearly defines its goal and formalizes the association by drafting statutes. This is the foundation for the association and should be done with all involved parties. The starting point for these statutes is the franchise agreement and what it stipulates about the possible decision-making authority of franchisees and whether or not franchisees are legally bound by decisions of the franchise association.

The statutes should offer the same possibilities as the franchise agreement provides. They should also align with applicable laws and regulations, the size of the system, and the size and professionalism of franchisees and the franchisor. Further specification and expansion of rules and guidelines can be done in internal regulations.

Mandate

It is also important for the professionalism of the association that the board of a franchise association has a mandate to act on behalf of the (affiliated) franchisees. This should be well-anchored in the statutes and/or internal regulations regarding what the association, the board, or certain committees have a mandate for and how far it extends. Despite the board of the association having a mandate to make a certain decision, it might still be wise in some situations to consult a relevant committee or the general meeting of members. Formal and informal voting procedures should be established in the association's statutes. They should indicate how many votes are needed for a majority, in which cases a qualified majority of votes is required, how many votes a multi-franchisee has, and the minimum turnout required. It's worth noting that a franchise association should strive for support, not just a majority of votes. Support is something very different from 51% of the votes.

Committees

What can contribute to this support and desired professionalism is the establishment of committees, also known as sounding boards. Such a committee can be set up for a variety of topics such as marketing, finance, operations, IT, or e-commerce.

Franchisees can participate in these committees, provide input, and prepare decision-making for the board. The board can also assign tasks and responsibilities to these committees to alleviate the board, gather broader input, and create broader support. A good way to organize such committees is according to the "overlap principle." This means that every committee includes a board member as a representative of the board, who can chair this committee on behalf of the franchisees and bridge the gap between the committee and the board. This ensures that the board knows the sentiment within the committee and that committee members can closely align with the policy set out by the board.

Financing the franchise association

To operate professionally and independently as a franchise association, it is important that the association is funded. For the independence of the association, its committee members, and its board, it is preferred that the entire funding is undertaken independently by the franchisees. However, depending on the size of the system and the relationship between the franchisor and franchisees, it is also possible that the franchisor bears part of the association's funding. In this case, due to the independence of the association, it might be a good idea to slightly lower the fee so that franchisees can use this space to pay more contribution to the association, instead of a higher levy fee from which a contribution is then passed to the franchise association. In any case, the statutes should clearly indicate how the association is financed.

Evaluation

Finally, it would benefit the professionalism of a franchise association if election and evaluation systems for board members (and committee members) were implemented. An election system promotes a good reflection of the base and allows for the assessment of capacities and integrity. Board and committee members should be elected or selected based on region, business phase, gender, experience, multi- or single-unit franchisee, and/or other criteria.

On the other hand, the functioning of these selected or elected board and committee members could be evaluated using an assessment system. For instance, once or twice a year during the general members' meeting, through a 360-degree assessment, or via an online survey among the members. For both systems, it is crucial that they are well-established in the statutes and/or the bylaws. However, a major caveat for both is that they only really become relevant when alternative board and committee members are available; otherwise, it is not possible to act on the results of such a system. In short, properly establishing the representation of franchisees is essential for the effective functioning of a franchise association. Do you need support in this area? Feel free to contact us through the form below.