The importance of a professional franchise association

The need for franchisee representation

Franchisees and franchisors enter into a long-term contractual relationship. However, this doesn't mean their economic motives are identical. Typically, there is a franchise agreement with an uneven distribution of rights, where the franchisor logically holds more rights than the franchisee. The franchisor owns the formula and thus drafts the franchise agreement.

Conflicts may arise when contracting parties have differing views on strategies or operational policies. A common example is the rise and implementation of e-commerce. Given the uneven distribution of rights and potential sources of conflict, there is a need for well-structured forums that can advance the relationship between parties and promote the exchange of knowledge and information. Additionally, it can help build trust between franchisees and franchisors.

Franchise councils and associations

This need can be fulfilled via franchise councils and franchise associations. A franchise council is a chosen or selected group of franchisees that convenes with a representative from the franchisor to advise and discuss matters important to all franchisees.

Meanwhile, a franchise association is a group of two or more franchisees within a system who unite, not for profit, to collectively promote their interests within the system and foster communication between the franchisees and the franchisor. While they may seem similar, a franchise association is organized independently of the franchisor. In contrast, a franchise council is initiated and supported by the franchisor.

Members of the franchise council are approved or elected by the franchisor, unlike in a franchise association. Most such bodies operate somewhere between fully dependent to fully independent. Each has its advantages and disadvantages.

Since franchise councils are initiated and supported by the franchisor and council members are approved or chosen by the franchisor, franchisees often see them as extensions of the franchisor. On the other hand, a franchise association can be completely independent, possibly lacking input or recognition from the franchisor.

Sometimes there’s a combination of a franchise council and association, where the board members of the association are also part of the council representing franchisees. For the remainder of this article, we will focus on franchise associations. Many of the following pieces of advice are also relevant to franchise councils.

Why is it important to professionally structure a franchise association?

First, let's consider what professional or professionalizing entails. Professionalizing is a concept difficult to define and lacks a clear explanation in general usage. In management literature, professionalizing is often described as transitioning from a non-structured, entrepreneurial condition to a more structured and formalized situation. This process can cover various aspects, such as developing management structures, implementing formal control systems, or different organizational structures, depending on the context and circumstances.

Complexity

Professionalism within franchise associations is increasingly essential due to several factors. Firstly, it is driven by the rapidly changing franchising world and the increasing complexity within it.

This complexity is partly due to the introduction of Dutch franchise laws and other European regulations like vertical agreements and the revised Block Exemption Regulation (VBER/GVO) and its accompanying guidelines. Additionally, the rise and evolution of e-commerce contribute. Franchisees often lack the necessary expertise on these topics.

Additionally, like many other associations, it's challenging to find board and committee members within franchise associations. Those found often struggle to allocate time and focus beyond running their franchise to effectively fulfill roles within the association. This shortage, combined with limited focus and governance knowledge, means boards overly concentrate on operational matters rather than policy-making and forward-looking strategies.

This is crucial because the franchise association represents many (or all) franchisees within a system, wielding influence within the system—this needs to be conducted diligently and professionally.

Many challenges could be addressed by professionalizing the franchise association to efficiently and effectively advocate for the interests of its franchisee members.

The importance for franchisors with a professional Franchise Association

Franchisors also benefit greatly from a professional dialogue structure and a well-functioning franchise association. This can serve as a serious partner in discussions with the franchisor, becoming critically important with the implementation of Dutch franchise legislation.

For example, a workable relationship with a professionally functioning franchise association can be more efficient and practical when a franchisor requires consent for a proposed formula change (Art. 7:921 BW), rather than approaching each franchisee individually for approval.

Moreover, it's vital to realize that franchising is a collaborative model where franchisee and franchisor are closely linked and mutually dependent. The entire system, including the franchisor, benefits from a balanced relationship between the professional franchisor and the franchise association. Achieving the desired balance involves elevating the franchise association to the same level of professionalism as the franchisor.

What should a professional association look like?

Incorporating external management into the organization of the franchise association is key to professionalizing. This might take the form of an external manager, director, board member, or advisor, potentially combined with a secretariat.

This is particularly important if the association and franchisor have a strained relationship. An external consultant (not a franchisee) lacks emotional involvement and dependency on the franchisor. They can provide objectification for governance where franchisee board members may have personal interests and dependencies on the franchisor.

Moreover, an external manager, director, board member, or advisor can bring continuity, vigor, knowledge, and diplomacy, preventing board member shortages. However, clear agreements about the tasks and responsibilities of such an external professional are needed, with the franchisor’s involvement in the process highly recommended.

Notably, the positive impact of external management depends partially on professionalism in other areas. Thus, professionalism must be present in other dimensions for an external consultant to function effectively. Simply appointing an external manager or director won’t achieve the desired professionalism; more effort is needed.

Statutes

For professionalism, it’s essential that the association sets a clear goal and formalizes itself through statutes. This forms the association's foundation and should involve all stakeholders. The franchise agreement and its provisions on decision-making authority for franchisees and the legal binding of franchisees by the association’s decisions serve as a starting point.

The statutes should allow what the franchise agreement permits and align with applicable laws, formula size, and the professionalism of franchisees and franchisors. More detailed rules and guidelines can be specified in internal regulations.

Mandate

Professionalism within the association also requires that its board has the mandate to represent franchisee interests. It should be reinforced in the statutes or regulations where and to what extent the association, board, or committees have a mandate. Even with a decision-making mandate, boards should consider consulting relevant committees or the general meeting of members. Formal and informal voting procedures should be defined in the statutes, delineating the required majority, when a qualified majority is needed, multi-franchisee voting rights, and minimum participation levels. Associations should strive for consensus, not just a majority vote. Consensus differs from merely securing 51% of the votes.

Committees

Setting up committees or discussion groups can aid in achieving consensus and professionalism. Such committees might cover topics such as marketing, finance, operations, IT, or e-commerce.

Franchisees can participate in these committees, contribute input, and prepare decision-making for the board. The board can assign tasks and responsibilities to these committees to ease its workload and gather broader input and support. A good way to organize such committees is the “side-by-side” principle, placing a board member in each committee to chair and bridge between the committee and the board.

Financing the franchise association

For a franchise association to operate professionally and independently, financing is crucial. Ideally, franchisees would fund it independently, though the franchisor might cover part of the cost, depending on the system’s size and the franchisee-franchisor relationship. In such cases, lowering the franchise fee might allow franchisees to contribute more to the association directly, enhancing independence rather than routing additional funds through a larger franchise fee. Clear statutes should define the association’s financing model.

Evaluation

Lastly, introducing election and evaluation systems for board (and committee) members would enhance professionalism within franchise associations. Elections encourage a good reflection of the membership base, allowing assessment of capabilities and integrity. Members should be elected or selected based on region, business phase, gender, experience, whether they manage single or multiple units, and other criteria.

On the other hand, the performance of these selected or elected board and committee members could be evaluated using an evaluation system. For example, once or twice a year during the general members' meeting, a 360-degree review, or via an online survey among the members. Both systems should be well-anchored in the statutes and/or the bylaws. A major caveat for both is that they are really only relevant if alternative board and committee members are available, as otherwise there is no way to act upon the outcomes of such a system.

In short, effectively establishing franchisee representation is essential for the smooth operation of a franchise association. Do you need support with this? Feel free to contact us via the form below.