Where Franchisor-Franchisee Relationships Go Wrong: 7 Common Issues

A strong franchisor-franchisee relationship is a thing of beauty. A great brand, menu offerings, and marketing from a franchisor combined with great leadership at the store level makes for a cycle of restaurant success.

The franchisor and franchisee are a team. And like any great partnership, there are issues that must be resolved. In the case of restaurant franchises, there are a number of common places where things can go wrong. But armed with the right tools and knowledge, these conflicts can be solved–or avoided all together.

Franchisor vs. Franchisee: The roles in a franchise

A franchise restaurant business is made up of two parties: the franchisor and the franchisee. The franchisor is the person or company that started the business and made it successful, and decided to expand by offering the rights to open new locations to a franchisee.

Role of the franchisor

After creating a successful business, the franchisor creates the system for franchising their business. They're responsible for many of the high-level processes, such as:

• Developing the restaurant business concept, business plan, brand, and standard operating procedures
• Creating the brand logo, colors, and other trademarks such as slogans or jingles.
• Provide marketing, advertising, and PR for the brand
• Research and development for new menu items and limited time offerings (LTOs)
• Forming and nurturing relationships with suppliers of ingredients, paper goods, and more
• Vetting and approving new franchisees
• Creating staff training manuals and codes of conduct for staff

Role of the franchisee

The franchisee is responsible for the day-to-day operation of the business,whether they own one store or are a multi-unit franchisee.

• Hiring, onboarding, and training new staff
• Managing finances and accounts, controlling expenses, and paying bills
• Scheduling employees properly and running payroll
• Ordering and tracking inventory
• Engaging in local marketing
• Leasing and maintaining the building

Where do franchisor-franchisee relationships go wrong?

There's often a shared fear of failure among franchisees and franchisors–especially in the volatile restaurant industry. Franchisors can feel skeptical that their franchisees will not meet their agreed-upon sales numbers, which can make franchisees feel stressed and unsupported.

A lack of trust and communication between both parties worsens this cycle, with franchisees of worldwide restaurants like McDonald's, Dominos, and Subway having very public disputes with their franchisors.

All of these issues spur franchisor-franchisee issues that can hinder potential success. Therefore, it's worth facing these problems professionally and head-on to ensure a healthy business relationship for many years.

Recommended Reading: The Seven Most Common Franchise Problems (And How to Solve Them)

Franchisor Franchisee Relationship Issues

1) Poor communication

Whether you own one or one hundred restaurant franchises, it can be hard to establish and maintain communication with your franchisor.

A lack of communication can take a serious toll on franchise owners, particularly when it comes to finances. Changes can trickle down from a corporate level to individual restaurant owners without clear communication or feedback from those owners. This restricts franchisees' abilities to voice concerns and provides limited time to make necessary adjustments to the menu, sales forecasts, and operations.

Real-world Example: Tim Horton's

In 2017, a group of Canadian Tim Horton's franchisees formed an association to combat “mismanagement” of the brand since its sale to Restaurant Brands International in 2014. One of the main grievances was a “lack of transparency” in how the company was using ad funds paid by the franchisees.

Solving this problem

For franchisors: Establish both formal and informal communication channels between yourself and the franchisees. Holding meetings at a regular cadence, site visits, and being open to franchisee feedback are some of the best ways to establish rock solid communication.

For franchisees: Be proactive about communicating with your franchisor. Take advantage of meetings and face time to ask questions, voice concerns, and make suggestions on how you can both succeed.

2) Franchisees take the fall

With a restaurant group large enough to be franchised, mistakes and times of controversy run the risk of instant scrutinization by the media and the public. It's not uncommon for the mistake or decision of one store to impact several others, but it's worse when the change comes straight from corporate.

Restaurants that franchise tend not to own many locations as a company. Take McDonald's, for example, which owns around 5% of all its locations. As a result, franchisors and corporate employees will often make decisions that, if made from someone with daily exposure to the restaurant, might have been made differently. These decisions can have a strong impact on franchisees, for better or worse.

Real-world Example: Kentucky Fried Chicken UK

In 2018, about two-thirds of KFCs in the United Kingdom had to temporarily close due to an inventory issue. KFC utilized a supplier with a single location, and when they had problems, the supply chain collapsed.

The result? No chicken at hundreds of KFCs across the United Kingdom.

Mistakes happen in restaurants. However, this incident with KFC's supplier–an incident that franchisees had no control over–impacted KFC's reputation across an entire country, threatening to damage the livelihood of every KFC franchisee.

Solving this problem

For franchisors: Own mistakes, lest the entire network of franchisees feel the effects. To respond to the chicken shortage, KFC took out a full-page ad in multiple publications, apologizing to their customers.

Franchisees shouldn't have to pay for mistakes they're not responsible for. Both parties must ensure you have a franchisor-franchisee relationship where everyone owns their mistakes and steps up to make it right for themselves, their business partners, and (of course) their customers.

For franchisees: If the actions of the franchisors (or other franchisees) are impacting your locations, all you can really do is to stay in close touch with your franchisor to see what is expected of you. If you're part of a larger franchise organization, they may have resources to guide you.

3) Costs and royalties add up

Franchisees benefit from built-in brand recognition of their restaurants, but have to (quite literally) pay the price. On top of an initial license fee, franchisees must pay regular royalty fees to franchisors. These are either percentage-based or fixed dollar costs that go to marketing and operations for the entire business.

Naturally, the never-ending check cutting doesn't leave every franchisee happy. When the contribution is fixed, franchisees who are slow to start or who are having a bad month may not be able to meet their agreed-upon dues. For successful franchisees, a percent-based royalty fee can seem punitive, since the more you make, the larger check you have to write to corporate.

Real-world Example: Domino's

In December 2018, multiple Domino's franchisees threatened to “declare war” on corporate and stop opening new stores if the franchise cost and profit models were not restructured. This led to a 7% fall in the company's stock price.

Solving this problem

Franchisee costs and royalties are often tough to negotiate and tend to be consistent across all locations.

For franchisors: The best solution for this issue is stronger alignment between the franchisee and franchisor on how to grow sales. Franchisees must feel supported, and franchisors must feel confident that each franchise can hit its goal. To aid in this, franchisors can provide best practices on how to increase sales and streamline internal operations to increase profits. Conversely, franchisees should be ready to reach out when they need help to show they're invested and want to hit their goals.

For franchisees: One way to simplify this is through integrated restaurant technology, such as POS and employee scheduling software. When franchisors have granular data on sales and staff performance, they'll be able to offer more specific guidance on what areas require improvement from a corporate perspective. Not to mention what has worked for franchisees in the past. When you can shave off a few percentage points of expenses, franchise fees become easier to manage.

Either way, when sales grow, it's a win–win for both parties.

4) Restaurant tech stacks

Generally, franchisors are in charge of vetting and implementing technology solutions for their franchisees. However, some franchisees are less receptive to change than others, which complicates accounting and reporting on both the franchise level and the corporate level.

Conversely, some franchisees are ready and willing to adopt new systems, but corporate is reluctant to change operations at their hundreds or thousands of locations.

Real-world example: Wendy's

When one of Wendy's largest franchisees would not agree to adopt a universal POS system, Wendy's sued the operator of the 152 locations.

As restaurants become increasingly reliant on technology, it's imperative that large franchises have systems in place to gain visibility into each location's success metrics. This is true for all software–not just POS software, but online ordering, accounting, and employee scheduling software as well. Otherwise, corporate will have a huge blind spot into how to improve and grow their business.

Solving this problem

For franchisors: When mandating technological changes, franchisors should provide a clear rationale for the change, a list of benefits, an outline of costs, and a list of dates as to when changes should be made.

For franchisees: Use this time to share their thoughts and work alongside franchisors to ensure a confident and successful rollout in the requested time frame. If you have software or technology that you'd like to use, share this with your franchisor.

Recommended Reading: How to Manage Your Restaurant Labor Cost Percentage

5) Franchisee compliance

Franchises are a two-way street. While franchisors hold a lot of the power when it comes to branding, menus, and marketing, the franchisee is what determines the success for the overall business.

Franchises work in part due to consistency of brand, menu, design, and service. A variation of any of these factors from one location to another calls into question the consistency of the business, which defeats the very purpose of a franchise business model. Thus, franchisees must recognize the type of business they are operating and hold themselves accountable for meeting certain standards.

Real-world example: Burger King

When Burger King Corporation noticed a 37-location franchisee was not meeting its service or cleanliness standards, they sued that franchisee.

Burger King used a heavy hand to show that they value their declared standards and won't tolerate a blatant disregard for the health and safety of their customers. However, the lawsuit arguably shed even more light on the situation, and like many other issues on this list, likely impacted multiple franchisees and their revenue.

Solving this problem

Ideally, these issues can be solved before lawyers need to get involved. At Shawarma Press, a Mediterranean fast-casual in Texas, the franchisor ensures compliance in three ways.

The first, is with regular communication and friendly reminders of the terms.

Second, they have regular site visits to locations to “observe how they are operating and to help them if they are having challenges,” says Sawsan Abublan, co-founder and franchisor.

Lastly, “We have a few ‘secret shoppers' who drop in at certain locations as customers and test the food quality and how the restaurant appears to be operating. That may seem a bit extreme, but we do have a brand to protect, and these methods have been effective for us," says Abublan.

For franchisors: Monitor brand consistency closely, and remind and retrain when necessary.

For franchisee: Franchise regulations exist for good reasons. Following them helps keep your restaurant operating consistently, giving guests what they expect and keeping sales strong. This doesn't mean that franchisees can't have an impact, though, Without some intrepid franchisees, we wouldn't have the Big Mac, DQ Blizzard, or $5 footlong. If you have an idea to make the business better, taken it up with your franchisor or franchisee association, rather than breaking the terms of your agreement.

6) Embracing changes

Businesses that are able to sell franchises have longevity for good reason: they're open to change.

Unfortunately, it's not uncommon for corporate to spot an opportunity in the market, seek to embrace change, and reposition the brand and position of the restaurant.

This move can disrupt the franchisee's vision for his or her business. When sales take a dip, it causes friction in the franchisor-franchisee relationship.

“Change can be frustrating for a franchisee, especially if the 'why' isn't communicated correctly. Resistance to change can be frustrating for the franchisor especially when they only see where they're headed not where they've been. If you build a good communication base and have a history of making the right changes it becomes a lot easier. Everyone wants to be agile, but true agility comes from a place of stability,” says Jonathan Almanzar, CEO and founder of Chick'nCone.

Real-world example: Pizza Hut

Back in 2019, Pizza Hut began to reposition itself from a dine-in pizzeria to a predominantly takeout and delivery restaurant. That transition caused a lot of uncertainty among franchisees.

At the time, the shift left franchisees feeling less secure in the short term, with the threat of restaurant closure looming. In the long run, it turned out to be the right move. But it's impossible to predict the future.

Solving this problem

For franchisors: In a situation of forced rebranding, franchisors should be more sympathetic to franchisees and realize the means come before the end. Some solutions include more leniency during the shift, in addition to adjusting royalties and fees during times of transition as each location's market position changes.

For franchisees: Trust the process. Changes from the top are well researched, have a strategic rationale, and are made because corporate believes in them. Work with your franchisor or franchise association to see what can be done to make the transition as seamless as possible.

7) Bad culture fit

The franchisor and franchisee are a team. For a successful partnership, the brand has to be the right fit for the franchisee, and the franchisee must be a right fit for the brand.

“One of the main reasons why I didn't want to move towards franchising was I was afraid of losing the culture. So when it comes to selecting a franchisee, it's making sure that they align with our core values and making sure they align with our purpose,” says Mijo Alanis, CEO and Founder of Beyond Juicery and Eatery.

If both parties aren't a great fit for one another, it can cause major problems down the road.

How to address this Issue

For franchisors: A comprehensive approval process is essential in franchising. Not only do you have to ensure a franchisee is financially capable of opening one of your restaurants, but that they align with your purpose and values. Spend just as much time getting to know franchisee applicants as you do look at their balance sheets.

For franchisees: Respect the approvals process and be open and honest during it. Franchisees also have to be a good fit for their franchisor. When choosing a franchise to buy into, make sure it aligns with your own personal core values and purpose, too.

Improving the Franchisor-Franchisee Relationship

Franchises are a staple of the restaurant industry, but their predominance doesn't make the relationship that forms them any easier to navigate. With better communication, a focus on the future, and agreement on the positioning of their business, franchisors and franchisees can establish and maintain that much-needed alignment to keep the business thriving.

Frequently Asked Questions

Are there laws that govern the relationship between the franchisor and franchisee?

Franchising in the United States is governed by laws at both the state and federal levels.

At the federal level, the FTC Franchisee Rule gives prospective franchisees details of the franchise so they can better decide on the investment. The law requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees.

At the state level, laws exist to govern the relationship between franchisor and franchisee, inclsuding termination, non-renewals, encroachment, and transfer of ownership. States with these types of laws include: Alaska, Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, Utah, Virginia, Washington, Wisconsin, District of Columbia, Puerto Rico, and the U.S. Virgin Islands.

What cycles does the franchisor-franchisee relationship go through?

A franchisor-franchisee relationship isn't going to be perfect from the beginning. By using the Tuckman model, we can see how a franchise team evolves:

• Forming: After an agreement is signed, franchisors and franchisees begin to work together and learn each other's working and communication styles.
• Storming: Differences start to arise and boundaries are pushed on both sides as parties begin to understand the ups and downs of working together. Conflict may come up during this stage.
• Norming: Things settle down, conflicts are resolved, and the day-in, day-out work team relationship takes form.
• Performing: The relationship begins to groove and business begins to prosper.