Properly drafting a franchise agreement in order to avoid unfair competition

In theory, franchising is designed to be the perfect blend of entrepreneurialism and employment. The key to a great relationship between franchisor and franchisee is support but one of the most common pitfalls of franchising is when the agreement doesn’t have terms that enforce this support. The truth is that the franchisor is just as responsible as the franchisee for brand success.

What’s in a Franchise Agreement?

Simply put, franchise agreements are essentially a kind of small business contract. They are meant to do several things, besides simply defining the franchisor and franchisee relationship, obligations and binding them through operations. A franchise agreement will usually stipulate as to fees owed, support given, upfront investment requirements, ongoing training and professional development, and might even briefly touch upon operations. Franchisees also have the right to expect that they be protected from internal or unfair competition. Standard form contracts for small businesses don’t usually include clauses about unfair competition but there are laws that promote anti-competitive practices and policies. This could be through operations itself, hiring practices and even prices. Generally speaking, since marketing promotions and sales must be green-lighted by head office and the franchisor, franchisees may not themselves use sales tactics that allow them to undercut other locations in the area.

Cases of Unfair Competition Breed Disloyalty

There is legislation that covers cases of unfair competition and this can be something that occurs internally, with franchisees initiating the practice, or even franchisors. While disciplinary bodies and processes differ from country to country, there is a precedent, through cases brought on by franchisees against the franchisor and brand, to find franchisors guilty of promoting unfair competition through practices that undercut bidding for local contracts by franchisees. For example, many franchise cleaning companies based in the United States were responsible for these practices and were subsequently brought to court by their own franchisees for precisely this sort of behavior. In this case, many franchisees who had bought into the excitement and promise of starting their own business, being their own boss and making a considerable profit found that their efforts were diluted. Several franchise managers (and the franchisor, by extension) would provide leads on homes or businesses that required cleaning but would offer these leads a significant cut on prices. This means that they would underbid on a contract and a franchisee would then be responsible for taking the contract at severely reduced prices or lose out on business altogether.

On a larger scale, unfair contract terms harm the relationship and trust between two parties. These are important ingredients anywhere, but especially in the case of franchisors and franchisees. Since the relationship is hierarchical, at best, franchisors must do more to balance the scales.