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FRANCHISEE OR FRANCHISE OWNER?

by Simon Lord,
last updated 16/12/2011

Why should European Union politics mean a change of name for franchisees?

European Union officials are currently having to defend franchising against big corporations and trades unions who are challenging the idea that franchisees are genuine owners of their own businesses. According to Brian Smart, Director General of the British Franchise Association, the corporations are suggesting that franchised networks are enjoying many of the benefits available to SME’s under EU regulations when they are really just ‘disguised corporate chains’. According to the corporations, franchisees are no different to employed unit managers. Meanwhile, the trade unions are arguing that franchising is a way for big business to move franchisees out of protected employment and into SME’s where many statutory protections, including collective bargaining, can be ignored.

Writing in the latest issue of The Franchise Magazine in the UK, Mr Smart comments that both arguments are nonsense. He says that corporations are trying to minimise the advantages that franchising has over traditional, less competitive, business models, while franchising has been proven, in areas such as contract and domestic cleaning, to improve the working conditions of employees rather than detract from them.

As part of their response, the BFA and the European Franchise Federation are stressing that franchisees are genuine owners of their own businesses and pointing out that franchisees have the right to sell and retain the benefit of the value they have built in the business. An interesting by-product of this argument has been a move to stop calling franchisees ‘franchisees’ and instead to refer to them as ‘franchise owners’. Mr Smart says the term speaks to ‘the respect which they have a right to expect for their decision to put their future into their own hands.’

While I understand the political reason for the proposal, the idea that ‘franchise owner’ is somehow more respectful than ‘franchisee’ seems a little strange. To my mind, there is nothing disrespectful about the term ‘franchisee’ – it is merely an accurate reflection of a commercial relationship, as with ‘lessor’ and ‘lessee’, or ‘mortgagor’ and ‘mortgagee’.

The word ‘franchisee’ also avoids confusion. A franchisor owns the franchise – they own the intellectual property, control the products or services offered, and in all probability dictate how, when and where they may be marketed. A franchisee receives the right to use this intellectual property, the brand and operating system. This right is not bought in perpetuity: it is granted by the franchisor for a fixed term, perhaps with rights of renewal if the franchisee performs satisfactorily. The impact of this is that a franchisee may own a business but they don’t own the franchise.

Does it really matter? Legally, probably not. Writing in the same magazine, UK franchise lawyers Mike Barlow and Ed Savory point out, ‘The status and rights of a franchise owner [franchisee] have little to do with its name and far more to do with the provisions of the franchise agreement under which it operates and its business relationship with both the franchisor and other franchise owners [franchisees] within the network.’ However, the very fact that, in quoting the above sentence, I had to add parentheses to clarify what was meant by the authors is testament to the potential for confusion that a change of terminology could create.

Some research in Australia last year suggested that 20% of new franchisees didn’t really understand what they were getting into, and the figure is probably not that different here – or, I suspect, in the UK. The idea of ‘be your own boss’ is an appealing one, but franchisees need to be aware that they are never truly independent. To call them ‘franchise owners’ can be confusing, misleading and create the wrong expectations right from the start.

Politically, would a change make any difference to the way franchisees are regarded by their opponents within the EU? There is no suggestion that the actual status of franchisees would be amended, so it’s purely a matter of semantics. Corporations and trade unions are hardly likely to withdraw their objections because of a name change, while the complexities and cost of introducing a new term throughout the various languages of the EU don’t bear thinking about.

Fortunately, in New Zealand we don’t have to worry about those issues – or do we? According to international franchise consultancy Franchise Development Services, ‘the phrase “Franchise Owner” is already being incorporated into franchise agreements, and our company is encouraging clients like Molly Maid, Subway and even McDonald’s to use this more accurate terminology whenever possible.’ Yet it is not more accurate – just more politically expedient and perhaps, particularly in such a class-conscious country as the UK, more politically correct.

New Zealanders have embraced franchising to an extraordinary degree. We have more franchise systems and franchised units per capita than anywhere else in the world. The terms ‘franchisor’ and ‘franchisee’ are widely used here and are widely understood in legal, business and general intercourse. They accurately reflect where power lies within the franchise relationship, and they help to explain that relationship to newcomers. To adopt the confusing and meaningless term ‘franchise owner’ in an attempt to bamboozle vested interests within the EU seems like a retrograde step.

This article was first published in NZ Business magazine, December 2011

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