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SURVEY FINDS MOST NEW FRANCHISEES
DON'T DO ENOUGH DUE DILIGENCE

by Simon Lord,
last updated 02/02/2012

A new report by Massey University suggests that over half of all New Zealand franchisees felt they had failed to conduct sufficient due diligence before purchasing their franchise. The survey also suggests that 44% of franchisees spent less than one month researching the opportunity before buying their franchise, and finds that resolving conflict later becomes an issue for many franchisees.

The latest study from Massey's School of Economics and Finance is entitled Towards Understanding and Resolving Conflict: Franchising in New Zealand 2011 and accompanies an earlier Australian study which set out to explore perceived levels of conflict in the franchise relationship, the types of conflict and the causes.

The Massey study was sent to 1500 randomly-selected franchisees in mid-2011. There were 196 useable questionnaires returned. According to the 2010 Franchising New Zealand survey, also conducted by Massey, there are an estimated 23,600 franchised units in the country.

The franchisee sample of the latest survey is perhaps not fully representative of the franchising in New Zealand as a whole: for example, over 13% of respondents were in the education and training sector, which in 2010 was found to account for only 2.4% of franchisors (and probably a lower percentage of franchisees), while almost 32% of respondents are from the retail sector, which the 2010 survey suggested accounted for only 24% of franchisors. In addition, almost 31% of respondents were multiple franchisees (owning 2 or more franchised units) – an unusually high proportion.

The questionnaire consisted of a series of statements with which respondents were invited to ‘Strongly Disagree’, ‘Disagree’, ‘Neither’, ‘Agree’ or ‘Strongly Agree’. Around a quarter of respondents answered ‘Neither’ to most statements.

The Topics

The 2011 survey looked at four key areas:

1. How well-prepared franchisees are before entering franchising

2. The perceptions franchisees hold about their franchising relationship in relation to their expectations and overall feelings of honesty and trust.

3. How satisfied franchisees felt about the support given to them by the franchisor.

4. Franchisees’ experience of conflict and its management.

How well-prepared are franchisees?

One of the major concerns in franchising, both in New Zealand and overseas, is that many new franchisees do not do sufficient research into their intended franchise prior to signing the agreement. This was borne out by the Massey study, which showed that fewer than half (48 percent) of the franchisees in the sample believed they had been diligent in gathering a lot of information before entering into the franchise agreement. 32 percent felt in hindsight that they should have been more diligent.

There is no shortage of free advice available on buying a franchise, from this website and its associated magazine to the wealth of information from banks and other sources. Despite this, over 25 percent of respondents admitted they did not gather a lot of information before entering into a franchise agreement. It is perhaps significant that a similar figure, 23 percent of franchisees, indicated that the information provided by the franchisor prior to purchase was not satisfactory – perhaps they didn’t know what questions to ask to get the information they missed?

What perceptions do franchisees hold?

The second part of the study looked at franchisees’ expectations and overall feelings of honesty and trust. The majority of respondents reported that they felt they could trust their franchisor, although over a quarter expressed some misgiving related to openness and a similar percentage felt that their experience of franchising did not measure up to their initial expectations.

Many franchisees felt that information was forthcoming from their franchisors if they really needed it, but around a quarter felt communication could be better.

Resolving conflict was seen as a problem area by the researchers. According to the study, almost half of franchisees felt that conflict was dealt with openly in their franchise, while 32 percent felt that it was not dealt with transparently. A key question is the definition of conflict. Questions in section D of the survey define this as ‘Any form of disagreement or misunderstanding with their franchisor that needed to be resolved.’

Over half of franchisees (52%) indicated that differences that arose between themselves and the franchisor were usually handled well, with 24% feeling they were not handled well. A third of respondents felt that dispute handling was not timely. In her report, the study author Dr Susan Flint-Hartle comments that, ‘In general, it can be said that conflict is not handled well by franchisors and often the outcomes are seen as unsatisfactory by franchisees.’

The vast majority of franchisees said that the terms of their franchise agreement were understandable and gave them space to run their own business operation unimpeded. Most felt comfortable that their interests were balanced with those of the franchisor. It is worth noting that 77.4 percent of respondents had consulted an accountant before purchasing their franchise, and 71.4 percent had consulted a lawyer.

How satisfied are franchisees with the support provided by the franchisor?

Over the past three years or so, many franchisees have suffered from the effects of the economic downturn, and it is only natural for them to expect their franchisors to increase the support they provide (and sometimes to make financial concessions) in order to help during this time. However, franchisors have suffered similarly, and are therefore not always in a position to assist, especially as the downturn has dragged on. This could reasonably be expected to affect the survey’s findings, and indeed non-committal responses were common.

  • 62 percent of franchisees felt that help was readily available from their franchisor while 23 percent were not satisfied in this respect.
  • Just under half felt that their franchisor understood and accommodated their problems and needs, while 29 percent disagreed.
  • 58 percent indicated that their franchisor supported them whenever possible: 25 percent disagreed.
  • 40 percent of franchisees felt they could rely upon their franchisor to help them if they faced difficulties: 36 percent were not confident of help.

It should be noted that similar-sounding statements often produced different answers. In addition, some of the questions were phrased in such a way that encouraged dissent: for example, ‘My franchisor helps me no matter what,’ (C6) or ‘Whenever I’m in trouble, I know my franchisor will help me out’ (C8). This invites a perhaps distorted view of the role of the franchisor and the responsibilities of the franchisee. Overall, around 52-54 percent of franchisees felt their relationship with their franchisor was satisfying, fair and healthy: 23-24 percent disagreed.

74 percent of franchisees indicated the absence of conflict in their relationship with the franchisor; only 12 percent found conflict a reality. The intensity of any disagreements was generally low; just 7 percent reported constant argument over issues.

How is conflict managed?

The study produced some interesting results from the sample group.

In Year 1 of the franchise, only 27 percent of franchisees experienced any form of disagreement or misunderstanding with their franchisor that needed to be resolved. In Years 2 & 3 (double the period) that figure rose slightly to 29 percent. In subsequent years (period unknown) the overall figure was 39 percent.

The most common means of resolving issues were:

  1. Contact with franchisor staff
  2. Negotiation (ie. Agreement via discussion)
  3. Contact with other franchisees.

Correspondence with solicitors was most likely among established (over three years) franchisees at 17 percent. Despite the promotion of mediation in the franchise sector and the inclusion of alternative dispute resolution clauses in many franchise agreements, mediation was used in only 5% of cases.

It is worth noting that previous surveys of franchisors in New Zealand have represented the level of conflict as being only around 1-2 percent of franchisees. It is not clear whether the difference in reported levels relates to under-reporting by franchisors, over-reporting by franchisees or a difference in survey definition as to what constitutes ‘conflict.’ The 2010 franchisor survey question specifically related to ‘any dispute with a franchisee that has been referred to external parties for action’ rather than the broader definition of conflict used in the 2011 franchisee survey: ‘any form of disagreement or misunderstanding with their franchisor that needed to be resolved.’

Causes of conflict

One of the most interesting parts of the study is the analysis of reasons why franchisees have got into conflict – however defined – with their franchisor. These have been categorised as follows:

Issue

Percentage of Respondents

Profitability (including franchise fees)

15.3

 

Too much franchisor control

14.8

Franchise agreement

12.8

Lack of support

11.7

Communication

8.2

Deceitful/misleading franchisor behaviour

5.6

Stock supply & quality

5.1

Territorial

4.6

Marketing

2.0

Misrepresentation

2.6

Compliance

1.0

Other

16.3

 

 

Dr Flint-Hartle comments that in the Franchising New Zealand 2010 survey, franchisors themselves perceived and reported conflict quite differently, and suggested that most disputes related to franchisee lack of compliance with the system.

‘Although profitability was considered an important issue [by franchisors], communication was perceived as less important and enforced franchisor control, lack of support and honesty were not considered,’ she suggests. ‘This point has been noted in Australia as well, where it is justified by claiming that franchisor focus may be on issues that escalate from conflict to dispute, rather than softer relationship problems. But it seems clear that franchisors do not consider their own support or level of transparency to be a concern and it appears there remains a high level of franchisor ‘navel gazing’ and control.’

Once again, the difference in definition of ‘conflict’ may have some bearing on this.

The Full Report

The latest survey is a useful addition to the small body of research on franchising in New Zealand. It attempts to put numbers on franchise relationships, which is a hard area to quantify without case studies and interviews that explore the background and provide context. As with the 2010 survey, it is hard to take meaningful information from this latest survey in isolation; however, it does identify some areas where franchisors might usefully review their policies and, as the research is repeated over subsequent years, it should prove valuable in determining trends and changes in the franchise sector

The startling finding that 52% of new franchisees, by their own submission, failed to do sufficient due diligence should also provide a lesson for intending franchisees everywhere. Although some level of disagreement is inevitable in all long-term commercial relationships, the better new franchisees understand the nature of franchising, the more likely it is that such disagreements will be minor and can be resolved for the good of all concerned.

The full report Towards Understanding and Resolving Conflict: Franchising in New Zealand 2011 can be downloaded here.


Read Fiona White's article 10 Reasons to Embrace Conflict

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