Simple Successful Franchise Marketing

A common feature of Franchise models offering marketing support is the “Marketing Fund”. Generally, a marketing is a compulsory fund to which all franchisees must make donations, pursuant to the terms of a franchise agreement. Mandatory centralised marketing programs can be easily seen as one of the greatest strengths of franchising. The pooling of funds from all of the franchisees can collectively achieve greater marketing power. The resulting larger fund can afford and accomplish purchasers or strategies that no single franchisee could afford for example running billboard, or radio or television advertising campaigns. Another example is the marketing fund can also be used to hire experts to produce advertising materials of far better quality than what an individual owner could create.

When does marketing go wrong?

Marketing funds have the potential to be a great source of conflict due to franchisees often feeling that the pooled money is not being spent in the way they think it should be. Our experience has shown that conflict has arisen when franchisees believe they have better spending ideas than their franchisors. In some cases, they do. Other factors include franchisees’ cash-flow, or environmental factors such as recessions when all advertising tends to be less effective than in prosperous times. So it is essential for anyone contemplating purchasing a franchise to extensively investigate and understand the company’s marketing system and marketing history to ensure they Franchisor has viable plans to utilise the marketing plan. The following are some indicators of good franchise marketing:

  • Will the advertising attract your bread and butter customer?

A marketing fund must attract your core customers to a level validating the expense. If so conflicts will be kept to a minimum. When the franchisor’s marketing activity fails to attract interest and directly benefit your business, the potential for conflict exponentially rises.

  • Do your franchisees have a say in how marketing should be done?

Successful franchise marketing programs typically give franchisees substantial opportunity to weigh in with their opinions. The ultimate decision-making authority is normally still reserved for the franchisor; however well-run funds get plenty of input from the people closest to the customer – the franchisees. Advanced brands include a franchisee advisory committee (elected or appointed) that meets with the company’s marketing executives regularly to provide input on future projects and campaigns.

  • Are the existing Franchisee’s satisfied?

Contacting existing franchisees to evaluate their satisfaction is a prudent step to take. You will find that they will be very forthcoming on this topic since few things are closer to their hearts than marketing. Be specific and inquire about how well the marketing works or if they think they are consistently getting good value for their contributions to any required marketing fund. If your evaluation reveals a dissatisfied group of franchisees, you will be wise to assume that you will end up as dissatisfied if you become a franchisee in that system too.

  • Is the marketing fund split right?

A recurring franchisee complaint is that there is too much expenditure on the wrong items, particularly internal costs/research. Marketing fund dollars tend to be used for three matters. Covering the costs of administering the marketing effort (internal expenses, agency fees, etc.), costs of producing advertising materials (print, direct mail, radio and television ads, etc.), and paying for media purchases to place these advertisements for the benefit of the contributing franchisees. The Franchisor’s ability to manage these issues is paramount. If the fund clearly needs to produce high-quality promotional materials, but if all of the money is spent on production, there won’t be any left to deliver these wonderful materials to consumers. A reasonable balance between these two needs is required. Another common conflict is over the amount spent to promote “brand-building” advertisements versus the amount spent on “customer attraction” advertisements. So again, in the absence of a pragmatic balance between competing needs failure will occur triggering conflict.

Document the Marketing Plan.

A well-thought-out and proven franchise marketing system will be carefully documented by the franchisor. A franchisor is unlikely to provide all the material prior to you executing the Franchise Agreement. You may be able to request at least the table of contents of the marketing support manuals which the franchisor normally provides to franchisees in order to understand the topics addressed and compare these to your business plan. This will give you a good idea of the scope of the strategies they address in training franchisees to market effectively. It will also demonstrate that the franchisor has perfected its systems evidenced by professional documentation and support tools.

Take your time and make sure you know whether or not you are dealing with a good marketing program. This is a critical issue as you are forfeiting revenue and control over marketing decisions by entering into a franchise agreement. Your business’ success wil depend on the success of the marketing program in driving customers to your business. The time and diligence you invest in this area can pay big dividends in the long run, and you will be happy you made the effort.

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What’s the point of the franchise advice then?

It’s only mid-march 2014 and already I have assisted clients to settle several disputes this year.  Sadly in all of these disputes the trend which I observed since day one of being a franchise lawyer continues.  A staggering amount of franchisees simply disregard or fail to grasp the gravity of the pre-purchase advice they receive.

There are two types of serial offenders in this department.  The first and most obvious, are the potential franchisees who simply want a solicitor’s certificate because the franchisor has told them, they won’t sign the franchise agreement until the franchisee acquires the certificate.  These types of victims are a danger to themselves and probably could not be saved prior to a dispute arising.  The second and more heartbreaking scenario is the potential franchisee that receives good advice, fails to heed the advice (normally blinded by opportunity frenzy) and then realises the significance of the advice when it all comes to a head.

 

 

Good franchise lawyers are not fear-mongers and deal-killers. They paint a clear picture of the likely scenarios which will occur in light of the agreement between the parties. The challenge for the client is to fully consider these potential outcomes based on their personal circumstances, experience, aptitude and risk adversity, and make a well informed decision.

Franchisee clients have a tendency to rely on verbal promises and “personality assessments” when entering into a franchise agreement.  Whilst, prior promises with respect to the franchise business and the character of the directors of a franchise are important indicators, in most cases only the franchise agreement can reliably be referred during a dispute as a record of what was agreed to between the parties. A franchisor provides a franchisee with a +/-50 page franchise agreement because they expect to rely on the agreement’s provisions.

 

Remember, Murphy was an optimist.  If your adviser takes what I consider, the drastic step of telling you not to enter into a deal, at the very least get a second opinion. Avoid making emotional decisions when purchasing a franchise. Exercise good judgment and more caution than optimism. I find the most successfully franchisees I know, spent more time looking for reasons not to buy their franchise business, than reasons to buy the franchise. Regret is a pill that is often too large to swallow.

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What laws have Melbourne established to protect citizens from

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AMENDMENTS TO THE FRANCHISING CODE

On 2 April 2014, the Government released for public consultation an exposure draft of amendments to the Franchising Code of Conduct (‘the Code’) and relevant provisions in the Competition and Consumer Act 2010.

If the draft legislation is passed into law, it will result in significant changes to the framework for franchising laws in Australia. The notable changes are the introduction of pecuniary penalties for breaches of the Franchising Code, amended information disclosure requirements and a new express obligation on franchisors to act in good faith.

Whilst the government is seeking comments on technical aspects of the draft legislation by 30 April 2014, it has no intention to reconsider the underlying policy on which the legislation is based.

Why The Changes?

Enhanced protections for small business franchisees were warranted According to the Small Business Minister. The goals of the amendments are:

  • to promote growth in the franchising sector, and provide greater power and protection in the Code to franchisees, who are often small business owners;
  • to reduce red tape; and
  • ensure that all participants in the franchising sector follow best practice principles.

What Are The New Penalties For Franchisors?

For many years, non-compliant franchisors did not face any pecuniary penalties under the Code. The reforms mean stronger consequences for breaching the Code as a deterrent for parties who would otherwise breach the Code.

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The reforms will:

  • introduce civil pecuniary penalties, empowering the ACCC to take proceedings and seek penalties of up to $51,000 for serious breaches of the Code; and
  • empower the ACCC to issue infringement notices of up to $8,500 without having to formally bring proceedings in court when it has reasonable grounds to believe that an entity has breached the Code which may be disputed by the allegedly infringing party.  If the party disputes the infringement notice the ACCC may commence court-based action regarding the alleged contravention. Alternatively, the entity may choose to pay the infringement notice, in which case the ACCC may not commence court proceedings in relation to the alleged breach;

What’s On The Horizon?

A good faith requirement will be imposed, which franchisors and franchisees cannot contract out of. This is an obligation to act honestly and not arbitrarily and to co-operate to achieve the purposes of the franchise agreement.

The obligation will apply in all dealings that the franchisee and franchisor have with one another, including during negotiations, the term of the agreement, in dispute resolution and as part of renewal discussions.

Other changes will include:

  • improving disclosure and transparency of marketing funds and online sales agreements;
  • removing unnecessary provisions to reduce red tape and compliance costs; and
  • introducing general provisions to clarify the operation of the Code.

Do Franchisors Need To Make Any New Disclosures?

In addition to current disclosure requirements the Code will now require franchisors to provide prospective franchisees with an information statement in a prescribed form.

The information statement is intended to give franchisees a general overview of the risks and rewards of entering into a franchising agreement which may include information on unforeseen capital expenditure, the importance of education and conducting due diligence, and the prospect of franchisor failure. The goal is to encourage franchisees to conduct more thorough investigations prior to entry into a franchise agreement.

When Does all This Come Into Effect?

Subject to any submissions received in respect of the technical drafting of the legislation, the Government expects to introduce the Bill formally to Parliament later this year, with the changes to take effect from 1 January 2015.

Next Steps For Franchisors?

Franchisors have less than a year to prepare themselves for the proposed changes. Franchisors Must

  • update their disclosure documents;
  • prepare new information statements to ensure that they comply with the new information requirements; and
  • implement best practice protocols compliant with the new “good faith” obligations.

Call us on 1300 664 984 or visit www.franchiseease.com.au to find out more.

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THE JOURNEY OF A BIG BUILD

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