January 1, 2009

What every Franchisor should know about Franchisee Advisory Councils and Franchisee Associations – Part 1

There are many challenges in the relationship between franchisees and franchisors. Franchise associations and franchisee advisory councils can serve as a useful interface in the franchisor / franchisee relationship. In general, both types of organisations can play a useful role as communication vehicles and sounding boards if properly structured and utilised. Conversely, poorly organised and led franchise associations and franchisee advisory councils can lead to conflict or futility.

A. What are the key differences between advisory councils and franchisee associations?

Franchise Associations

Franchise legislation in the Provinces of Ontario, Alberta, British Columbia, New Burnswick and Prince Edward Island accord franchisees a statutory right of association i.e. the right of franchisees to associate with each other without interference or penalty from a franchisor. For the most part, franchisee associations are created by franchisees and exist independent of the franchisor. Membership is voluntarily and rarely represents all franchisees in a system. Their purposes include improving communication between franchisees and the franchisor, collecting information of interest to all members, and negotiating with the franchisor. Associations have no authority to make decisions binding on a franchisor, though the collective will of an effective association may be difficult for a franchisor to ignore. The franchisor typically has no official role within the franchise association and is not present for association meetings.

Franchise associations are funded by franchisees who wish to join the association. These associations formulate their own governing rules and constitutional documents, and retain independent legal and financial expertise. Franchise associations are best advised to organise themselves in corporate form, without share capital, in order to take advantage of the limited liability of incorporation. Limiting liability may be of particular concern for those assuming an organizing or leadership role in the association. Incorporation as a not-forprofit corporation will not lead to personal liability for directors of the corporation so long as the directors of such a corporation fulfill their fiduciary duties and abide by corporate laws.

There are many different catalysts for the formation of an independent franchisee association. They often form as a crystallization of prolonged frustration that a franchisor has not been listening to franchisee concerns or is unwilling to address specific issues. The formation of an association can be triggered by a perceived threat to franchisees arising as a result of a franchisor that is viewed as incompetent, unreasonable, or self-serving in its intentions and actions. Associations are sometimes formed as a result of inside or outside agitation or political forces, for example, franchisees having a personal grievance against a franchisor and taking it upon themselves to “bring down” the system.