When Franchisees Stop Following the System: What Should a Franchisor Do?
Managing franchisee non-compliance before it becomes a serious dispute
One of the fundamental attractions of franchising is consistency. Customers expect a familiar experience, regardless of which franchise location they visit. The products, services, branding and operating standards should be broadly consistent across the network.
But what happens when a franchisee decides to do things differently?
Perhaps they introduce a new product without approval, stop following certain operating procedures, use an unauthorised supplier or begin running their own marketing campaigns. Sometimes these departures are relatively minor. At other times, they can undermine the integrity of the entire franchise system.
For franchisors, the challenge is knowing when to intervene, how firmly to respond and what to do when a franchisee simply refuses to comply.
The answer is not always to reach immediately for the franchise agreement and issue a breach notice. However, ignoring non-compliance can be equally problematic.
The key is understanding how to manage these situations before they develop into something more serious.
Why Do Franchisees Stop Following the System?
In our experience, franchisee non-compliance is not always the result of deliberate misconduct. There are a number of reasons why franchisees may begin departing from established operating standards.
Sometimes it is simply complacency. A franchisee who has operated successfully for several years may gradually become less diligent about following procedures that were emphasised during their initial training.
Other franchisees may genuinely believe they have identified a better way of doing things. They might introduce a new product, modify a service or adopt a different operating practice because they believe it will improve profitability or customer satisfaction.
There are also situations where franchisees become frustrated with the franchisor. They may disagree with changes to the system, question the value of ongoing fees or feel that head office is becoming increasingly disconnected from the realities of operating the business.
And, of course, there will be franchisees who simply decide that certain rules no longer apply to them.
The difficulty for franchisors is that the underlying motivation is not always immediately apparent. What looks like deliberate non-compliance may actually be a training issue, a misunderstanding or a breakdown in communication.
Understanding why the franchisee is departing from the system is therefore an important first step in deciding how to respond.
Why Small Departures from the System Matter
It can be tempting for franchisors to overlook minor departures from operating standards, particularly where the franchisee is otherwise performing well.
Consider a franchisee who consistently achieves strong sales but has started using an alternative supplier without approval. The products appear satisfactory, customers aren’t complaining and the franchisee argues that the alternative supplier is cheaper.
From a purely commercial perspective, the franchisor might wonder whether the issue is worth pursuing.
However, the problem is not necessarily the alternative supplier itself. It is the precedent that may be created by allowing individual franchisees to disregard established requirements.
Other franchisees may reasonably question why they are required to comply with standards that are apparently optional for someone else.
Over time, inconsistent enforcement can create confusion about which requirements are genuinely mandatory and which are merely recommendations.
This can also create difficulties when the franchisor subsequently attempts to enforce those same requirements against another franchisee.
Franchising depends upon maintaining a reasonably consistent system. If every franchisee is permitted to operate according to their own preferences, the fundamental value of operating under a common brand begins to erode.
That does not mean every operational departure warrants disciplinary action. It does mean franchisors should be conscious of the broader implications of allowing non-compliance to continue.
Start with a Conversation, Not a Breach Notice
One of the mistakes franchisors sometimes make is treating every instance of non-compliance as a legal dispute from the outset.
In many cases, a conversation with the franchisee will achieve considerably more than a formal letter threatening consequences.
The first step should ordinarily be to identify exactly what the franchisee is doing differently, why it is happening and whether the issue can be resolved through clarification, guidance or additional training.
For example, a franchisee who is failing to follow an updated operating procedure may not fully understand the reasons for the change. Explaining the commercial or operational justification may be sufficient to obtain their cooperation.
Similarly, a franchisee who has introduced an unauthorised product may genuinely believe they are helping the business. Their initiative may even identify an improvement worth considering across the broader network.
The franchisor does not necessarily need to accept the change, but there is often value in understanding the franchisee’s reasoning before deciding what action to take.
Importantly, discussions should be followed up in writing where appropriate. A short email confirming the issue, the relevant requirements and the agreed corrective action can help prevent misunderstandings later.
This also creates a useful record if the problem continues.
Check What Your Franchise Agreement Actually Says
Before taking formal enforcement action, franchisors should carefully consider whether the conduct in question actually constitutes a breach of the franchise agreement.
This may sound obvious, but it is an issue that is sometimes overlooked.
Franchise agreements typically impose broad obligations requiring franchisees to operate in accordance with the franchise system and comply with the operations manual.
However, the extent to which particular requirements are enforceable will depend on the wording of the agreement, the way the operations manual has been incorporated and the nature of the obligation being imposed.
For example, there may be a significant difference between a requirement expressly stated in the franchise agreement and an informal direction issued by a member of head office staff.
Similarly, franchisors should not automatically assume that they can introduce any new operational requirement simply by updating the operations manual.
Whether a particular change can be imposed will depend upon the contractual arrangements and applicable law, including the Franchising Code of Conduct.
This is particularly important where the change involves significant expenditure, substantial alterations to the franchisee’s business or obligations that were not contemplated when the franchise agreement was entered into.
Franchisors should also consider whether they have previously approved similar departures from the system or allowed the particular practice to continue without objection.
The important point is that a franchisor should be satisfied it has a proper contractual and legal basis for requiring compliance before escalating the matter.
When Is a Formal Breach Notice Appropriate?
Where informal discussions have failed, or the non-compliance is sufficiently serious, a formal breach notice may become necessary.
A breach notice serves a different purpose from an ordinary warning letter. It is a formal step that may ultimately form part of the process for terminating the franchise agreement.
For that reason, it needs to be approached carefully.
The Franchising Code of Conduct establishes procedures that franchisors must follow when proposing to terminate a franchise agreement because of a franchisee’s breach.
For an ordinary breach to which section 55 of the current Code applies, the franchisor must provide written notice identifying the proposed termination, specifying what the franchisee must do to remedy the breach and allowing a reasonable period to do so. That period need not exceed 30 days.
If the franchisee remedies the breach in accordance with the notice within the specified period, the franchisor cannot terminate the agreement on the basis of that breach.
Different procedures apply to certain specified termination grounds, and transitional provisions mean that the applicable rules may depend on when the franchise agreement was entered into, transferred, renewed or extended.
A breach notice should therefore not be treated as a standard form letter that can be issued whenever a franchisee fails to follow an instruction.
It is important to identify the correct contractual obligation, accurately describe the breach and clearly explain what the franchisee must do to remedy it.
An incorrectly drafted notice, or one issued without proper grounds, can complicate the matter and expose the franchisor to unnecessary legal risk.
The Importance of Acting Consistently and in Good Faith
Franchisors also need to remember that the Franchising Code imposes an obligation on parties to act in good faith in their dealings with one another.
This does not prevent a franchisor from protecting its legitimate commercial interests or enforcing contractual obligations.
However, the manner in which those rights are exercised matters.
A franchisor that responds aggressively to a relatively minor issue, acts arbitrarily or uses an alleged breach as an excuse to pursue some unrelated commercial objective may create difficulties for itself.
Consistency is particularly important.
If one franchisee is permitted to depart from operational standards while another is threatened with termination for substantially the same conduct, questions may arise about the franchisor’s approach.
There may be legitimate reasons for treating different situations differently. The nature of the breach, its seriousness, previous warnings and the franchisee’s willingness to cooperate are all relevant considerations.
What matters is that the franchisor can demonstrate a genuine and reasonable basis for its response.
A measured, properly documented approach will generally place the franchisor in a much stronger position if the disagreement ultimately develops into a formal dispute.
Your Operations Manual Is an Important Part of the Solution
Many operational disputes expose shortcomings in the franchise system’s documentation.
In some cases, the franchise agreement contains appropriate compliance obligations, but the operations manual is outdated, unclear or inconsistent with the way the business actually operates.
In others, the franchisor has introduced new procedures over time without properly documenting them or communicating the changes to franchisees.
This can create uncertainty about what is expected.
An effective operations manual should provide franchisees with practical guidance about how the business must be operated. It should distinguish mandatory requirements from recommendations and provide sufficient detail to allow compliance to be assessed objectively.
It should also be regularly reviewed to ensure that it reflects current business practices.
Equally important is ensuring that the franchise agreement appropriately supports the franchisor’s ability to establish, maintain and enforce operational standards, subject to applicable legal limitations.
A well-drafted agreement and a current, properly maintained operations manual can significantly reduce the scope for disagreement about what the franchisee is required to do.
Without that foundation, enforcing compliance can become much more difficult than it needs to be.
Sometimes the Problem Is Bigger Than the Breach
There will be situations where non-compliance is simply a symptom of a much broader deterioration in the franchise relationship.
A franchisee who repeatedly challenges operational requirements may have lost confidence in the franchisor, become dissatisfied with the financial performance of the business or decided that they no longer wish to remain part of the network.
In these circumstances, issuing successive warnings and breach notices may do little to resolve the underlying problem.
It may be more productive to have a frank discussion about the future of the relationship.
Depending on the circumstances, this might involve additional support, an agreed improvement plan, a negotiated exit or assistance with selling the franchised business to a suitable purchaser.
The objective should not necessarily be to retain every franchisee at all costs.
Sometimes the best outcome for both parties is an orderly separation that avoids a prolonged and expensive dispute.
Recognising when a relationship has become commercially unworkable is an important part of effective franchise management.
Final Thoughts: Address Problems Early, but Keep Things in Perspective
Franchisee non-compliance is an inevitable challenge in managing a franchise network.
Even well-run systems will encounter franchisees who question the rules, develop their own methods or occasionally fail to meet expected standards.
The important issue is how the franchisor responds.
Ignoring relatively minor problems can allow them to become entrenched. Equally, reacting too aggressively can damage relationships that might otherwise have been preserved.
The better approach is usually to identify issues early, understand why they are occurring, communicate expectations clearly and escalate matters proportionately where necessary.
Most importantly, franchisors should ensure that their franchise agreements and operations manuals provide a clear, legally sound framework for maintaining and enforcing operational standards.
Dealing with non-compliance is much easier when everyone understands the rules from the beginning.
How Aventus Legal Can Help
At Aventus Legal, we work with franchisors across Australia to help them manage franchise relationships, maintain compliance and address operational problems before they become serious disputes.
We assist with reviewing and updating franchise agreements, assessing the enforceability of operational requirements, preparing breach notices and advising on disputes, termination and negotiated exits.
We also offer our Franchise Health Check, which reviews key franchise documentation to identify potential compliance issues, inconsistencies and areas of legal or commercial risk.
If you’re experiencing difficulties with franchisee compliance, or simply want to ensure your documentation adequately protects your franchise system, we’d be happy to discuss how we can assist.
Disclaimer: This article provides general information only and does not constitute legal advice. The rights and obligations of franchisors and franchisees will depend on the particular franchise agreement, the applicable Franchising Code of Conduct and the circumstances of each case. Independent legal advice should be obtained before taking formal enforcement or termination action.
