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What is The Concept Of Free-Riding in Franchising and Why Does It Occur?

The commonest form of opportunism in the franchise industry is free-riding. In this, a franchisee joins a very well-recognised network but adds almost nothing of their own personal endeavours and entrepreneurship to the business; in short, it’s only the franchisor’s efforts and the strong brand that generate customers for that franchisee’s business.

A free-rider franchisee is unlikely to interact with their peers or the franchisor. They will also be unlikely to actively participate or attend discussions and group meetings; and will only stick to the bare minimum compliance requirements in order to continue being in the system. While free-riding in franchising is more of a business jargon, franchisors would be more apt to refer to free-riding franchisees as underperforming, lazy or bad.

Lack of accountability

While free-riders don’t really display any major deviant behaviour, they just don’t uphold their end of the business relationship; because they don’t exert the level of energy and motivation that a serious franchisee would display. Some franchisees tend to free-ride and offer below-average service simply because they don’t have to bear the brunt of the damage caused to the franchisor’s brand. In simple words, because a franchisee is relatively anonymous within the network, it reduces their accountability for the delivery & performance the business’ brand promise at either the territory or store level.

The solutions

• The solution to this is to incorporate broad termination provisions in the franchise agreements; this will help the franchisor exclude the underperformer out of the network. The risk of forfeiting their investment and being excluded can prove to be incentive enough for a free-rider to improve his/her performance.
• The other effective way of curbing the entry of free-riders into the system is for a franchisor to have more comprehensive screening processes in place at the outset.
• They should also be more proactive with monitoring every franchisees performance across a number of non-financial as well as financial metrics.
• Right performance management techniques can be used to motivate the errant franchisee to engage with their business and the network.
• If this doesn’t seem to be a viable solution in a certain situation, a mutually agreeable exit strategy can also be developed.

The other aspects of opportunism

Free-riding isn’t the only problem that franchisors have to face with reference to franchisee opportunism. The other problems that may surface include:

• Intellectual property use- Franchisors find that some franchisees take advantage of access to their IP; they eventually move out and set up business in competition to the franchisor. New franchisors generally don’t have very efficient and well-developed franchising processes and an opportunistic franchisee would be able to copy their model very easily.
• Lack of resources- The other reason why this kind of deviant behaviour occurs is because some franchisors don’t have the capacity or resources to enforce the contractual restraints of trade when any franchisee strikes out on their own. In some cases, the franchisor is unaware that the franchisee has violated the clauses in their agreements.

Franchisee opportunism isn’t always discussed and is a topic that requires attention. The objective of this article is to bring to the fore some of the common problems that franchisors face when they are dealing with free-riders. Being aware of these can help a franchisor adopt best business practices and better processes, which provide for equal opportunities and greater sustainability for both parties involved.

If you want to know more about setting up a franchise business or want some advice on franchising, feel free to get in touch with us at The Franchise Institute. You can call us on 1300 855 435 or fill in this contact us form and we’ll reply as soon as we can.

Thanks for reading,
The Franchise Institute Team
1300 855 435