Internet sales by franchised networks

Increasingly franchisors in both the retail and service sectors are using the internet to generate additional sales for themselves and their networks.

The move to generate sales from the internet may be fully online via an interactive e-commerce website or directed at the generation of customer leads. It may form part of the original business model that is franchised or be introduced at a later date. In all cases there are particular issues to be addressed in order to avoid disputes between the franchisor and its franchise owners in relation to the profits generated from such sales.

The first issue for the franchisor is to ensure that both it and its franchise owners are properly notified under the Data Protection Act so that they can pass to each other relevant customer data.

A surprisingly large number of businesses still choose to ignore their obligations under data protection legislation. Franchisors do so at their peril since not only are the fines levied for non compliance substantial (and set to increase) but ownership and control over such data is put at risk. Franchise owners may challenge the franchisor's right to access their customer data or blame the franchisor for not advising them as to their obligation to be properly notified. Serious damage may be sustained to the network's brand from the publicity attracted by proceedings being taken by the Information Commissioner for non-compliance.

Compliance is not difficult to achieve but for a franchised network it is essential that all franchise owners have the right to use data in the same way and, most importantly, to share it with the franchisor and (where applicable) between themselves. Getting this wrong can have costly consequences. An experienced franchise lawyer will be able to provide the franchisor and its network with a simple set of compliance procedures that deal with this issue and a data policy for inclusion within the operations manual.

The next step is for the franchisor to ensure that its website is legally 'bullet proof' with a properly drafted set of terms and conditions and privacy policy in place. These need to be tailored to the business and, again, can be provided by the franchisor's lawyers.

The franchisor then needs to determine how it will apportion the benefit from internet sales between itself and its franchise owners where such sales arise from customers located in a franchise owner's territory. The franchisor should be careful when granting exclusivity to franchise owners that in doing so it addresses in the franchise agreement the issue of any such sales secured via the internet. This may involve changes to the existing franchise agreement and a more detailed set of procedures added to the operations manual.

The franchisor clearly needs to recover its costs in hosting the website for the benefit of the network and in processing customer orders if they are sent out from a central distribution point. However, if such customer leads are referred to the franchise owner and delivery of the product is made by the franchise owner or the customer is required to collect it from the franchise owner's store, then the benefit attributed to the franchise owner will need to be greater than where the product is sent out from head office.

Where there is a service element involved in providing after-sales service, product assembly or delivery, then that too will need to be taken into account in assessing the apportionment of benefits.

Very often the cost of setting up and hosting such websites can be paid for at least in part through the franchisor's national marketing fund, but franchisors need to give very careful consideration to the whole issue of internet sales, even if at the time they begin franchising this is not part of the business model. They are well advised to consider the issue with a franchise lawyer who is familiar with all the implications and has experience of the alternative steps that may be taken to ensure fairness between the franchisor and franchise owner. This will ensure that disputes are avoided and maximum benefit is derived for the network as a whole.