Your franchise agreement contains a long list of obligations that the franchisee must fulfill or not: the obligation to follow the franchisor's concept and instructions, to operate its business, to use designated suppliers, to keep the premises clean and in good order, to have proper insurance coverage, to report to the franchisor, to comply with a non-compete clause, etc.
Closer examination, however, reveals that a franchisee can meet all of its obligations while still managing a franchise that is underperforming or even headed straight for insolvency in the short, medium or long term.
These two principles are part of the most fundamental challenges of sound management:
- You can't manage what you can't measure; and
- To stay on track and monitor progress, a business needs clear and measurable goals.
Franchisors would therefore be wise to include franchisee performance and evaluation clauses in their franchise agreement.
These are sensitive clauses that you won't find in contract templates, as their content will depend on the industry, the information available to the franchisor and the areas that warrant performance measurement and evaluation.
What measurable performance standards should be included in a franchise agreement?
Start by identifying aspects of a franchisee's performance that are both important and measurable and about which the franchisor can collect objective information from reliable sources (such as recognized statistics, surveys or data gathered from its network).
The performance standards can address various aspects of a franchised business management, including sales, sales growth, sales profitability, customer satisfaction and market share.
For instance, sales performance measurement might include (i) the ratio between a franchised business's sales and average sales in the franchisee network or a specific region, (ii) the ratio between a franchised business's sales growth and the sales growth of similar businesses, (iii) market share increase, retention or decline, or, more generally, (iv) comparisons with known averages or ratios in a given industry, local markets or networks, etc.
Next, add clauses to the franchise agreement outlining the primary objectives and performance standards that the franchisee is expected to meet, as well as the way in which the franchisee's performance will be evaluated by comparison.
Finally, decide on a set of evaluation and follow-up mechanisms as well as consequences for underperformance.
Ideally, these mechanisms should:
- be as objective as possible;
- provide the franchisor and franchisee with timely information on performance results;
- allow the franchisor, evaluator and franchisee to work together to establish realistic objectives and correct any performance shortfalls; and
- clearly identify what happens if these objectives are not met.
These clauses should only lead to the termination of a franchise agreement in the clearest of cases and after all other avenues for improvement have been exhausted.
The clauses can, however, serve as a condition for full or partial maintenance of territorial protection (exclusivity or right of first refusal) to which the franchise is entitled under contract, as well as a possible renewal of the franchise agreement at the end of the term or acquisition of a second franchise.
Whether or not your agreement includes performance clauses, continuously monitoring your franchisees' performance will allow you to quickly identify and address any problem cases before they become too severe and identify and reward outstanding performers whose best practices can be recognized and shared across your network.
Fasken has the expertise and necessary resources to help you draft comprehensive, adequate agreements that will protect your rights while avoiding potential pitfalls.
