Franchisor success relies heavily on franchisee success. Successful franchisees enhance brand recognition and goodwill, reducing the likelihood of franchise disputes and fostering network growth. Given this, monitoring and managing franchisee success is absolutely essential for franchisors. The first step in promoting franchisee success is ensuring the franchise agreement contains the right clauses. This article explores seven crucial clauses all franchisors should include in their franchise agreement to actively monitor and promote franchisee success.
1. Reporting Obligations
To effectively monitor performance, franchisors require data and information. Practically speaking, this is primarily achieved by mandating franchisees to submit periodic reports. These reports should detail not only revenue but also other critical aspects of the franchisee’s business, such as customer complaints, acquisition and conversion rates, employee retention, and promotional activities. The relevant clause in the franchise agreement ought to compel franchisees to provide detailed reports ‘in the form and with the detail prescribed by the franchisor’ to ensure all pertinent information is supplied. Further, franchisees should submit reports monthly to allow for thorough data analysis.
2. Business Plan Obligations
Planning is fundamental to operating a successful business, including franchised businesses. To keep franchisees focused on working on their business rather than in it, it’s essential to require them to submit an annual business plan. Thereafter, Franchisors should carefully review the plan and provide relevant feedback upon submission.
3. Imposition of Additional Training
In case of an underperforming franchisee, having the contractual ability to mandate additional training is beneficial. This training could be conducted internally or by an external provider. Franchisors typically link this training with Key Performance Indicators (KPIs) or minimum performance criteria clauses.
4. Franchisee Peer Support Obligations
Although not common, including a clause for franchisee peer support can be highly practical. Pairing underperforming franchisees with high-performing ones for observation and mentoring can be effective. Encouraging a ‘franchisee buddy system’ through appropriate clauses in the franchise agreement further fosters support and knowledge sharing among franchisees. Having a buddy system for new franchisees is also a great way to introduce them to the network and make them feel supported.
5. Meetings, Conferences, and Ongoing Learning
In franchising, adopting a ‘set and forget’ approach is ill-advised. Franchisors should actively promote ongoing learning, collaboration, and idea sharing by hosting regular meetings, conferences, and training sessions. A clause in the franchise agreement should compel all franchisees to attend, with electronic attendance often preferred for cost efficiency and convenience.
6. Key Performance Indicators/Minimum Performance Criteria
Identifying franchisee underperformance often relies on data analysis through carefully considered KPIs or minimum performance criteria. These indicators should encompass not only revenue but also crucial aspects like customer satisfaction and acquisition. Importantly, the franchisor should ensure that the relevant clause in the franchise agreement clearly outlines consequences when these criteria are not met.
7. Franchisor Management
In cases where an underperforming franchisee persists, a properly drafted franchisor management clause becomes invaluable. This clause allows the franchisor to step in and manage the business on behalf of the franchisee for a defined period. This intervention provides an opportunity to boost performance and diagnose underlying issues. The franchisor is entitled to charge a management fee for this service in most circumstances.
If you’re a new franchisor setting up your franchise agreement, consider including these clauses. Existing franchisors ought to review their agreements to ensure they include these clauses (and call us if they are not!). Magnolia Legal specializes in drafting and amending franchise agreements. Contact us for an obligation-free initial chat if you require assistance!