The Franchise Rules That Really Matter

16/02/2018 08:00 | Start a business

Franchising rules

The whole franchise model is based on buying into an established brand. The reason why the franchisor chose to franchise their business is because they have developed a proven concept which has many operational aspects that have driven its success. It is these operational aspects which form the rules of the franchise agreement. The rules are in place to ensure that the all franchisees operate their units in a way that guarantees the consistency of the brand, product and service.

With rules being such a huge part of the franchise model, you really need to understand if your personality type is suited to following them as you should. If youre the creative sort with a strong entrepreneurial spirit, then franchising may not be the best fit for you. Although its a misconception that franchisees dont have any input into the running of their business, the reality is that franchising is completely founded on following carefully planned rules.

Perform a self-assessment

To understand if you have what it takes to confirm to the rules of the franchise contract, you should perform a self-assessment. Its important to spend time considering if you have what it takes to stick to the rules and follow a pre-determined business model that has been developed by someone else.

You could waste time and money by investing in a franchise only to find out that youre simply not suited to the franchise system.

Which rules would result in a breach?

We all know that franchisees must comply with the rules of the franchise, but not all rules are created equally. If you breach certain rules, the consequences can be severe.

Here are five franchise rules that you must adhere to; and theres no room for negotiation.

  1. Franchise fees

    All prospective franchisees are aware that they will pay ongoing franchise fees to the franchisor when they start their new business. The most common charges are royalty fees and marketing fees. Both tend to be paid monthly and the amount is likely to be worked out as a percentage of sales revenue. As you can imagine, the payment of these fees is a key requirement that the franchisee must adhere to if they are to avoid breaching the franchise agreement.
  2. Operations

    Many of the rules that need to be followed as part of the franchise model are related to a very specific set of operational directions set out in the operations manual. This manual will cover many elements including site selection; use of the franchise brand; employee management; and service procedures.

    The franchisee may be in breach of the franchise contract if they veer away from the guidelines detailed in the operations manual.
  3. Supplier list

    One of the ways that franchisors can maintain high standards across all franchise units is by dictating where franchisees can buy stock and equipment from. The list of approved suppliers tends to be documented in the operations manual. Failure to purchase from an approved supplier could result in the franchisor issuing a breach notice. In the worst-case scenario, if failure to use the preferred suppliers ends up with the franchisor suffering a financial loss, they may decide to take legal action to recover the damage to their profits.
  4. Territory requirements

    The franchise contract often states that franchisees may only operate within their specific geographic territory. While this may not be an issue for a franchisee with fixed premises, if a franchisee operates a mobile service and regularly travel to customers houses, they need to be careful. If they accidently accept a job outside of their territory it could end up badly. Encroaching on another franchisees territory could lead to breach notices being applied.
  5. Renewals and terminations

    Having to follow the franchisors rules may be obvious during the term of the franchise agreement, but many franchisees dont realise that rules also apply when the contract comes to an end.

    If the franchisee decides theyd like to continue running their franchise after the original term, theyll need to pay franchise fees for renewal. However, the franchisor will have the right to refuse renewal if the franchisee has not met the franchise agreement conditions, or has any outstanding breaches.

    If, on the other hand, a franchisee chooses to sell their franchise, its their responsibility to find another buyer for the business. Even when a buyer has been found, the franchisor still needs to approve the prospective franchisee. After all, its in the franchisors interests to ensure that the incoming franchisee has the necessary skills and experience to operate the franchise successfully and adhere to the franchise rules.

What happens if you dont stick to the rules?

So, what happens when a franchisee breaches any of these rules? Well, the franchisor will issue a formal breach notice to the franchisee giving them no more than 30 days to right the wrong. If the franchisee cannot rectify the breach, then the franchisor has the right to terminate the franchise agreement.

If the franchisor takes such an action, the franchisee may end up having to wave goodbye to their business ownership dreams. If the franchise contract includes a clause that restricts the franchisee from operating a similar business after exiting the franchise, it will leave them in a position where they can no longer continue trading.

Just as with any business, there are ups and downs to running a franchise. As much as franchisees do their best to comply with the franchise rules, there may be times when a breach occurs. The important thing for franchisees to remember is that this doesnt automatically mean the end of their franchising journey.

Good franchisors will support their franchisees as much as they can and will encourage them to remedy the situation. In fact, from a legal perspective, the franchisor must allow a period of time for the franchisee to fix the issue before taking any action.

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