Vicky Wilkes, senior associate at law firm Squire Sanders (UK), outlines a franchisor’s obligations to its franchisee network
A franchisor’s obligation towards its franchisees does not end once the ink has dried on the franchise agreement.
A franchisor will be bound by continuing obligations that are contained in the franchise agreement, together with a number of other commitments to the franchisee network, which although not contractual are regarded as best practice.
Pilot schemes and product/ service development
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A franchisee may be persuaded to enter into a particular franchise because it is a market leader or has a competitive edge over similar franchise concepts. The franchisor should continue to work with its franchise network to ensure the franchise concept is developed and enhanced to benefit the franchise network as a whole.While a franchisee can expand their franchised business to a certain extent, they will generally be contractually restricted as to what they can sell, produce or develop and have to rely on the franchisor to update and move the franchise forward. A franchisee should therefore look for a franchisor that is committed to developing its brand, new products and/or services.
A franchisor will often set up a pilot scheme to establish whether the proposed franchise business is conceptually and financially viable before launching a full scale franchise operation.
It is a membership requirement of the British Franchise Association for a franchisor to run at its own risk - for approximately 12 months - at least one managed pilot scheme. Some franchisors may continue to use a pilot operation, which is run separately from the rest of the franchise network, to test products or services before releasing them into the franchisee network.
While not a contractual commitment, continuing such a pilot operation after the initial testing is beneficial to the franchisor and illustrates to potential franchisees the intent of the franchisor to move the brand forward and maintain its competitive edge.
Updating the operating manual
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A franchisor’s continuing obligations contained in a franchise agreement will vary from agreement to agreement. However, there are core obligations that all franchisees will expect to see in their franchise agreement. These include the right to use relevant trademarks, trade names and relevant know how, together with the provision of ongoing advice and guidance relating to the franchise business. This advice and guidance may be conducted through one-to-one ad hoc advice or through general updates to the operation manual. The operation manual is the backbone of any franchise business and to ensure the franchise business does not become stagnant it needs to be updated to reflect any changes in the market, legislation or regulation.
The franchise agreement will generally obligate a franchisee to comply with the operation manual. If the franchisee does not implement the manual and any subsequent revisions they will be in breach of their franchise agreement. However, a franchisor should be careful in their approach to amending the operation manual. The operation manual is an unnegotiated document, but the franchisee is strictly bound to comply with it, therefore any material change to the manual that alters the basis of the franchise business could be seen as going to the heart of the original franchise concept and could amount to a fundamental breach of the franchise agreement.
Training the franchisee
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A franchisor will be obliged to provide any initial training to the franchisee that is required to ensure they have the right skills and tools to operate and manage the franchise business effectively from the outset.
The franchisor usually also gives its franchisees the opportunity to seek further ongoing training if required. This additional training is usually provided at an additional cost to the franchisee. However, if a general update is provided by the franchisor to the whole of the franchise network that requires further training to implement, the franchisor will usually provide such training free of charge, not least to ensure all franchisees understand how to implement any new techniques, products, services, etc and ensure that consistency across the brand continues. Although the franchisor will provide this training at its own cost, the franchisee will have to pick up the cost of theirs own staff attending the training.
National advertising
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While a franchisee will have an obligation to advertise its franchise business, the franchisor may agree to carry out national advertising, which will be for the benefit of the whole of the franchise network.
A franchisee is often expected to contribute towards this national advertising through an advertising fee, although in return the franchisor is unlikely to give any guarantee that any national advertising will advertise any specific franchisee’s business. If charged, the franchisor should have a responsibility to use the advertising fee in the manner for which it is intended - for the benefit of the franchise network.
Best practice would see the franchisor keeping the marketing fund in a separate account and making the results of an annual audit available to its franchisees.
Annual meetings
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Some franchisors find it beneficial to hold annual meetings or conferences for their franchise network. A few franchisors do make attendance at annual conference a strict obligation. These meetings can be beneficial to franchisees, as the franchisor will often reveal plans for the franchise network and will encourage franchisees to discuss and pass on tips/best practice to each other.
A successful franchise network requires the franchisor to remain committed to its franchisees and network and fulfil its continuing obligations. Failure on the part of the franchisor to develop new products/services and keep the franchise business fresh in response to market changes can be a threat to not just the franchisor’s business, but also its franchisees’ continued success.
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