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Do franchisees have to achieve minimum turnover levels?

Author: Vicky Wilkes

answered by Vicky Wilkes

Senior Associate at Squire Patton Boggs (UK) LLP

From the franchisor’s point of view, it is important to have a franchisee who maximises the potential of their respective business in their territory. The inclusion of a provision in the franchise agreement that sets minimum turnover levels is a useful tool for doing this.The British Franchise Association provides guidance that suggests that while minimum turnover levels are permitted, those levels must be reasonable. What is reasonable depends on each franchise - the size and maturity of the franchisee’s territory may be a relevant consideration, for example. It is also in both parties’ interests to set levels that are achievable to incentivise rather than dishearten franchisees.If minimum turnover levels are set, the franchise agreement should deal with what happens if the franchisee fails to meet the set levels. Failure to meet a minimum turnover level should not automatically lead to termination of the franchise agreement and a formal procedure should be included in the franchise agreement allowing the franchisor and franchisee to review performance and agree a reasonable remedial plan.This may grant the franchisee reasonable time to remedy the failure, require the franchisee to attend further training and/or allow the franchisee to continue to operate within a smaller territory. However, if remedial action has been taken and the franchisee still fails to meet minimum turnover levels, it may be reasonable for a franchisor to terminate the franchise agreement.

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