Does a franchisee have to achieve minimum turnover levels?

Author: Brain Duckett

answered by Brain Duckett

Chairman of The Franchising Centre

All businesses have to achieve a minimum turnover level, as there will be a level of sales at which they at least break even. This, however, would do no more than maintain survival level, which would be further influenced by positive or negative cash flow.

It’s possible to far exceed the required level of sales, but if the goods or services aren’t being paid for in time or they’re heavily discounted, the business will run out of money if it exceeds its funding facilities and be forced to close.

Franchisors often set minimum performance clauses in their franchise agreements, which normally refer solely to levels of turnover. The British Franchise Association accepts ‘a requirement that the franchisee’s gross sales in any 12-month period (after their first year) shall at least reach 70 per cent of the average gross sales for the same period of all network franchisees who have been operating for longer than one year’.

Turnover is one thing, but in my view ‘minimum performance’ should include measures such as pricing, profitability and debt collection. These should all be the subject of regular review, best done by the automatic collection of accurate data via a robust franchise management system.

What’s done about poor results? Ideally, they should trigger a review and an agreed training intervention, rather than immediate talk of potential termination.

Brian Duckett is chairman of The Franchising Centre, part of the world’s largest network of specialist franchise consultants.

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