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What happens if a franchisee fails to meet a franchisor’s minimum performance targets?
Franchisors will want to keep their franchisees committed and motivated and to ensure that the franchise is being suitably developed and exploited. To do this franchisors will often set minimum performance targets for the franchisee to achieve. This is particularly important where a franchisor has granted the franchisee rights to an exclusive territory. MPTs may take a number of forms, including annual and cumulative rates of growth. For example, a franchisee may be asked to achieve a certain percentage of the average gross sales for the same period as all network franchisees who have been operating for a similar time.MPTs should be realistic and achievable, based upon a reasonable business plan agreed between the parties at the outset. The British Franchise Association has recommended that if the minimum performance targets are not achieved by a franchisee there should be a meeting between the parties to review the performance and agree a reasonable remedial plan.Ideally, the franchisee must be given a chance to remedy his failure to meet MPTs, especially if there are extenuating circumstances that may explain the failure, eg local market conditions. A franchisor should not resort straight to termination, but instead have a number of alternative remedies escalating in severity that it can turn to. Escalating remedies include a loss of exclusivity, a reduction of the size of the franchisee’s territory or some sort of financial payment (eg, the franchisee may still be asked to make their franchise payments as if they had met their targets).At the end of the day, what happens if a franchisee fails to meet a franchisor’s minimum performance targets will largely be dictated by what the franchise agreement says. Therefore, to ensure the agreement contains appropriate remedies that are fair and reasonable the franchisee should seek independent legal advice.
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