What happens if my franchise underperforms?

Running a franchise can be highly rewarding, but it also comes with complex obligations and expectations. Here, we speak to franchise experts to explain what happens when performance falls short and how franchisees can navigate their agreements.

What should I do if my franchise doesn’t perform as expected?

When a franchise doesn’t meet your expectations, it can feel alarming – but the first step is understanding where responsibility lies.

John Pratt, senior partner at specialist franchise law firm Hamilton Pratt, explains: “If [poor performance] is not attributable to the franchisor, a disappointed franchisee will not have a claim.”

Often, issues of poor performance arise in the context of projections given by franchisors to encourage franchisees to join. These can include cash flow forecasts, start-up costs and expected turnover.

John Pratt notes, “If [you don’t achieve] those levels [...], the franchisor may have done nothing wrong. Projections are simply projections and not guarantees.”

However, there are limits to this protection. If the projections were overly optimistic and not based on the average performance of existing franchisees, they could constitute misrepresentations.

Pratt adds that you may have a claim against the franchisor if your franchise underperforms and the shortfall isn’t your fault. This is especially if the projections you were given were unrealistically high.

Do I have to achieve minimum turnover levels?

Some franchisors include minimum turnover levels in the franchise agreement to ensure the franchisee maximises the potential of their territory.

Vicky Wilkes, head of legal at Aston Villa Football Club, explains, “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.”

Minimum levels should motivate rather than dishearten franchisees. Wilkes adds, “Failure to meet a minimum turnover level should not automatically lead to termination of the franchise agreement. [The franchise agreement should include] a formal procedure, allowing the franchisor and franchisee to review performance and agree on a reasonable remedial plan.”

Remedial actions might include additional training, operating in a smaller territory, or extra time to meet the target. However, if these measures fail, termination may be justified.

What happens if I don’t meet minimum performance targets?

Minimum turnover levels are one form of minimum performance target. However, minimum performance targets (MPTs) can also include other measures. These include growth rates, customer numbers or operational standards.

Franchisors often set MPTs to ensure franchisees remain motivated and develop their territories effectively.

Shelley Nadler, legal director at Bird & Bird, explains: “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.”

It’s important for these targets to be realistic. Nadler advises that MPTs should be “based upon a reasonable business plan agreed between the parties at the outset.”

If a franchisee struggles to meet targets, the British Franchise Association recommends a review meeting to agree on a remedial plan.

Nadler adds, “Ideally, the franchisee must be given a chance to remedy their failure to meet MPTs. This is especially if there are extenuating circumstances that may explain the failure, e.g., local market conditions.”

Ultimately, Nadler emphasises: “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.”

Can a franchisor regularly check my sales figures?

Many franchise agreements give franchisors the right to review a franchisee’s sales and management information. John Pratt explains: “The majority of franchises in the UK require franchisees to pay the franchisor continuing fees based on a percentage of turnover. On this basis, franchisors have an interest in making sure that the information that franchisees provide to them is accurate.”

Even when fees aren’t linked to turnover, franchisors need to monitor performance to support struggling franchisees.

Pratt reassures, “Without sales figures, it would be difficult for franchisors to know that their franchisees have a problem. There should be nothing to fear from franchisors wanting to access franchisees’ sales information.”

How do franchisors monitor performance beyond sales figures?

While sales figures provide a useful indicator of performance, they don’t reveal whether a franchisee is meeting operational or brand standards.

Vicky Wilkes explains: “To do this, the franchisor may have to visit the franchisee’s business and do a spot check, an operations audit, or adopt a ‘mystery customer’ programme, which is becoming increasingly common, particularly in retail franchise businesses.” Other methods may include reviewing customer comments and complaints.

Conclusion

By understanding how franchise performance is measured, what targets and obligations exist, and the remedies available if things go wrong, you can navigate challenges more confidently and work with your franchisor to achieve long-term success.