Do Business Well

To keep the franchise agreement manageable and to avoid the unacceptable burden of renegotiating the agreement in response to frequent changes in day-to-day operational requirements as far as possible, it is customary to state only the principles according to which the franchise relationship will be conducted. This will be supplemented by a proviso stating that detailed operational requirements are set out in a series of written directives issued by the franchisor and delivered to the franchisee in the form of the operations and procedures manual.

Moreover, the franchisor will reserve the right to issue updates to the operations and procedures manual from time to time, which will reflect changes in operational requirements. As soon as such directives are received by the franchisee, they become binding, just as if they were contained in an amendment to the franchise agreement.

It should be noted that this provision could never be used by the franchisor to unilaterally make material changes to the franchise agreement. The following two examples will illustrate this point.

n Staff uniforms: A clause contained in the franchise agreement gives the franchisor the right to demand that all members of the franchisee’s staff wear uniforms. He may, from time to time, issue directives in the form of updates to the operations and procedures manual pertaining to the nature, style and colour of these uniforms. On receipt of such updates, the franchisee will be contractually bound to implement the instructions it contains.

Management services fee: Changes in the level of management services fees the franchisee is obliged to pay would constitute a material change to the agreement and could affect the viability of the franchise. Let us assume, for example, that a franchise agreement stipulates that the management services fee will be calculated as of 5% of net turnover. A prospective franchisee, having done his sums, has entered into the franchise agreement on this basis.

If, a year or two down the line, the franchisor realises that he has underestimated the costs of providing ongoing franchisee support and that, to make any money, he would have to increase the management services fee to 10%, can he do this simply by publishing an update to the operations and procedures manual? Certainly not! Such a change would require the drafting of a formal addendum to the original franchise agreement that would have to be agreed to and signed by the franchisee before it could become legally binding and enforceable.

Expert assistance is essential

It will be clear by now that franchise agreements are, of necessity, complex documents, requiring input by an expert in this field. Under no circumstances can a do-it-yourself approach be recommended, neither to the drafting of a franchise agreement by a franchisor, nor to the evaluation of such an agreement by a prospective franchisee.

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• What does a Franchise Agreement cover?
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• Open-ended franchise agreement
• Modern-day Franchising Part 2
• Preparations for franchising
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• Franchising Disadvantages Part 1

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