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Some new franchisors think that most of the effort is complete once they have finalised their operations manual and recruited the first few franchisees.  This is far from true. The franchise recruitment journey is only just beginning, and managing your franchise network comes next.

First, you will need to ensure that you keep the operations manual current. You must communicate any changes to the requirements of the operations manual to the network with adequate notice of any changes to operations. Franchisees can feel abandoned if there is not regular and ongoing contact with you. In this context, regular newsletters and keeping up communications within the network are vital to maintaining morale and a consistent focus.

In addition, there are compliance obligations that you must ensure you enforce within the network. Note, in particular, your obligations relating to franchisees paying employees.  This requires regular checks throughout the network. In this article, we explain some tips for managing your franchise network.

Your Operations Manual

For any business owner that wants to begin operating under a franchise model, developing an operations manual is a significant step. It is crucial in ensuring consistency of service throughout the network.  

The Difference Between the Operations Manual and Franchise Agreement

It can often be difficult to know what should be included in your operations manual and what should be included in your franchise agreement.  The guiding principle is generally that strict legal obligations that will not change or adjust during the term of the franchise relationship should be included in the franchise agreement. However, day to day operational and administrative matters – particularly matters that are subject to change, evolution or updating – should be included in the operations manual.

Your franchise agreement should refer to the operations manual as a binding document on the franchisee. Therefore, the operations manual forms part of the legal obligation between franchisor and franchisee. Breach of the operations manual is considered a breach of the franchise agreement. As such, the operations manual should be clear, concise and specific. This will ensure that franchisees know their operational responsibilities, and you can identify clearly when a franchisee has not complied with relevant standards.

You should be very clear in the operations manual regarding what is suggested, voluntary or optional, and what is required and mandated.  This will allow you and the franchisee to be clear on the minimum performance obligations within the network.

What Should I Include in the Operations Manual?

The operations manual is usually quite detailed. This is because it includes aspects of the business that are needed to maintain consistency among all franchisees. When developing your operations manual, you should begin thinking about the following areas:

  • products (what can/cannot be sold);
  • suppliers (where can a franchisee purchase products);
  • prices for goods and/or services;
  • use of any software;
  • use of technological equipment;
  • marketing strategies;
  • performance targets; and
  • compliance standards.

When Should I Provide the Operations Manual?

Operations manuals usually include details that are confidential in nature. For this reason, many franchisors are hesitant in providing the operations manual to potential franchisees in the first instance. Instead, after the franchisor can gauge better the seriousness of a potential franchisee, they usually provide the franchise agreement and disclosure documents before providing the operations manual. As an extra precaution, many franchisors require the potential franchisee to sign a confidentiality or non-disclosure agreement before providing a copy of the operations manual.

How Can I Update the Operations Manual?

There are no specific legal requirements in the Franchising Code of Conduct regarding updating your operations manual and notifying franchisees. However, there are several principles to be followed when doing so.  First, there is an overarching obligation of good faith under the Code. This means you should give reasonable notice to franchisees to enable them to comply with any changes to operational standards.  You can notify franchisees of changes regularly as part of a periodic (e.g. monthly) newsletter publication.  You should highlight significant changes to the operations manual in a separate communication. Include a summary of the changes and a reference to the sections that you have amended.

Second, there is a requirement under the Code to disclose any anticipated significant capital expenditure at the recruitment stage. You must provide any update of fit-out or systems that require significant expenditure according to what you originally disclosed in the disclosure document. If you fail to do this, you risk franchisees complaining that the change is unfair or even unlawful.  This emphasises that careful drafting of the disclosure document prior to recruitment is vital to ensure you can make necessary changes to systems and processes during the franchise term.

Communication With and Supervision of Franchisees

When you commence operating a franchise network, it is often easy and intuitive to keep in touch with your first franchisees.  You might call once a week to see how things are going and perhaps visit every second month.  However, once a franchise network reaches 10 (or 20) units, it needs more professional and systematic reviews. This will ensure issues do not “fall between the cracks” and you can address problems promptly and diligently.

The first and most obvious method of checking on franchisees is via site visits. You should bring a checklist of matters to address on each visit.  Most sophisticated franchisors have set checklists to tick off on each visit to ensure the franchisee is complying with systems and procedures.  You should tailor this for the particular franchise system.

For example, you may include checking payroll information to ensure staff are being paid correctly and in accordance with relevant legislative requirements.

You can also draft franchise agreements and operations manuals to permit access to electronic surveillance, video security data and administrative and CRM databases. This will help ensure head office can observe compliance with systems remotely if necessary.  Given recent COVID-related restrictions on travel, these remote access tools are becoming more valuable and more utilised by franchise networks. It is important to ensure your legal documents permit access to this data and information.

How Should I Communicate With Franchisees?

Franchisors can trend toward a compliance and discipline focus when interacting with franchisees. Therefore, you should maintain regular, positive communications to balance any perception of negativity around franchisor communication. A regular newsletter to franchisees can highlight recent successes in marketing and other initiatives. It can also highlight recent changes or updates to the operations manual and other compliance issues, such as reminders on superannuation contributions and award rates.  

Online Networking Systems

More developed franchise systems can invest in customised intranet or other online networking systems. These allow for more sophisticated communication amongst and between franchisees. This may include:

  • allowing noticeboards to be organically developed by franchisees (whilst still being curated and monitored by the franchisor);
  • highlighting recent sales successes; and 
  • helping with questions and problems franchisees may have. 

This “peer to peer” communication is often as valuable – or even more valuable – than “top-down” communications from the franchisor. This can come off as less threatening than interacting with the franchisor on compliance or operational matters.  You should encourage “peer to peer” communication within a franchisor-monitored and managed online network. This will ensure that communications remain positive and customer-focused.

Protecting Vulnerable Workers Act

One significant development in terms of franchisor compliance has been the passing of the Protecting Vulnerable Workers Act in 2017.  This legislation permitted liability for unpaid wages to move up the chain from franchisee to franchisor if the franchisor did not: 

  • ensure it had put in place appropriate systems and procedures to pick up non-compliance by franchisees; and 
  • if it did not inform franchisees of their obligations concerning employee payments and award rates.  

Essentially, if the franchisor turned a blind eye to a franchisee’s non-compliance, the franchisor itself could be held liable for non-compliance with a franchisee’s employment obligations.

The Fair Work Ombudsman has published a comprehensive guide to ensuring franchisors comply with their responsibilities under this Act. You can find the guide here on their website.

How Can I Meet My Obligations?

To avoid being held liable for the actions of franchisees, you should ensure that you take reasonable steps as set out in the Act to:

  • inform franchisees of the relevant awards and conditions that the franchisees must comply with when employing staff;
  • have arrangements in place to periodically check franchisee compliance on wage conditions;
  • have a complaints system. This allows employees can contact you directly should they have issues with a franchisee not paying them correctly;
  • implement steps to encourage franchisees to comply (and address issues with those who do not).

Equipping franchisees to appropriately run the franchise and comply with the law is vital. You can do this by providing them with information in regards to legal issues such as:

  • the requirements when employing staff; and
  • where to obtain information regarding awards and employee remuneration.

The operations manual and information brochures you produce are a good place to provide clear steps regarding the requirements for employing, training and paying staff. It is wise to include:

  • examples of letters of employment;
  • examples of payslip statements;
  • recommend or require an accounting software systems that issue compliant payslips;
  • details regarding record keeping and time recording;
  • the relevant award for the industry; and
  • links to Fair Work Australia and best practice guides.

You should also ensure that the head office regularly checks and records franchisee compliance with laws. Checks should include whether:

  • letters of offer include appropriate position descriptions;
  • payslips are correct;
  • hours worked by employees are recorded via a software system.

The frequency of these checks should depend on the size of the network and resourcing of the head office.

Does the Act Consider My Franchise’s Resources?

The Act includes a provision where ‘size and resources of the franchise’ is taken into account. Therefore, it implies that more leniency will be given to a smaller network with limited head office staff than a large network with a significant head office staff count. Regardless of the size and resources of a franchise network, compliance with the law should be a priority.

A complaints system provides employees with an outlet to direct comments, questions and complaints about workplace conditions. By making a complaints system available, whether through an employee hotline or other channels, you can reduce the risk of public complaints. It also reduces the risk of franchisees going directly to the Fair Work Ombudsman and triggering an investigation. Internal mechanisms such as the complaint system and going to HR managers allows you to handle any issue efficiently, effectively and confidentially.

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Managing the Marketing Fund

The regulatory requirements surrounding franchise marketing funds are surprisingly complex. Due to this,  a number of smaller or emerging franchise systems elect not to charge marketing fees. Instead, they simply ensure the franchise fee covers the required marketing expense.  This is much more viable in the age of social media and Instagram. Nowadays, organic and relatively inexpensive promotion can occur without significant expenditure on “traditional” or “legacy” media sources.

The ACCC has imposed significant penalties on franchisors for non-compliance with Franchising Code requirements in relation to marketing funds.

If you have the opportunity to cover your marketing expenses via the standard franchise fee and avoid the complexity of setting up a marketing fund entirely, we certainly recommend you explore that option.  The standard franchise fees can be sent straight to general revenue and your standard operating bank account. On the other hand, you must deposit marketing fees into a separate account. Additionally, marketing funds face significant reporting and auditing obligations.

Marketing Fund Requirements

Suppose you already have a marketing fund, or cannot reasonably avoid the imposition of a marketing fee to cover head office marketing expenses. Then, you need to familiarize yourself with the basic regulatory requirements regarding the operation of the marketing fund. First, the ACCC has provided a very useful guide regarding the management of franchise marketing funds. We recommend you review this information and ensure compliance.

You must also provide an annual marketing fund report within 4 months of the end of the financial year (in Australia, this is the end of October each year).  You may be aware of the need to update the disclosure document each year. However, you may not know that you must prepare a marketing fund report each year as well.  This needs to provide “meaningful” information regarding the sources of income and the items of expenditure. 

The report also needs to be audited, which is a very significant expense for smaller marketing funds.  The only way of avoiding an audit is for at least 75% of the franchise network to vote to waive the audit eadh year.  You must organise this waiver within 3 months of the end of the financial year.

Finally, if you operate corporate outlets, you must pay into the marketing fund on the same basis as the rest of the franchise network. 

Managing the IP Portfolio in a Franchise Network

One key aspect of running a franchise network is to protect and preserve the intellectual property associated with the brand and the network. This is easy to overlook in the growth phase of a franchise. However, this can be a major stumbling block when the franchise network comes up for sale or when investors are considering investing in the franchisor as part of their due diligence process.

You can avoid these traps by proactively managing these matters at the earliest stages in the growth of the franchise network. This will ensure you do not compromise the value of the most important asset you have to sell.

Trade Marks

The first task in protecting the brand is to ensure your trade mark portfolio is current and up to date. It is a relatively simple and inexpensive process to register a trade mark in Australia. As part of the process of developing your franchise documentation, you should have already registered the ‘core’ trade marks that are associated with your brand.

However, trade marks and logos evolve over time, and if subtle updates have occurred to your logo (or ‘composite trade mark’) the new logo needs to be registered to ensure it is protected.  Merely because an old (registered) logo looks similar to the new (unregistered) logo does not mean the new logo is protected.  Moreover, if you no longer use the old logo, it is vulnerable to being de-registered due to lack of use, leaving your brand vulnerable.  To avoid this, you should ensure new logos are registered even if the update to the brand is a subtle one.

Marketing Handbooks

In addition, you should maintain a ‘marketing handbook’ with all ads and promotions stored in chronological, preferable monthly, sequence, either in hardcopy or softcopy form.  If your brand has expanded overseas, each territory should keep their own handbook.  This is vital to protect your brand, because trade mark disputes can arise regarding when you first promoted or used a brand or trade mark in a particular jurisdiction.  The handbook is an easy way to access the date when your brand was first promoted or used.  This information can be vital if another brand is contesting that they first used a similar logo or trade mark in a particular country or region.  

Overseas Trade Marks

Finally, you may consider when should you apply for registration of a trade mark when expanding overseas.  Although in some countries (including Australia) the costs of applying to register a trade mark are relatively low, there are some countries (such as in the Middle East or Asia) where the costs are high and the time required to apply for a trade mark can involve many months or even years of delay.  

The general rule of thumb when expanding overseas is to apply for trade marks at least 18 months before:

  • entering the territory;
  • trading in the territory; or 
  • recruiting franchisees in the territory.  

That gives you sufficient time to have the trade mark processed through the local bureaucracy and protects you against local competitors trying to jump ahead and register the trade mark ahead of you.

Customer Database

Another often overlooked aspect of franchisor operations is ensuring real-time access to the customer database and social media accounts throughout the network. It is surprising how many franchisors are shocked when a franchisee unilaterally terminates the franchise agreement and does not hand over the client database. However, it is likely in a large franchise network that, at some point, a rogue franchisee may try to terminate and rebrand.  In such circumstances, it is crucial to minimise disruption and loss for your business. The ability to communicate to customers and refer work to a nearby franchisee is critical here. Then, you can explore legal remedies or commercial negotiations with the ex-franchisee, which may involve negotiating an exit payment or other form of compensation for an early exit.  

In this context, it is vital that the franchise agreement clearly state that you, the franchisor, own the customer database. The operations manual must stipulate how to upload client information to the online database.  With many cloud-based off the shelf CRM systems available, there should be no reason why you cannot access the client database in real-time.  Therefore, it should not be the case that you needs to ask the ex-franchisee for client information as part of the exit negotiations.  If you cannot access the client database in real-time, you should invest in the appropriate systems to ensure this potential loophole is closed off.

Social Media

Similarly, franchisees should not operate social media accounts without sharing administrative access with you.  Inappropriate content uploaded by an individual franchisee can damage brand reputation very easily. Individual franchisees are often more inclined to share “edgy” material on social media than franchisors, who are more interested in protecting overall brand integrity.  Again, you should clarify the systems and processes around posting on social media in the operations manual.  Include these requirements to ensure you have joint administrative and password access. Then, you can edit and delete any material you consider inappropriate for the brand.

Operations Manual and Other Confidential Information

Additionally, the operations manual itself and confidential commercial information such as supplier and product information form a central component of the network’s intellectual property.  As such, you should not provide this information to prospective franchisees without basic protections. These include:

  • limiting access to such information by allowing access at the head office via a head office computer for a limited time; and 
  • ensuring franchisees sign a confidential agreement before accessing this information.

When selling the franchise network, the key assets to transfer include the franchise agreements, trade marks, customer database and operations manual. This constitutes the intellectual property associated with being able to run the network.  Many franchisors elect only to allow the franchisee to access the operations manual during the cooling-off period after signing the franchise agreement. This is advisable where the operations manual is very comprehensive and contains commercially sensitive information that may allow a competitor insight into the business’s operations. 

Key Takeaways

Your franchise journey is far from over after the franchisee recruitment process. You have ongoing obligations as a franchisor when managing your network. Overall, your key responsibilities in network management include:

  • creating and updating your operations manual;
  • communicating regularly with franchisees, and maintaining positive contact;
  • regularly checking on your franchisee’s businesses;
  • ensure franchisee compliance with all relevant laws, including the Vulnerable Workers Act;
  • register your intellectual property both in Australia and relevant overseas markets;
  • ensure you have access to your client database and all franchisee social media accounts; and
  • protect confidential information, such as your operations manual and relevant intellectual property.

If you have any questions about managing your franchise network, our specialist franchise lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What should I include in my franchise operations manual?

Your operations manual should include day to day operational and administrative matters. This includes compliance standards, products and suppliers, and marketing strategies. 

How can I manage my franchise’s intellectual property?

Ensure that you have registered all relevant trade marks for your business. Additionally, ensure that franchisees sign confidentiality agreements before accessing intellectual property. Your intellectual property includes your operations manual, so ensure you take steps to keep it safe.

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