Your franchise agreement is an important document that contains all the rights and obligations that apply to the franchisee and franchisor in relation to the franchise business. There are a variety of clauses that are generally included in a franchise agreement that you, as a franchisee, should be aware of. One such clause relates to meeting minimum performance criteria. Meetings these requirements is important as often failure to meet such criteria could result in termination of your franchise.
What are the criteria?
Minimum performance criteria can vary depending on the nature of the business that is being franchised and the management style of the franchisor. There may be basic requirements such as requiring the franchisee to complete a staff training program within the first year of trading. They may also be linked to the financial operations of the business and require that franchisees achieve a certain level of gross sales annually. The purpose of these performance criteria is to protect the franchisor’s business brand and reputation as well as ensure a high level of quality.
When preparing the criteria, the franchisor may take one of three approaches. The franchisor may choose to prepare a general set of obligations that all franchisees must meet. Alternatively the franchisor may develop a set of obligations that both parties agree are appropriate to develop the franchise. This is the most common approach and usually the most effective since both parties are able to collaborate and come up with obligations that they consider to be useful and achievable. Finally, on rare occasions the franchisees may be allowed to establish their own minimum performance criteria.
Consequences of failure to meet this provision
It is important to know your obligations to ensure you comply with the minimum performance provisions. Failure to meet these criteria could have varying results for the franchisee, including incurring additional costs, being required to attend further training, having your exclusive territory reduced or ultimately the franchisor being able to terminate the franchise agreement.
If there are no minimum performance criteria outlined in the franchise agreement, be sure to also check the operations manual. If these provisions are in the agreement or the operations manual, the franchisee has an obligation to meet these minimum performance criteria. If the provisions are complex or you would like to have a clearer understanding of your obligations, it is a good idea to get some legal advice from a franchising lawyer as soon as possible.