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franchise agreement binds you and your franchisee together in business. In this agreement, you might specify the minimum performance standards your franchisees must meet when operating their business. A franchisee’s failure to meet the standard could have varying consequences. For instance, you might require the franchisee to undertake further training at the franchisee’s cost. This article explains minimum performance standards and the benefits of including them in your franchise agreement.

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What Are Minimum Performance Standards?

Minimum performance standards will change depending on your business’s nature and management style. However, minimum performance standards generally cover some basic requirements of running the franchise. For example, one standard might require a franchisee to complete a staff training program within the first year of trading. On the other hand, the standards might require franchisees to achieve a certain gross sales level annually.

Franchisors can include minimum performance standards in the franchise agreement. Alternatively, they can outline the standards in the operations manual. Either way, the minimum performance standards can become a binding legal obligation between the franchisor and franchisee.

When preparing the criteria, you can choose and prepare a general set of obligations that all franchisees must meet, or you can establish minimum performance criteria. 

Below, we explore three examples of minimum performance standards you might include in your franchise agreement.

1. Consistency and Quality

Many franchisors include minimum performance requirements to ensure that all franchise locations operate consistently and provide quality goods and services. As a result, some notable franchises like Mcdonald’s are successful because consumers can rely on any branch within the franchise system to provide consistent quality of goods and services.

Ultimately, the minimum standards you include in the franchise agreement will depend on the nature of your business. You can include as many or as few requirements as you think are necessary to run the franchise business. However, you should note that including too onerous requirements could deter potential franchisees from entering the agreement. 

2. Protecting Your Reputation

In a franchise system, a franchisee becomes your brand ambassador. Franchisees within your system will use your business brand and intellectual property to promote their goods and services. In this sense, minimum performance standards can help you protect your business reputation by ensuring franchisees follow specific guidelines when using: 

  • your business brand; 
  • intellectual property; and
  • providing the goods and services. 

Since minimum standards will form part of the franchise agreement, you can pursue additional legal avenues if a franchisee consistently fails to meet the standards. A failure to meet the standard requirements could have varying results for the franchisee. This can include:

  • incurring additional costs;
  • a requirement to attend further training;
  • a reduction in your franchisee’s exclusive territory; or
  • in rare circumstances, your ability to terminate the franchise agreement.

You should discuss the consequences of a breach of the minimum standard requirements with a franchise lawyer.

3. Fairness

Furthermore, minimum performance standards can also ensure fairness across the franchise network. This is because you will have similar expectations regarding your franchisee’s performance throughout the franchise network.

However, you should note some potential issues in setting minimum performance requirements. Namely, it can be unfair and unreasonable to expect some franchises to operate at the same standard as others in different locations. For example, a large shopping mall franchise business may attract more foot traffic than a business in a small town.

Additionally, minimum standards are only fair if you enforce them consistently across the franchise network. 

For example, if you scrutinise one branch for failing to meet a performance standard but turn a blind eye to another, this can undermine the consistency and fairness that your performance standards seek to uphold.

Key Takeaways

Franchisors can develop a set of obligations that franchisees agree are appropriate to develop the franchise. While minimum performance standards will change depending on the nature of your business and your management style, the standards can cover basic requirements like staff training to financial targets. Ultimately, minimum performance standards can ensure:

  • consistency and quality output across the franchise network;
  • protection over your business’ brand and reputation; and
  • fairness where the minimum standards are reasonable, and you enforce the standards fairly.

If you have questions about minimum performance standards, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a franchise agreement?

A franchise agreement is a contract that will bind you and your franchisee together in business. It can cover various issues, such as who owns the franchise’s intellectual property and what fees a franchisee must pay.

What is an operations manual?

An operations manual should contain all the information necessary to run a branch in a franchise. This can range from how you train staff to the core functions of your business.

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