If only signing on the dotted line of a franchise agreement would give you freedom to operate your franchise business in any way you see fit … In reality, signing a franchise agreement will bind you to a wide range of responsibilities. You must comply with these ongoing obligations to avoid breaching the franchise agreement. Here are some key ongoing obligations that you should consider when entering into a franchise relationship:
Compliance with the business model
Franchise agreements contain a strict list of obligations that franchisees must follow in order to uphold and carry on the proven business model that the franchisor has carefully developed. This ongoing obligation requires the franchisee to comply with the systems and procedures outlined to the franchisee in both the franchise agreement and operations manual.
Contributing to the marketing fund
The franchisor often establishes a marketing fund as a means by which all franchisees’ resources are pooled to create a marketing strategy. A well-run and successful marketing fund can be beneficial to you, creating a strong advertising base to promote your business. However, you should be aware of the financial commitment involved, as contributions are usually ongoing for the term of the franchise and are often determined as a percentage of gross sales. It is important to understand the role of the marketing fund and keep abreast of how the monies are spent by the franchisor. The recent amendments to the Franchising Code of Conduct will require franchisors are transparent with respect to how these financial contributions, such as to the marketing fund, will be used.
Minimum performance criteria
Another ongoing obligation that your franchise agreement may also stipulate is minimum performance criteria that you must satisfy. Even if your franchise does very well in the early stages of the business, you may be required to maintain this success for the duration of the term to satisfy any minimum performance criteria. This is an ongoing obligation that is crucial to any franchise agreement.
Purchase and supply of products and services
The main function of the franchise will be to supply products and services to customers. It is often the case that you will have to purchase products to be sold from the franchisor or other nominated suppliers and you may also be required to maintain minimum stock levels. You should carefully consider whether such minimum stock levels are commercially viable and make enquiries and ensure that the products you are required to purchase from the franchisor are reasonably priced as part of your due diligence prior to entering into a franchise agreement.
There are a variety of ongoing obligations that you must comply with for the duration of the franchise term. We have touched on a few of these general obligations but there will be many more obligations, all of which are outlined in your franchise agreement. For this reason, we highly recommend that you have a franchise lawyer review your franchise agreement so you are fully informed about your ongoing obligations as franchisee.