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Do You Know Why Service Franchisors Love Five Year Agreements?

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Over the last 10 years or so, franchisors have begun including performance standards, minimum gross sales requirements, and minimum royalty rates in their franchise agreements.

Whatever vintage they are (sales requirements, minimum sale or royalty), the whole rationale is this: The franchisor wants to make sure that the franchise territory is not tied up, underperforming, or underutilized.

The performance standards, minimum gross sales requirements, and minimum royalty rates are commonly stated in straight dollar amounts. Those dollar amounts may seem a bit measly, when the franchise agreement comes up for renewal 10 years later.

The franchisor can up the dollar amounts at the time of renewal. Right? One franchisee argued no way, no go.

The case is Home Instead, Inc. v. David Florance et. al. The franchise agreement in question stated, in pertinent part, "The franchisee must maintain minimum gross sales of $30,000 per month after the end of the fifth year of operation of the Franchised Business through the end of the term of this Agreement or any renewal term of a renewal Franchise Agreement (the Performance Standard)."

In this case the franchisor wanted to raise the $30,000 to $70,000, a more than double increase of the Performance Standard. The franchisee read the franchise agreement to say that the $30,000 would run forever over all renewal periods. The court called this a "strained reading" of the franchise agreement. The court went on to say that "This reading places a permanent ceiling on the Performance Standard." The court honed in on the word "minimum."

The court found that the $30,000 stated in the initial franchise agreement "creates a floor, not a ceiling." "Nothing in [the franchise agreement] ยง2.F prohibits the franchisor from raising the minimum amount."

Lesson from the Court: Each word has meaning, make sure to heed the meaning.

Don't get caught

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1 Comment

"Nothing in franchise agreement - to prohibit Franchisor to raise minimum amount", but then Franchisor will not provide adequate training and/or ongoing support to Franchisee. This could be some of the reasons why Franchise business is only as successful as any other Small Business. In order for Franchise business to continue to do well and say meet the minimum amount, it should get continuing and consistent support from Franchisor.

Though, looking at this from Franchisor end - they could be needing help in being able to provide level of support. What type of help would they need to do so? Perhaps firming up structure and process between Franchisor and Franchisee?

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About this Entry

This page contains a single entry by Mary Beth Gettins published on January 29, 2013 3:31 PM.

Franchisor Ordered to Pay Franchisee a $Million Dollars was the previous entry in this blog.

Is it Fair that Franchisees Who Pay All The Royalties Get Terminated? is the next entry in this blog.

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