Almost all franchises will have minimum performance requirements that each franchisee must meet. These requirements help ensure consistency and promote the franchisor’s standards across the franchise network. This article will explain what performance standards are and why they are important to develop a successful franchise.
Minimum Performance Requirements
Most franchisors use minimum performance requirements to set expectations for their franchisees. These requirements help protect the reputation of the franchise.
Minimum performance requirements work by providing criteria for the lowest standard a franchisee must satisfy. Minimum performance requirements often assess a range of factors that indicate the success of a business.
For example, minimum performance requirements often relate to the following:
- gross sales;
- growth rate;
- profitability;
- expenses;
- customer count; and
- customer satisfaction.
Determining Minimum Performance Requirements
The responsibility for establishing minimum performance requirements will differ between franchises. In most franchises, the franchisor will set criteria for each franchisee. Occasionally, the franchisor and the franchisee collaboratively decide on the requirements. In these instances, the franchisor and franchisee will do this as part of a planning process. This might occur on an annual or bi-annual basis. Having franchisees be part of the negotiation process helps motivate them to meet these requirements.
Continue reading this article below the formDocumenting Minimum Performance Requirements
Most minimum performance requirements are outlined within the franchise agreement. This might be within the agreement itself or in an attached annexure. In some cases, the operations manual will document minimum performance requirements.
Depending on where they are contained, the minimum performance requirements may create a binding legal obligation between the franchisor and the franchisee. Accordingly, failure to meet the minimum performance requirements may be a breach of contract.
Franchisees Not Meeting Requirements
The consequences of failing to meet minimum performance will typically accompany the requirements. This will differ from franchise to franchise. For example, failure to meet the minimum requirements in some cases may instantly result in meetings with the franchisor.
In other cases, the franchisee might fail to meet these criteria for one or two months, but discussions will only commence if they fail to meet these requirements for a consecutive three-month period.
Furthermore, the method of rectifying the situation will again differ between each franchise. Often, a franchisor representative will meet with the franchisee to discuss the situation. In such instances, the franchisor and franchisee may develop a plan to help the franchisee address the situation. A good franchisor will be cognisant of factors outside the franchisee’s control impacting their ability to meet these standards, such as a new competitor in the same location.
Importance of Minimum Performance Requirements
1. Ensure Consistency
One of the main reasons consumers like franchises is because they know what they can expect at each location. As such, a franchisor will include minimum performance requirements to ensure consistency across the franchise network. For example, some minimum performance requirements will relate to consistently providing high-quality goods or services. Alternatively, there might be a minimum performance requirement for customer service ratings.
2. Promote Fairness
Minimum performance requirements can also help ensure fairness. This is because such requirements mean the franchisor has similar expectations for each franchisee. However, a good franchisor should remember that expecting the same sales or growth rate from each location is not always reasonable. Factors such as business location and franchisee experience will inevitably impact these factors. Accordingly, consider these discrepancies when preparing the minimum performance requirements for a new franchisee.
3. Protect the Franchise’s Brand
Finally, minimum performance requirements are essential because they help protect the franchise brand. Each franchise is an ambassador for the entire franchise network, using the franchisor’s goods or services and intellectual property. This means each franchisee directly contributes to enhancing a brand’s reputation. Minimum performance requirements protect this by having guidelines on franchisees’ quality standards.
Key Takeaways
Minimum performance requirements set expectations for franchises. They work by providing criteria for the standards required to be achieved by each franchisee. Minimum performance requirements are necessary because they:
- ensure consistency;
- promote fairness; and
- protect the franchisor’s brand.
If you need assistance reviewing the terms of your New Zealand franchise agreement, our experienced franchise lawyers can assist 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 0800 005 570 or visit our membership page.
Frequently Asked Questions
Minimum performance requirements as a way to set expectations for franchisees. Minimum performance requirements work by providing criteria for the lowest standard a franchisor will be satisfied with. For example, minimum performance requirements may relate to sales, growth rate expenses, customer count and satisfaction.
Minimum performance requirements are important for franchises because they ensure consistency and promote fairness across the franchise network. They also help protect the franchisor’s brand by ensuring all franchisees consistently meet a certain quality threshold.
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