Massively Big Ideas for Creating Massively Better Franchise Agreements

• January 2, 2019

You’re a franchising industry veteran. You understand franchise agreements like you do the back of your hand. But is it possible that you still have a lot to learn? That there are revolutionary new ideas out there?  I suspect yes, and I would like to tell you about them in this article.  So please read with an open mind.

What’s Wrong with Franchise Agreements?

Chances are you will agree with me when I say that there are plenty of things wrong with the binding documents that you sign with your franchisees, AKA franchise agreements. The biggest of the problems are tied to the fact that franchise agreements typically are binding for five years, or often 10.

There’s security in that, you might say. But what if some great new idea comes along during that time? Let’s say, for example, that you realize that there is a huge opportunity if you begin to sell products online, if you introduce a new line of products, or introduce some other big new idea?

You can’t just announce it and expect the change to automatically happen across all your franchise locations. Your feet are stuck in clay. How can you get all your franchisees to agree?

How can you retroactively change the franchise agreement? You have to change your franchise agreement, but it’s binding for those five or 10 years, and your franchisees are under no obligation to change. You need to write a new agreement and get everyone to sign it. What if they don’t want to? Do you really want to wait five or 10 years before you can issue a new agreement – before you can make the changes you want? Of course you don’t.

Massively Big Idea #1

This isn’t a theoretical problem, I have had many franchises ask me about it over the years. My solution? When you write new franchise agreements, include a procedure for implementing change. Here is what I recommend.

Write a provision in your franchise agreements that states that if management proposes new changes, all franchisees will get to vote on them. If 60 percent of all franchisees vote in favor of the change, it is binding on everyone. One vote per franchisee.

Of course, this new clause will not be included in the franchise agreements that are already in force. But here’s a suggestion – start including it in all the new agreements you create.  Isn’t it better to start including this provision in all the new agreements you write, starting today? In time, your old agreements will cycle out and you can replace them with new ones that include this clause . . . along with your big new business idea. This is a massively big idea

Massively Big Idea #2

Franchise agreements explain activities that franchisees are required to engage in. Your agreements might say that franchisees are expected to attend your annual convention, to take part in the training you provide, to use your signage and display systems – to refrain from selling certain products, or products made by your competitors.

Okay, your franchisees have agreed to adhere to your requirements. But what if they don’t? What if they don’t play by your rules? Are you really going to terminate franchisees who decide not to attend your convention , even though they are required to? Are you going to terminate them if they start to create their own substandard advertisements instead of those that come from you? In most cases no, you are not.

But here’s my solution. Instead of writing franchise agreements that threaten franchisees with termination, your franchise agreement should specify penalties, with specific dollar amounts that franchisees will pay for violations. With a termination option still available, if needed.

For example, the fee could be $1,000 for brand standard violations, for the first month that a franchise is in violation. If the franchise is still in violation after that, the fee increases by $1,000 a month. And it continues to increase by $1000 every month, until the franchisee complies. Plus, you back up those requirements with a clause that says you still have the option to terminate franchisees that don’t comply. Because these requirements are spelled out in the agreement that franchisees sign, you are building in a big incentive for them to adhere to the standards that build your success and your brand.

The penalties you put forth should not be punitive, but they should be rational and motivational. Let’s say, for example, that the typical airfare and hotel costs that franchisees will pay to attend your annual convention will be about $1,500. The penalty for not attending should exceed that amount. If you only penalize them $500, some of them are going to say, “I’ll skip the convention, because the penalty is less than what it will cost me to attend.”  So a $2,500 penalty would be rational.

All penalty dollars should go to the national advertising fund. That way, franchisees will not see your fines as a way enrich the company.  You will gain more support from your franchisees if the funds go to the national advertising fund – a source of funding that benefits them all.

Your franchise agreement should also include a process that franchisees can use to request a variance.  Let’s say, for example, that one of them gets into a major car accident on the way to the airport, went to the hospital, and was unable to attend your convention. Variance requests should be heard by a group of franchisees, not by  management. Franchisees are tougher than management about the behavior of their fellow franchisees.

You should look at every violation you have in your franchise agreement and attach a dollar amount to it. Of course review this process and the fine amounts with your franchise council and get their buy-in, and vet the concept with the entire system so you have the support of the franchisees before implementing this change.

Don’t wait for all your agreements to rollover.  If you have gotten support from your franchisees, implement changes now. By  offering your current franchisees a fine in lieu of termination, you can’t require the fine, but most franchisee would choose it over termination.

This will massively change for the positive how you handle violations.

Hopefully these were two ideas you never have heard of and that you can implement in your franchise system.  These ideas are game changers.