five franchise rules

Five franchise rules you need to know

Sarah Stowe

When a franchisee signs up to their new business, there will be a host of benefits including training and marketing support provided by the franchisor. And of course franchisees can leverage brand value and the systems and processes the franchisor has developed.

Which is why it’s vital for franchisees to understand, and follow, the franchising rules. Compliance across the network of franchises is at the heart of a successful franchise operation.

Here are five rules franchisees must follow

Every franchise will have its own set of rules and regulations, but there are some broader compliance requirements.

1. First rule, pay the fees

A franchisee pays the franchisor royalty fees on a regular basis. It can be weekly or monthly, a flat fee or a percentage-based figure based on the franchisee’s income.

Don’t forget the marketing fund

In addition, most franchises hold a marketing fund in to which franchisees pay a regular amount to be used for national marketing purposes.

These fees must be paid. Non-payment is a breach of the franchise agreement, which can result in penalties.

2. Know your territory and location limits

Franchisees need to observe the rules that govern where they can provide their service, either from a specific location, or within a territory.

For instance, a premises occupancy licence details exactly what a leased space can be used for, for example a pizza business. If the franchisee starts serving burgers, that might be an exclusion which would be a breach of the licence.

Know your limits

With a territory, there may be restrictions on the franchisee operating in other areas. This is particularly relevant for mobile service-based franchises. Of course these franchise rules ensure each business owner’s territory is safe from a fellow franchisee scouting for business outside their zone.

3. Follow the franchise operations manual

The operations manual is like a guide to the engine room of the franchise. It contains specific details including

  • use of branding and trade marks
  • a step by step guide to daily operations in the franchise
  • how to manage staff
  • approved supplier list

Again, a franchisee can be in breach of the franchise agreement for non-compliance with the operations manual.

4. Stick to the approved supply chain

In many businesses franchisors provide a list of approved suppliers from whom franchisees can source product or equipment.

The supply chain should deliver benefits

While sometimes this is seen as restrictive it is a common way for the franchise to provide the same standard service across all outlets. Ideally the sourced products are well priced because the franchisor has negotiated a deal based on volume.

The franchisor can issue a breach notice to any franchisee who doesn’t follow the rules and purchases from other sources.

5. When you need to renew or transfer the franchise

If a franchisee wants to renew their franchise agreement for another term, they will need to pay a renewal fee.

Whether they are renewing or selling the business a franchisee will need to resolve any outstanding disputes or breaches.

Selling the franchise

As a vendor, the franchisee will also need to pay reasonable costs, and provide reasonable information about the buyer to the franchisor. As an example, paying for equipment maintenance to ensure everything is functioning is considered a reasonable cost.

Franchisees will also need to meet any transfer obligations imposed by the franchisor.

Compliance to these franchise rules is crucial

It’s important that franchisees comply with these, and other, regulations outlined in the Franchising Code of Conduct, as well as the franchise’s own processes.

Unfortunately, there are consequences for failure to comply. It can lead to the franchisor issuing a formal notice, or breach notice. This means the franchisee has to rectify the issue or it will lead to possible termination of the agreement and legal action.