Of course it is. Between you, your franchise advisor’s and your franchise solicitor, you have this covered. In every single way, if your franchisee contravenes the agreement, you have the power (should you choose to use it) to apply sanctions, remedies or even void the agreement for gross breach of contract.
From my perspective, I am not qualified to comment on the legal minefield that is the franchise agreement. If instructed to carry out a franchise audit, I will do so on the basis of my client’s instructions and under the governance of specific terms in the franchise agreement. If I find areas of non-compliance, I will report these on the basis that their disclosure will allow you to act on any relevant breached terms within the agreement.
Of course, this can be looked at another way… from the franchisee’s perspective. What if you are a franchisee…
If you are a franchisee and don’t want to lose everything, you need to read, understand and follow the principles outlined below.
Your franchise agreement contains many provisions in addition to those requiring you to do what you are told and pay money to your franchisor on time. You probably never read them, and if you did, you didn’t appreciate what they mean. There are many “boilerplate” (contained in every franchise agreement) provisions that deal with financial transactions, intellectual property protection, ownership and transfer, consents and rights of refusal.
If you forget about these and do certain things that seem perfectly normal in any non-franchise business context, without following the requirements of the contract, your franchisor may declare you in default, and the default will in some instances not have a cure opportunity. You could simply be terminated and lose everything.
You may have done whatever you did that failed to comply with your obligations under these provisions many years ago. They didn’t affect the day to day operations of your franchise or relate to your normal monthly reporting routines. The fact that the franchisor failed to discover the failure to comply until many years later may not excuse what you did or failed to do.
This is an extract from an article written and first published by Richard Solomon on his website: www.franchiseremedies.com. Richard, who is a Franchise Lawyer based in Texas where of course litigation stemming from breaches of franchise agreements is commonplace, (within a franchise market which is considerably more mature than our own), feels very strongly that the interplay of clauses within an agreement should be considered much as one might write a song with various contrapuntal rhythms. The more complete the agreement, the better it is for both Franchise and Franchisor alike. Indeed, Oddly enough it is often franchisor conduct that, notwithstanding the contract language, gives the franchisee an avenue to outmanoeuvre a breach they are purported to have made. Curiously then, if they are aware of their obligations under the agreement and do manage to find a way to contravene it without prejudicing their position, the clauses within the agreement may be worthless. Which conveniently brings me back to my opening salvo: Your Franchise Agreement- Is it all encompassing?
Of course going to the effort and cost of generating full-proof and all encompassing franchise agreements is pretty pointless if you do not know that an agreement is being breached. Suspicions are one thing and within a network of franchisees, there will be those you suspect of breach and those who you do not. Sending in a franchise auditor to look at potential areas of non-compliance need not be costly, particularly if you generate revenue from that disclosed as a result of the process. Indeed, if your franchise agreement, includes terms where on exceeding certain levels of undisclosed revenue determined, this will make the franchisee liable for the auditor costs.
Deploying an external auditor, can also send a message your network, clean up your sales submissions and your working practices or else and with current research from the other side of the pond suggesting that 15% to 20% of franchisees are under-reporting sales by 15% or more. As a result, locating and correcting under-reporting behaviour can increase royalty revenues by up to 4% annually.
There are therefore two messages from this:
- Make sure the franchise agreement is all encompassing
- Follow through with regular auditing inspections to highlight that you are looking and locate much needed missing revenue from your network
But I am sure you are all doing this already…
Chris Burton
11th September, 2014
All Things Financial 