The main documents in every franchise are the recruitment prospectus, the franchise agreement (FA) and the operations manual (OM). Each is important but the latter is often overlooked. It can be argued that it holds a key to avoiding franchise problems and disputes.
The typical chain of events that takes place in the recruitment process is that a prospective franchisee will look at the franchise prospectus, meet the franchisor, read the FA and decide to join. Once the FA is signed, it will probably be put in a drawer and forgotten. The OM may be used during training, but after that, it will probably gather dust on a shelf. If it is in digital form, as most now are, it will languish in a folder somewhere in the franchisee’s computer. If this happens, it will be a serious missed opportunity for both the franchisor and the franchisee.
It is fundamental that the FA will require the franchisee to comply with the OM. As every business must adapt to outside forces such as changing markets, new technology and different legislation, the OM will need to be revised accordingly. The changes will be made by the franchisor, but consent of the franchisees is not required. This provides the franchisor with an opportunity to unilaterally make changes to the business. Significantly, this isn’t possible with the FA, where any changes require the agreement of both parties. This factor is sometimes a major benefit to the franchisor and could represent an area of vulnerability for the franchisee.
The FA will almost certainly require the franchisor to promote and develop the business. As this inevitably involves making occasional changes, which should be enshrined in the OM, a lack of revisions could be an indication that the franchisor isn’t properly developing the business. At the very least, it would show that changes are not being correctly documented. This factor could be important to the franchisee when doing due diligence prior to joining. It could also be a factor in the event of a dispute because it could imply negligence or dereliction of duty by the franchisor.
With regard to due diligence by a prospective franchisee, most recruitment prospectuses state that the OM will be made available for inspection. For obvious reasons, this will only be at the offices of the franchisor and no copying is permissible. A glaring omission on the part of most prospects is that they very rarely take advantage of this opportunity.
Anyone who is considering franchising their business should understand the importance of developing a clear and concise OM. If this is difficult because it is a business that makes a large percentage of profit through speculative opportunities, it could be unsuitable for franchising. The same applies if the business is heavily reliant on the personal contacts or personality of the owner rather than a model that can be easily replicated. If the business is suitable for being developed into a franchise, it should be possible to write down a set of instructions and processes that, if followed, will provide the projected level of return for the franchisee. If the OM is muddled or incoherent, it is sensible to avoid it.
The development and drafting of the OM are probably the most important things that a prospective franchisor has to be concerned with. For this reason, the use of a franchise consultant or specialist OM writer is highly desirable. The drafting of an OM is not a simple matter and a sizeable budget should be allowed. The resulting document will need to include how to set up the local branch, capture sales, deal with customers, deliver the goods or services, follow reporting procedures, comply with legislation and deal with suppliers. If staff are needed, there should be a section to explain recruitment, training and human resources issues. Also, how confidential IP should be protected.
As previously stated, the FA is also a key document. As franchising law is involved, it should be drafted by a specialist solicitor. The solicitor will need to tailor the agreement to the specifics of the business, and the task will be greatly simplified if they have access to a well-written OM.
For all these reasons, it can be argued that the OM is the foundation stone on which all franchises are based. An appreciation of it can assist both franchisees and franchisors to avoid franchise disputes and related problems.
Important takeaways:
If you are considering investing in a franchise, take the opportunity to look closely at the OM and see how frequently it has been revised. It will provide you with an understanding of how complex the business is and assist you in deciding if this is the right franchise for you.
If you are a franchisor, make sure that you are using the OM to document every change in working practices and promulgating them to your franchisees by issuing addendums. Doing this will not only assist your franchisees but will also avoid problems by demonstrating compliance with any obligations in the FA to develop and promote the brand.
If you are considering franchising your business, you should appreciate that the OM is probably the most important document that you will personally have to deal with. Give it the time and attention that it deserves. Lawyers will draft your FA, franchise consultants can deal with most of the other matters, including finalising the OM, but you are the only person who knows how the business operates and what processes your future franchisees will need to follow. Getting this right at this stage will assist in avoiding problems later.
