The acronym VUCA (Volatility, Uncertainty, Complexity and Ambiguity) is often used to describe the actual business environment.
This means, among other things, that any business model must be flexible in order to adapt quickly to the many important and rapid changes that characterize such an environment.
This poses a particular challenge for any franchisor since a fundamental element of its business model is based on a long-term agreement signed with each of its franchisees.
How can a franchisor maintain the flexibility of a business model that is based on a long-term contract with multiple franchisees?
Here are four ways to improve the flexibility of your franchise agreement:
- Reduce the term of the franchise agreement.
A first way to do this is to reduce the initial term of the franchise agreement and by adding to it one or several renewal options conditional upon the signing of a new, updated agreement at the time of each renewal.
Thus, rather than stipulating a twenty-year initial term, the franchise agreement could provide, for example, for an initial term of five years followed by four renewal options in favour of the franchisee of five years each.
Provided the agreement clearly provides for it, a condition of the exercise of each of these renewal options is the execution of the franchisor's new updated franchise agreement.
This allows the franchisor to amend its franchise agreement from time to time to better reflect current business realities while ensuring that all of its current franchisees will be bound by such amended agreement within the next five years.
Of course, there are certain constraints on shortening the term of a franchise agreement, including the franchisee's initial investment (which must be amortized over the initial term of the agreement), the franchisee's financing (which must be reimbursable over the initial term of the agreement) and the term of the lease of the franchised business.
- Optimize the use of the operations manual.
A second way is to optimize the use of the operations manual by properly tying it to the franchise agreement.
A particularity of an operations manual is that it can be modified by the franchisor as its business model evolves.
It is therefore an excellent tool to allow the franchise network to adapt quickly to various changes decided by the franchisor or resulting from changes in the network's environment.
However, there are limits to the changes that a franchisor can impose on its franchisees through its operations manual.
First, the rules and standards imposed by an operations manual cannot contradict the provisions of the franchise agreement.
Second, an obligation imposed by the operations manual must be supported by the franchise agreement, i.e., the agreement establishes the principle of an obligation while the operations manual describes in detail how to comply with it.
In order to optimize the use of the operations manual as a flexibility tool for a franchise network, it is therefore necessary to ensure that the operations manual and the franchise agreement are properly linked.
- Stipulate a clause allowing modifications to the franchise
agreement.
For franchise networks with many franchisees, it is possible to include in the franchise agreement a provision allowing for amendments to the agreement in a clear and specific manner that generally requires the approval of a large majority of the franchisees.
For example, a clause in the franchise agreement could provide that the franchisor has the right to modify the franchise agreement from time to time (including for franchisees who have already signed it) provided that any modification proposed by the franchisor is approved by at least three quarters of the franchisees, often (but not always) calculated on the basis of one vote per point of sale held
In the event of a material change, such a clause may also provide for the right of any franchisee who disagrees with the change to terminate its agreement within a certain period of time (e.g., 60 days) following the approval of such change.
The drafting of such a clause is, however, delicate and raises various legal issues; it should therefore be entrusted to an expert in franchise law.
- Adopt a relational agreement.
A fourth way is for the franchisor to adopt a relational contract which, by its nature, can be modified over time.
For those interested in this approach, we invite you to read our bulletin entitled A Revolutionary Approach to Drafting a Franchise Agreement: The Relational Contract, which describes in detail this innovative approach to drafting a franchise agreement.
The ability for a franchisor to respond quickly to changes in its business environment is an important factor in the success and sustainability of any franchise network. A well-drafted franchise agreement should not pose an obstacle to this flexibility.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
