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Making performance targets equitable

ByNicola Broadhurst, Stevens & Bolton

After consultation with franchisees on its then Franchisee Forum, the BFA upped the stakes on minimum performance clauses to 70 per cent of bona fide turnover targets.

The subject, however,

remains controversial as there are difficulties in fixing equitable performance targets, particularly in new franchises and those in novel and fast-growing markets.

There is also the risk that

successful franchisees without challenging targets may drift into their comfort zone to the detriment of the system’s market share and the franchisor’s income.

Nicola Broadhurst looks at this contentious issue in the sixth part of her exclusive series for potential franchisors.


he use of minimum performance targets in franchise agreements is

now widespread, even where exclusive rights are not being granted to a franchisee. Yet they still remain one of the most contentious clauses in franchise agreements.

Whilst the use of performance targets

by a franchisor can be an extremely effective way of measuring performance and preserving brand standards they must be realistic. In particular, the conse- quences of failure to meet targets needs to be carefully considered and a clear staggered procedure provided. Any franchisor, whether it is granting

development rights, regional/master franchise rights or single franchise rights, will wish to ensure that the franchised territory is properly exploited and standards maintained. This is particularly important where exclusive rights have been granted as the franchisor is effectively locking itself out of the area. If the territory is not fully or effectively exploited then it offers a potential field day for competitors to step in at their leisure and consequently result in a loss of revenue for the franchisor.

Target clauses Area development and master

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franchise agreements usually deal with this issue by including a development schedule or target clauses in the agreement setting out the number of outlets to be opened or the number of franchisees to be recruited. This approach has been modified for use in single-unit franchise agreements where the performance targets are invariably linked to sales to be achieved and little else. There are two main justifications for minimum performance clauses - motivation and control.

●Nicola Broadhurst is head of the franchise

department at Stevens & Bolton, the Surrey law firm.

● Motivation: Clear written objectives set a standard to aspire to and highlight the potential earning power of the franchise. However, there is no point in having a target unless it is capable of being achieved or enforced. There is a delicate balance to be achieved between ensuring the right level of productivity and profitability to the franchisor and what can be realistically achieved by the franchisee. If it is to be a motivational tool, the target cannot be set too low, but at the same time must not be unrealistically high.

● Control: Minimum performance clauses offer control in two ways. Firstly, they are an effective damage control mechanism providing the franchisor with the early ability to deal with an under- performing franchisee before matters become financially disastrous. Ultimately, the franchisee may be removed from the network, thereby allowing another more motivated individual to step in. This should be a measure of last recourse as no franchisor wishes to have a failure in its network and such a situation is likely to affect the marketability of the territory. Secondly, the clauses help preserve the standards of quality and reliability which the franchisor wishes to associate with the brand. This element of control is more effective where the performance targets are not simply linked to sales, but also to other aspects of the business

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