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which the franchisor considers essential, such as the number of complaints, waiting times where the franchise offers product delivery, the ratio of products sold, and so on. However, if the minimum performance clauses are to set a true standard then they must be monitored on a regular basis, e.g. quarterly, and enforced uniformly.

BFA guidance

The BFA issued guidance on the setting of performance targets in September, 2008. Essentially the franchisor must act reasonably. It is usual in franchise agreements

for performance targets to be linked to a percentage of the gross turnover to be achieved by the franchisee, usually in each year or quarter. These targets are expressed as minimums and the BFA after consultation with the franchisees on its Franchisee Forum increased its recommendation for this target figure to 70 per cent of the average gross sales projected for the network. However, the BFA acknowledged that even this 70 per cent figure may be unreasonably low in a business where turnover levels increase significantly in later years. Increasingly certain franchisors are adopting even higher percentage figures, e.g.75 to 80 per cent. This figure is important as it also

affects the funding that is likely to be available to a potential franchisee. Banks will be less likely to lend to a franchisee if they consider that the latter will be faced with onerous targets that may result in the termination of the franchise agreement if they cannot be achieved and as a result leave the bank at risk.

It is essential, therefore, that professional advice be sought by franchisors at the outset to ensure that any targets are pitched accurately and will not prove to be a deterrent to recruitment. This is not so much of an issue where the franchise concept is well established and has been tried and tested, but the difficulties arise where the concept is new and novel. Too often the franchisor bases these targets on its own trading experience, rather than that of any pilot operation, which usually results in the figure being set far too high and inevitable failures.

In order to appear ethical and

reasonable a franchisor would be well advised (if it lacks actual trading data to substantiate minimum performance

targets) to link these to 70 per cent of the average gross revenues actually achieved by other members of the franchise network who have been trading for a similar period. This presents an objective benchmark and complies with the BFA’s recommendation. Some franchisors attempt to link

performance targets to objectives set out in business plans which can be reviewed annually. This gives greater flexibility to the

franchisor, but can be used unfairly against a franchisee, particularly if the franchisor can simply impose targets on a franchisee if they can’t be agreed. In such cases, it is essential that an objective benchmark is used to control the franchisor’s discretion. Therefore, if a sales target is to be imposed this should not exceed 70 per cent of the average sales actually achieved by the franchise network.

Drawback The drawback of imposing a

performance target becomes apparent particularly in the case of exclusive franchised territories where a franchisee is more easily satisfied with the return than the franchisor would be in the same situation. The minimum target is achieved with comfort and the franchisee sits back content, refusing to make the effort to take the business beyond his comfort zone. Some franchisees are simply less driven than others. One of the essential rules of franchising is that there should be uniformity as much as possible throughout the network. Therefore, it is unrealistic to set different performance targets for each franchisee. In this case, the franchisor may well look to other ways of motivating the franchisee, usually by offering some form of financial incentive, such as staggered fee thresholds for those who are more successful, or other rewards and incentives. It is clear that minimum performance targets cannot be relied on solely as a motivational tool.

Failure sanctions The consequences of failure to

achieve targets varies, depending on how they are used by the franchisor. Sometimes a franchisor simply uses a performance target as a condition of renewal. In this situation, a higher target is often justified, given that a franchisee may in reality be unwilling to renew if it is achieving less. This often causes less argument than targets imposed during the

46 April/May 2013

term, but clearly as a control mechanism it is of limited use. Where performance targets are imposed during the term a franchisor should ensure that they are monitored frequently and a clear staggered procedure put in place where a franchisee fails to achieve its targets. A franchisor should be willing to work closely with an underper- forming franchisee.

The ultimate sanction for failure to

achieve targets is invariably termination of the agreement by the franchisor. This is, however, a radical solution and often has a negative effect as it demoralises the network and attracts bad publicity. It also calls into question whether the minimum performance targets are realistic, implying that the franchisor’s main purpose is to make money at the expense of its franchisees or, even more disturbing, that the potential earning power of the franchisee has been inflated. There are measures that can be taken without resorting to termination, such as reducing the size of the territory, or removing exclusivity where an exclusive territory has been granted. Although, in the latter case it may be hard to attract another franchisee to take on the area, it will allow the franchisor to supply customers directly, or through others in the network, and thereby ensure the demand for its product/service is satisfied. These options, however, must be used cautiously as it is a unilateral right to vary a contractual term and, there- fore, can raise legal and ethical issues. As long as franchisors have the discretion to work with an under-achieving franchisee, who has failed for a good reason, then the use of minimum perfor- mance targets can be a useful monitoring and control mechanism, but they should not be relied upon by franchisors as an easy way out of their continuing obligations to assist their franchisees to succeed.

Key indicators

Franchisors can take a very narrow approach to performance targets choosing to measure simply sales. If instead a broader range of key performance indicators measuring service and reliability are used this would provide a more useful and sophisticated indicator of early problems and an easier argument to justify termination if need be. Performance targets do work, but

must be drafted with care and applied uniformly.


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