It Takes Two!

In this month’s article for Elite Franchise Magazine, Kate explores the interplay between the Franchise Agreement and Operations Manual.

It Takes Two –  the Franchise Agreement and the Operations Manual

If Love and Marriage go together like a horse and carriage, then so do the franchise agreement and operations manual.  Together they comprise the two key documents in a franchise relationship.  This article considers the interplay between them.

The Franchise Agreement

The franchise agreement is the legal contract between franchisor and franchisee.  It sets out the high level rules that govern the franchise relationship, including the extent of the rights that the franchisee is being given, the term of the agreement, the obligations of the respective parties, the fees payable, how the relationship can be brought to an end and what happens after the agreement ends.

The Operations Manual

The operations manual is a detailed blueprint for how to run the business.  It contains the detail that is missing from the franchise agreement, including the step-by-step procedures that the franchisee must follow on a daily basis.  This includes procedures for advertising, customer orders, invoicing, staff recruitment, training and discipline, opening hours, complaints handling, maintaining equipment – and everything else that a franchisee is likely to encounter during the day-to-day operation of the business.

The Manual is a Living Document

All businesses need to evolve over time to stay up to date with current trends, exploit advances in technology and meet changing customer demands.  Since the operations manual reflects the operating procedures in the business, it makes sense that the manual will also need to change and be updated from time to time as the business evolves.

This is an important distinction between the manual and the franchise agreement.  Whereas the manual will be updated and changed over time, the terms of the franchise agreement are fixed for the duration of the agreement.  If a franchisor wants to make any changes to the franchise agreement, he will usually have to wait until renewal.  If the franchise agreement is thought of as the rules of the game, it makes sense that the rules should be fixed for the term.

As a result, there is a critical balance to be struck between flexibility and certainty.  On the one hand, there must be enough flexibility to allow the business to innovate and evolve to remain successful.  On the other hand, the franchisee needs enough certainty to know what he is signing up to.  The balance is achieved through flexibility in the manual and certainty in the franchise agreement.

Sometimes, there can be grey areas around the extent to which a franchisor can change the system in the manual without fundamentally changing the franchise and it can be difficult to get the balance right.

Legal Status

The franchise agreement will be signed by all of the parties to the agreement.  Once signed, it becomes legally binding.  The operations manual is not signed by the parties.

A common question is whether the manual is legally binding, given that it is not signed by the parties and even if it was, changes can be introduced unilaterally by the franchisor.  Notwithstanding this, the manual is legally binding.  This is because one of the franchisee’s obligations in the franchise agreement will be to comply strictly with the manual.

This allows the franchisor to enforce the provisions of the manual as if they were set out in the franchise agreement itself.   This is important as one of the ways that the franchisor can ensure consistency across the network and maintain the quality of the brand is by being able to take action against those franchisees who fail to follow the system as set out in the manual.

Disclosure to New and Potential Franchisees

All reputable franchisors will give new recruits a copy of the franchise agreement for them to take away and review before they sign.  Most will also encourage their recruits to have the agreement reviewed by a lawyer with relevant expertise in the franchise sector.

It follows that if the operations manual is legally binding, shouldn’t it also be taken away for review? In reality, the manual represents the franchisor’s Crown Jewels; it contains the detailed instructions for operating that type of business.  It would a disaster if a person could obtain the blueprint for the business together with all of the franchisor’s hard won knowledge and trade secrets, by pretending to be interested in the business; only to use that knowledge to set up as an independent trader without paying any fees.

As a result, the franchisor won’t usually allow potential new recruits to take a copy of the manual until they have signed up to the franchise agreement.  Having said this, the manual is a legally binding document and so the franchisee should be allowed to inspect a copy (usually at the franchisor’s premises) before they sign.  The franchisee should review the manual and satisfy himself that it covers all of the relevant areas of the business and in sufficient detail for the franchisee to be able to follow the system.

Two Become One

The franchise agreement and manual are two distinct, but inter-related documents.  A franchise relationship can not operate effectively unless both documents have been properly drafted and dovetail with each other.  On their own, each document is of limited use, but when taken together, the whole becomes the backbone of the franchise relationship and fundamental to the successful operation of a franchise network.