Franchise fees and franchise agreement enforcement

As the economy starts to slowly reopen, franchisors will need to consider what concessions should be made in relation to their network’s usual standards and procedures.

Depending on the kind of business the franchisor’s network is engaged in, this could look quite different from network to network. However, to ensure the best possible reemergence from the COVID-19 period franchisors should carefully consider what sorts of concessions will help their network to quickly return to its pre-pandemic position.

Some of the potential concessions franchisors should consider may include:

• Reduction of fees. Where franchise fees are based on turnover there is a natural adjustment if turnover falls, or a business needs to temporarily close. A further fee reduction may be a necessary concession to ensure franchisees survive the current downturn. Determining the extent of a fees concession is best done on a case-by-case basis, as not all franchisees will have been affected equally. While no specific regulation has obliged franchisors to take any certain position on fee concessions, the government appears to be expecting franchisors to take their share of the losses. The concept of proportionality is a useful guiding principle, as it has been used in the leasing context between landlords and tenants. On the other hand fees may need to remain at a higher level to ensure the survival of the franchisor – franchisees have little future if their franchisor cannot survive.
• Operating hours. The hours that franchisees are able to operate may vary State to State and even region to region depending on the level of continued government restrictions. Permitting concessions in operating hour requirements may be a helpful way to ensure franchisees can best operate their business to maximize sales during peak periods, which have certainly shifted in the present climate. Discussions with landlords may also be necessary in this context.
• Alternate product/service delivery. The swift change in how consumers are prepared to obtain and consume products and services may necessitate a quick adoption of alternate product or service delivery methods that your network has perhaps not previously entertained. For example, in the retail food space, the adoption of third-party delivery platforms has been an essential key to maintaining viability. For service providers, alternate service delivery procedures may also be required to ensure that the service can be delivered while complying with social distancing regulations.
• Local marketing concessions. Marketing might look quite different in the current climate and during the reemergence to normal conditions. It might not be appropriate or helpful for franchisors to require the same level or type of local marketing engagement and spend as was expected and required prior to the pandemic’s onset. Some relief from the requirement to pay marketing levies may be important. On the other hand, some franchise systems may feel it is wise to increase marketing expenditure to expand market share.
• Product/service changes. Some businesses have entirely changes their product/service offering to remain viable in the present climate. For example, some businesses with manufacturing capability have switched to manufacturing health products such as hand sanitizer. In the food space, franchisor’s might consider whether a new offering such as delivery of fresh produce or ‘DIY’ at home meals will help franchisees cope with the number of people braving restaurants remaining low.

It is important for franchisors to properly document any temporary concessions made to their networks. This may be via a simple letter acknowledging a temporary acquiescence to a change, or via a formal variation to the Franchise Agreement.

Depending on the kind of concession the documentation may vary. For example, franchisors should consider whether a particular concession, such as operating hours, will apply to the whole network or to select franchisees who continue to face harsher government restrictions due to their size or location.