“FRANCHISE AGREEMENTS: What Prospective Franchisees Should Know About Operations Manuals” is the first part in the UnhappyFranchisee.Com series “Ten Things Every Prospective Franchisee Should Know About Franchise Agreements” by Dan Davis, Attorney, Ichter Thomas LLC
Topic Two: The Operating Manual (aka Operations Manual).
A franchisor-drafted franchise agreement may contain language along the lines of the following:
Operation in Accordance With Operating Manual. In order to protect the reputation and goodwill of the franchised businesses operating under the System, Franchisee hereby covenants to operate the Franchised Business in accordance with the instructions, requirements, standards, specifications, systems and procedures in Franchisor’s Operating Manual, which is incorporated by reference herein. Franchisee acknowledges and agrees that Franchisor may, from time to time, revise the contents of the Operating Manual.
First, be aware that this language makes the Operating Manual part of the franchise agreement. As a result, failing to follow the standards and specifications in the Operating Manual is a “breach” of the franchise agreement as much as not paying the royalty fee.
Have you even seen the Operating Manual?
Many franchisors take the position that the Operating Manual is confidential and will not allow prospective franchisees to review the document prior to the franchise sale; instead, they include the table of contents in the Franchise Disclosure Document (“FDD”). The Operating Manual, however, is likely very long and extremely detailed, and knowing, for example, that the franchisor will regulate selection, maintenance, and replacement of furniture, fixtures and equipment (“FFE”) does almost nothing to allow you to determine the expenses involved with compliance.
Second, the language that allows your prospective franchisor to modify the Operating Manual unilaterally without notice or your consent should be of major concern.
Many, if not most, courts allow franchisors to add to their franchisees’ obligations during the term of the franchise agreement. See, e.g., La Quinta Corp. v. Heartland Props. LLC, 603 F.3d 327, 335-37 (6th Cir. 2010); Nat’l Franchisee Ass’n v. Burger King Corp., 715 F. Supp. 2d 1232, 1244-45 (S.D. Fla. May 28, 2010); King v. GNC Franchising, Inc., No. 04-5125 (SRC), 2006 WL 3019551, at *6 (D.N.J. Oct. 23, 2006). The result, however, is that franchisees may be required to, for example, upgrade their FFE or use more expensive vendors. These sorts of costs can radically change the economics of your business and make the franchisor’s then-current financial performance representations (see Item 19 of the FDD) useless.
The bottom line: negotiate with your prospective franchisor!
Tell them you will not sign anything until you can review the Operating Manual (although you should be willing to promise to keep its contents confidential, which may require signing a non-disclosure agreement).
In addition, tell the franchisor you want language to the effect that they cannot update the Operating Manual if the result will be significant or material financial harm to you.
If you would like some assistance with the due diligence process or you are already in a franchise relationship and mid-dispute, I’d be happy to help. Give me a call at 404-869-5261.
Dan Davis, Ichter Thomas, LLC, Atlanta, Georgia
See Dan’s profile and articles in our Franchise Attorney Directory: Dan Davis, Attorney
This blog includes information about legal issues. Such information is for informational purposes only and is not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. If you want advice or guidance on a specific legal problem, you should contact an attorney. Receipt of this information, use of the same or both is not intended, and should not be construed so as, to create an attorney-client relationship between you and Ichter Thomas, LLC or any of its lawyers.
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tags: Franchise agreements, franchise information, franchise due diligence, franchise operations manuals, franchise operating manuals, franchise law, Dan Davis, attorney Dan Davis, Franchise Attorney Dan Davis, Ichter Thomas law firm, Georgia franchise attorney, Atlanta franchise attorney
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