The franchise agreement and the operations manual are vital components of any franchise relationship. But perhaps the most important factor is the interplay between them
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 and understanding how they interact is vital for anyone looking to enter the franchise sector.
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. These include the rights being given to the franchisee, 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
By contrast, the operations manual is a detailed blueprint for how to run the business. It contains the detail that is missing from the franchise agreement, covering 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 a franchisee is likely to encounter during the day-to-day operation of their 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 its duration. If a franchisor wants to make any changes to the franchise agreement, they will usually have to wait until renewal. Given the franchise agreement is thought of as the rules of the game, it makes sense that it should be fixed for its whole 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; on the other, the franchisee needs enough certainty to know what they are signing up to. Striking this balance can be achieved by providing flexibility in the manual and certainty in the franchise agreement.
The franchise agreement will be signed by all of the parties to the agreement and, once signed, it becomes legally binding. The manual is also legally binding, despite the fact that it is not signed by both parties and that changes can be introduced unilaterally by the franchisor. Essentially, this is because one of the franchisee’s obligations in the franchise agreement will be to comply strictly with the manual.
Because of this, the franchisor is able to enforce the provisions of the manual as if they were set out in the franchise agreement itself. As this enables franchisors to take action against those franchisees who fail to follow the manual, this can help them to ensure consistency across the network and maintain the quality of the brand.
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.
But surely if the operations manual is legally binding, shouldn’t it also be taken away for review? In reality, the manual represents the franchisor’s secret sauce; it contains the detailed instructions for operating that type of business. It would be a disaster if a person could obtain 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 in competition.
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, 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 themselves that it covers all of the relevant areas of the business in sufficient detail for them to be able to follow the system.
Two become one
The franchise agreement and manual are two distinct but interrelated documents. A franchise relationship cannot 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.