From generic to strategic: Tailoring your franchise agreement to protect growth and reduce risk

Introduction 

For growing franchisors, evolving risks often extend beyond the scope of initial franchise agreements. Many original agreements rely on generic language – sufficient for a startup franchisor but increasingly problematic as the system matures. As a franchise system expands, so do the complexities and legal demands it faces. A proactive, strategic approach to updating franchise agreements is critical to address the unique challenges that emerge as the system and its market develop. Keeping agreements current and precisely tailored to the franchise system’s specific requirements is essential – not only to ensure compliance but also to safeguard the franchise brand and pre-empt potential disputes. 

Key areas to consider for updating in a franchise agreement  

Here are some areas in franchise agreements that tend to fall behind the franchise system and its current standards: 

1. Franchisee setup and onboarding process: Out of date franchise agreements tend to lack updated terms that reflect the current setup and onboarding requirements for new franchisees. As the franchise system matures, the initial setup process often becomes more structured, with enhanced training programs, support services, and compliance checks. Outdated agreements may omit these evolved standards, which can lead to inconsistencies in franchisee preparedness and brand experience. Updating the franchisee setup provisions is essential to ensure that each new location meets the latest operational standards and receives the support needed for a successful launch and long-term compliance.

2. Franchise fees and financial commitments: Initial franchise fees and various ongoing financial obligations are often set in the early stages of the franchise. However, these financial terms may need periodic review to reflect the current value of the franchise system and economic conditions. Without adjustments, the fee structure may not align with the actual costs of providing support, brand resources, or market positioning, potentially impacting profitability and consistency across locations.

3. Transfer and renewal procedures: Transfer and renewal clauses are key to maintaining quality within the franchise network. Original agreements tend to have standard and generic provisions around franchisee transfers or renewals, failing to address unique changes in ownership or franchisee transitions in the particular franchise system. Updating these terms to include requirements for approval, training for incoming franchisees, and any necessary fees or criteria for renewal ensures that new ownership transitions smoothly and aligns with the system’s standards.

4. Territorial rights and expansion policies: As a franchise system scales, initial territorial definitions often fail to keep pace with new market developments and shifting demographics, particularly in high-growth regions in Ontario, Alberta, British Columbia and other provinces.  As franchisees invest in developing their designated territories, conflicts may emerge over market reach and customer retention. Without updates to the franchise agreements or policies that reflect the franchise system’s evolving experience and strategic priorities, outdated territorial provisions can lead to disputes over market encroachment and competitive overlap, especially in saturated or high-demand regions.

5. Brand standards compliance through renovations and equipment upgrades: To keep up with modern consumer expectations, franchise systems often introduce periodic updates to brand aesthetics, equipment, or facility standards. Older franchise agreements may not have specific-enough conditions to require franchisees to invest in these necessary renovations or equipment upgrades, which can create disputes with franchisees and lead to brand inconsistency and affect customer experience. Updating franchise agreements to mandate compliance with current brand standards, including specific renovation timelines and upgrade cycles, is crucial for sustaining a cohesive brand image across all locations.

6. Technology and data security obligations: With advances in technology and growing data privacy regulations, original franchise agreements often overlook key modern provisions to deal with evolving standards for cybersecurity, data handling, and digital platforms. Updating these areas is critical to ensure that the franchisee network meets current legal and business standards for data protection and online services.

7. Product sourcing and supply chain standards: As supply chains evolve and product quality standards improve, franchise agreements or policy manuals may need revisions to reflect approved suppliers or updated product specifications. Outdated sourcing requirements can impact quality control, cost-effectiveness, and compliance with current industry standards, in addition to conflicts with franchisees about alleged defaults in compliance obligations.

8. Post-termination covenants, including non-competition and non-solicitation: Franchise agreements frequently include post-termination restrictions to protect the franchise system from competitive threats. However, initial agreements tend to lack specificity and have weak prospects of enforceability in court because of the use of generic language, as well as changes in legal standards and market dynamics. As the franchise system matures, these covenants, such as non-competition and non-solicitation clauses, should be reviewed and potentially strengthened to ensure they effectively protect the brand and prevent former franchisees from using confidential information, customer connections, or training to compete directly.

9. Rights to acquire assets and customer lists: An often-overlooked area in franchise agreements is the franchisor’s right to acquire specific assets, customer lists, and proprietary materials from a former franchisee upon termination. These rights are critical for preserving market share, maintaining brand integrity, and minimizing exposure to risks from competing former franchisees. Older agreements may lack comprehensive or specific provisions tailored to the franchise system’s needs, leading to gaps in control over valuable assets. Updating these terms to clearly outline the franchisor’s rights to acquire assets, reclaim customer data, or access operational elements safeguards continuity in customer service and brand standards within the territory. Such updates help protect the franchise’s intellectual property and customer relationships, ensuring the brand’s competitive position remains strong, even amid franchisee turnover or transitions.

10. Dispute resolution and arbitration clauses: The approach to resolving disputes may need to adapt as the franchisor gains experience with specific challenges in franchisee relations. Revising these provisions based on what has worked best for the franchisor can help streamline the dispute resolution process and align with the most effective methods for the franchisor, such as updated arbitration standards or mediation options. 

How to implement changes and case studies

The most typical updates are made to new current-form franchise agreements that the franchisor requires new franchisees to sign. These can also be considered for use in renewing franchisees and on a transfer, assuming that the old franchise agreement gives the franchisor the right to impose its then-current franchise agreement.   

The flexibility for franchisors to make substantial changes during franchise agreement renewals largely depends on the original renewal clause. On one end, some clauses may explicitly grant the franchisor the right to introduce material updates, like increased royalty fees, aligning renewal agreements with the franchisor’s “then-current” terms. On the other end, some renewal clauses may not provide clear authorization for such changes, leaving room for potential disputes. 

In key Ontario court decisions such as Timothy’s Coffees of the World v. Switt and Pointts Advisory Ltd. v. 754974 Ontario Inc., courts examined the balance between a franchisor’s right to update agreements and franchisees’ expectations of stability. These decisions illustrate that courts consider factors like prior disclosure, good-faith negotiations, and consistency with system-wide standards when determining if changes at renewal are enforceable. Our article, “Legal considerations when expanding your franchise system”, explores practical guidance for franchisors on implementing updates legally and effectively. 

Franchisors should also consider updating operating manuals and policies, if these are properly referenced in the franchise agreement. Our article “What changes to an operating manual are enforceable?”, provides more information about that. 

Conclusion 

As franchise systems grow, the limitations of generic clauses in initial franchise agreements become evident. While these provisions may suit startup franchisors, they often fall short for maturing systems facing more complex legal and operational demands. Maturing franchisors need to take a proactive approach in updating their agreements. By customizing terms to reflect the system’s unique standards and evolving market landscape, franchisors can better ensure compliance, protect their brand, and avoid disputes as they expand their system. 

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The information contained in this article is provided for informational purposes only and does not constitute legal advice. Readers should not act on this information without seeking professional legal advice from a lawyer experienced in this area. The content in this article may not reflect the most current legal developments, and the application of law can vary in different provinces and territories. As such, the information in this article is not guaranteed to be complete, correct, or up to date. The author and the publisher of this article disclaim all liability for any actions taken or not taken based on any or all of the contents of this site. 

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