The franchisor's bible

The operations manual, we have always been told, forms the engine room of the transaction between a franchisor and its franchisees. Franchisees make great play of the fact that they are not given access to an operations manual prior to signing the franchise agreement. Franchisors jealously guard the contents of their operations manual, which they claim contains vital secrets about their business system and which together with the franchise contract they claim to be their 'crown jewels'.

Yet, it is clear from talking to a number of franchisees and franchisors that, in some cases, only lip service is paid to the operations manual. Indeed, only last year, when advising a prospective franchisee, I came across a franchisor who was selling franchises but admitted that the operations manual was not yet available because it was 'in the course of preparation'.

If you look at some mature franchise networks, it is apparent that the operations manual is all but forgotten, not only by the franchisees (sometimes with good reason because it has become hopelessly out of date) but also
by franchisors.

It is hard to believe that franchisors, who are serious about their business, do not by now know the pivotal role operations manual are supposed to play in a franchise system and the reliance which most franchise contracts place upon them.

On the other hand, many franchisees tend to see the operations manual not as an aide memoire, a source of constant reference and or tool which should enable them to operate the system more efficiently, effectively and profitably but rather as a cumbersome set of rules and regulations which they would rather not have and which in the absence of such choice they would much rather ignore.

What then is it, that this 'bible' of the system should contain, which makes it supposedly so significant?

An operations manual should contain a detailed description of the franchisor's system and how to operate it. There are a number of aspects of running a small business which will be common to all franchised operations such as how to deal with employees, complete VAT returns and comply with other statutory obligations. Other aspects of an operations manual, however, will be more specific to the needs and requirements of each individual franchise. These latter provisions will deal with all manner of things such as the training of staff, stock ordering procedures, opening hours, methods of processing products (if any), payment of fees, accounting and reporting procedures, customer compliant procedures, the franchisor's policies with regard to advertising, marketing and promotions etc. In short, the operations manual should contain in detail the A to Z of running a particular business.

A general misconception is that the operations manual should be one book. That, of course, is not the case. There is no reason why it should not run to several volumes; indeed some mature franchise networks have operations manuals which run to 16 volumes or more, each volume dealing with various aspects of running the business. Furthermore, there is certain material which forms part of the operations manual although it may not necessarily be physically contained within it. For example, in a product retail franchise where the products are described in the franchisor's current catalogue.

The important thing is that the manual should be readily identifiable and accessible to the franchisee.

Problems arise when franchisors fail to ensure that their operations manuals are comprehensive or, indeed, if they set out on the road to franchising with a comprehensive operations manual they subsequently fail to update it. In one particular case I have in mind, the franchisor required his franchisees to make regular accounting reports to the franchisor in accordance with details 'contained in the operations manual'. This provision, amongst other things, was intended to ensure that each franchisee's accounts were kept accurately and up to date so that he could remit the necessary continuing franchise fees to the franchisor. In the event, the operations manual was totally silent on the matter and the franchisee not only failed to make the reports as the franchisor expected but the accounts of that particular franchisee were also in a mess, with the result that the franchisor was never sure as to whether or not he was receiving the correct amount by way of continuing franchise fees. The problem, of course, only came to light when there was a default and the franchisor was seeking to pin down a breach on the part of the franchisee. As long as things were going well and the franchisee was paying what he considered to be correct continuing franchise fees and the franchisor was receiving what he thought was the correct amount, the issue never surfaced.

In another case - a franchised retail business, the franchisee was required to purchase all its requirements of certain types of products 'described in the operations manual' only from the franchisor and from no one else. In that case the operations manual contained no description of the particular products in question and the franchisor was then somewhat puzzled when advised that it would be somewhat difficult to terminate the franchise agreement because a franchisee has infringed this particular provision in the contract. Curiously enough, after the deficiency in the operations manual had been put right another franchisee, within the same network, was held by the franchisor to be in breach of the same provision in its franchise agreement. In this case the error lay on the part of the franchisee because he had failed to file, in his operations manual, the update he had received from his franchisor. In effect, this particular franchisee was operating from an operations manual which was different from that used by the other franchisees in the network.

Some franchisors wonder why, given the length of these agreements, there should be any need for an operations manual at all. Simple. Provisions in a franchise agreement last for the duration of the franchise agreement and are incapable of being amended unilaterally by a franchisor. Any change to the franchise agreement will need the consent of all the parties who have signed it.

Given that a franchise is the commercial enterprise which is of an ongoing nature, there is a genuine requirement on the part of the franchisor to make changes to its operating system. Matters of an operational nature will perforce need to change in the light of experience and circumstances. 
Furthermore most franchisors have an obligation to expend resources

in research and development to develop, improve, enhance etc. the system. There is little point in a franchisor doing this if it is then unable to introduce such improvements to its network because the only means by which it can do so is by persuading all franchisees to agree to a variation of their franchise agreement.

Hence the operations manuals. The operations manual provides the mechanism which enables changes of an operational nature to be made on an ongoing basis without the need for the franchisor to seek its franchisees' consent. If the minutiae of the franchisor's operating system were to be recorded in a franchise agreement it would run considerably longer than 60 pages and would undoubtedly constrain a franchisor in the future.

While a franchise agreement is expected to set out the rules by which the game is to be played, the operations manual spells out how the game should be played.

It is for this reason that advisers advise franchisors to incorporate into their operations manuals the detail of running the franchised business and to make maximum use of it in terms of the day-to-day operation of the franchised business.

Any franchisor who ignores this valuable tool does himself a great disservice.

Franchisors should not expect to succeed in any proceedings against a franchisee for a breach of the franchise agreement where that breach is alleged to be of a term in the operations manual if it is, in fact, omitted from it.

Franchisees will only have themselves to blame if they do not ensure that the copy of the operations manual in their possession is kept up to date with the amendments received from the franchisor.

The moral of the story, both for franchisor and franchisee, is:

1. Don't underestimate the value and importance of the operations manual
2.Remember to make changes to the operations manual in keeping with changes to the system and ensure that all copies are updated
3. Treat the operations manual and its function within the scheme of things with the respect it deserves.