Agreements in Franchising and Confidential Operations Manual And Specifications

How important is it to have the confidential operations manual in a franchise company? Indeed, it always amazed me how many franchise companies would start out without ever having written their confidential operations manual. They may have had 20 years experience in a small business model, identical to the one they wish to franchise, however they had never written to manual.

I recommend “E-Myth” By Gerber and perhaps this will address some of what I am trying to say. The consistency and integrity of a franchise system and its brand-name rely on a duplicatable method of doing business. The confidential operations manual and it’s specifications must be followed consistently by each franchise outlet. In fact, this issue is so important that I have copied the clause in my franchise company’s franchise agreement, which addresses this issue;

3.7 Confidential Operations Manual And Specifications

For Initial And On-Going Equipment, Inventory And Supplies Our industry is highly competitive. Continuous efforts to maintain, update and improve the System are essential. The developments Franchisor will make for the benefit of the System as a whole are contemplated throughout the term of this Agreement. The continuous development of the System in this manner is an important and beneficial aspect of the relationship Franchisee wants to have with Franchisor. Franchisor agrees to provide Franchisee with one password to access the loaned copy of The Car Wash Guys Confidential Operations Manual once Franchisee has paid to Franchisor the Initial Fee, in full. The Confidential Operations Manual contains the System, including specifications, standards, operating procedures, accounting and bookkeeping methods, marketing ideas, inventory requirements and control techniques, wash unit plans and specifications, equipment and sign requirements, public relations and other rules that Franchisor may prescribe from time to time. The Confidential Operations Manual is and will remain confidential and Franchisor’s exclusive property. Franchisee will not disclose, copy or duplicate any part of the Confidential Operations Manual for any reason.

Franchisor develops minimum requirements for wash products, chemicals, merchandise, inventory, supplies, stationary, business forms, advertising, decor, wash unit plans and specifications, materials, equipment and signs, among other things. These requirements are outlined in the Confidential Operations Manual. Franchisee will purchase all wash products and inventory items specified in the Confidential Operations Manual. Franchisor may amend the Confidential Operations Manual, including changes, which may affect minimum requirements for the franchise operations. Franchisee will strictly adhere to the requirements of the Confidential Operations Manual as Franchisor amends it from time to time. Franchisee will implement immediately all changes at Franchisee’s cost, unless Franchisor otherwise specifies. Franchisor reasonably may restrict Franchisee from producing, stocking, and selling certain items and goods, from time to time, as specified in the Confidential Operations Manual.

Franchisee may purchase some wash equipment, inventory, and supply items from Franchisor, if offered, at Franchisor’s then current prices. If Franchisee desires to purchase any items from Franchisor, payment arrangements must be made when Franchisee places their order. The items Franchisor may offer include among other things equipment, merchandise and supplies that bear the Service Marks. Franchisee must purchase all wash products, supplies, chemicals and inventory items from Franchisor, if offered, or suppliers Franchisor approves from time to time.

Franchisor will not be liable to Franchisee if Franchisor is unable to deliver equipment, inventory, chemicals or supply items to Franchisee because of any loss, damage, or delay caused by strikes, riots, fire, insurrection, war, elements, embargoes, national or local holidays, failure of carriers, inability to obtain transportation facilities, forces majeuer, acts of God or of the public enemy, or any other cause beyond Franchisor’s control.

Franchisee must purchase all equipment, chemicals, products, supplies and materials required for the operation of the Franchise from manufacturers, vendors, suppliers or distributors approved by Franchisor. All specifications that Franchisor requires of Franchisee and lists of approved vendors and suppliers will be included in the Confidential Operations Manual and the Franchisee Forum intranet system. Franchisor will use their best judgment to set and modify specifications in order to maintain the integrity and quality of the franchise system.

Additional car wash trucks/units and related equipment must be purchased through Franchisor, if offered, or from a list of approved vendors. Franchisee understands that the prices of such equipment bought from Franchisor may be raised or lowered by Franchisor from time to time due to increases or decreases in prices by Franchisor’s vendors. Franchisee further understands that items Franchisee buys from vendors might also change in price.

Upon advance written request, Franchisee may request Franchisor approval to obtain equipment, chemicals, products, supplies or materials from sources that Franchisor has not previously approved.

Franchisor requests that Franchisee seek out manufacturers, vendors, suppliers and distributors in their Marketing Area to continually expand the approved vendors and products available to franchisees systemwide. Franchisor additionally requests that Franchisee seek out new services, concepts, technologies, materials and methods from their Marketing Area that can be introduced to continually update, improve and expand the System and keep all franchisees system wide on the leading edge.

Franchisor may require Franchisee to give Franchisor sufficient information, photographs, MSDS sheets, drawings, samples, and other data to allow Franchisor to determine whether the items from these other sources meet Franchisor specifications and standards, as established from time to time. These specifications and standards will relate to quality, texture, composition, absorbency, strength, finish and appearance, and the suppliers’ capacity and facility to supply Franchisee’s needs in the quantities, at the times, and with the reliability necessary for efficient operation. Franchisor may require that samples from any supplier be delivered to a designated independent testing laboratory for testing prior to approval and use. Franchisee will reimburse Franchisor for the actual cost of the tests. Franchisor will license any supplier, that can meet or exceed Franchisor quality control and confidential formula requirements and standards, for a reasonable license fee, to produce and deliver products to Franchisee but to no other person.

Franchisor confidential manufacturing requirements, equipment, designs, systems and formulas will be disclosed to potential suppliers only after Franchisor has received reasonable evidence that the proposed supplier is trustworthy and reputable; has the capacity to consistently adhere to Franchisor standards, requirements and testing procedures; will maintain the confidentiality of the designs, systems and formulas; and will adequately supply Franchisee’s reasonable needs. Franchisor will not unreasonably withhold approval of a supplier Franchisee proposes. Franchisor will notify Franchisee in writing of the approval or disapproval of any supplier Franchisee proposes.

From time to time Franchisor or their agents may inspect any approved manufacturer’s, supplier’s or distributor’s facilities and products to assure proper production, processing, packaging, storing, and transportation. Permission for inspection will be a condition of Franchisor’s continued approval of any manufacturer, supplier or distributor. Should Franchisor determine from any inspection that a manufacturer, supplier or distributor fails to meet Franchisor’s specifications and standards, Franchisor will give written notice describing this failure to Franchisee and to the manufacturer, supplier or distributor, together with a notice that unless the failure or deficiency is corrected within thirty (30) days, the manufacturer, supplier or distributor will no longer be approved.

All initial transactions with vendors must be negotiated by Franchisee prior to the opening of the Franchised Business. Franchisee must purchase the required items through Franchisor’s approved vendors and sources, have taken receipt of, installed in Franchisee’s mobile car wash truck/unit and have fully operational all required items within one hundred thirty-five (135) calendar days of signing the Franchise Agreement.

Franchisee will find all specifications for the initial equipment in the Confidential Operations Manual and the Franchisee Forum intranet system. If Franchisee does not have all required equipment ready within one hundred thirty-five (135) calendar days due to circumstances beyond Franchisee’s control, Franchisee agrees to borrow a loaner unit to start the Franchised Business if one is available and Franchisor offers it to Franchisee.

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Although our little franchising company was very simplistic you can see how important this issue was to us. Each franchising company needs to get with legal counsel and a competent franchise attorney to strategize how best to address this issue in the franchising agreement. So, consider this in 2006.

Mobile Based Franchising and Liability Insurance Issues in Franchising Agreements

Mobile based franchising companies must consider the potential eventuality of being sued or named in a lawsuit, which is directed at a franchisee due to a traffic accident while conducting the franchise outlets business operations. In places like New York, California, Washington D.C. the number of lawsuits from traffic accidents are astounding. Without protection and separation from the franchise outlets, a franchisor might unnecessarily open themselves up for liability issues of one of their franchisees.

It is for this reason that in my franchising agreements are decided to spend special attention to the clauses regarding insurance, limits of liability and operations of vehicles in the franchise business. Below is a copy of the clause that I inserted into our franchise agreements;

3.21 Insurance

3.21.1 Limits of Liability

Prior to the commencement of any operations under this Agreement, Franchisee must maintain, at their sole expense, a business liability, comprehensive and completed operations insurance policy or policies in accordance with standards and specifications set forth in the Confidential Operations Manual, which must include at a minimum the following coverage:

(a) Comprehensive general liability insurance, in the amount of $100,000 bodily

injury per occurrence and $50,000 property damage per occurrence;

(b) Vehicle insurance in the amount of $100,000 single limit, including

comprehensive and collision;

(c) Worker’s Compensation and Employer’s liability insurance (if Franchisee

has employees); and

(d) Equipment insurance for the value of all The Car Wash Guys equipment.

If Franchisee finances the equipment, the lending institution may also require Franchisee to maintain fire/theft/comprehensive insurance for the value of that equipment.

3.21.2 Additional Insured

Franchisor shall be named as an additional insured under all insurance policies, as its interests may appear, and contain a waiver by the carrier of all subrogation rights against Franchisor. Maintenance of insurance under this paragraph shall not relieve Franchisee of liability under the default provisions set forth in this Agreement.

3.21.3 Other Requirements

Franchisor may, at its discretion, change the required coverage and the limits of liability for Franchisee’s insurance during the term of this Agreement. Franchsior may require Franchisee to increase the minimum limits of coverage to keep pace with regular business practice and prudent insurance custom. In the event Franchisor does this, Franchisee may be paying a higher or lower premium.

The insurance will not be limited in any way because of any insurance Franchsior maintains. The insurance will not be subject to cancellation except upon twenty (20) days’ written notice to Franchsior. Certificates of Franchise’s insurance policies will be kept on deposit with Franchisor. Maintenance of the required insurance will not diminish Franchisees liability to Franchisor under the indemnities contained in this Agreement.

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If you run or operate the mobile franchise company you must pay attention to the insurance issues and make sure you or additionally insured to prevent risks to your financial health as a franchisor. You will need to contact the franchise attorney to make sure the clause in your contracts is up-to-date, considers all the recent case law and is liable for the jurisdiction of your franchise company and the jurisdiction of the franchise outlets where you will be selling these franchises. Make sure you get a franchise attorney who is knowledgeable inexperienced in this area. I hope you will consider this in 2006.