Member Article

Benchmarking is a vital tool in the development and improvement of a franchise network, and will benefit franchisees and franchisors alike.

A good benchmark, whether financial and/or operational requires the communication of accurate and relevant documents and information between the franchisee and the franchisor, which is best organised in a clear and detailed manner in the franchise agreement.

As there are no specific rules governing such reporting clauses, the parties have considerable freedom to define their content. In this blog post, we highlight 5 essential principles that need to be taken into account when drafting a reporting clause for benchmarking purposes that would be considered reasonable, relevant and valid under Belgian law.

The franchisor must define the documents and information to be communicated for the benchmark

The franchisor must clearly define the documents and information needed to be able to carry out a proper and relevant benchmark. This involves first determining what type of benchmark the franchisor intends to operate (e.g. purely financial or also operational).

In our opinion, the franchisor should specifically list the documents and information that it is sure that he/she will need to carry out the benchmark, for example: the annual accounts, the sales figures for the previous month by product category, the monthly wage costs, etc.

In addition, the franchisor could provide in a separate general clause that he/she reserves the right to request any other documents and information that he deems necessary to carry out a benchmark to improve the franchise network, e.g. the results of a specific promotional operation. If this clause is used in a reasonable and justifiable manner, then it should not raise any issues for franchisees.

The clause must set out the reporting terms and conditions

It is not sufficient to list the documents and information to be provided by the franchisee; the terms and conditions governing the communication of such documents and information must also be set out in detail. In particular, a reporting clause should at least define the following elements:

1. the format of the documents and information to be provided (e.g., in writing, in pdf format, etc.) and the means of communication (via a platform or software, by email, etc.);
2. who bears the costs. This is all the more important if the reporting requires the involvement of chartered accountants or auditors, or the purchase of specific software;
3. the frequency with which each document or piece of information must be communicated (e.g. “at the franchisor’s request”, “at the end of each month/quarter/year”) and the deadline by which the communication must be made (e.g. “within 15 days of the request”, “no later than the 7^thday following the end of the previous quarter”);
4. finally, it is important to set out the consequences of failing to provide information or providing incorrect information. The standard penalties provided for in the franchise agreement (most of the time, the termination of the agreement) may not be appropriate for this type of breach. It is therefore advisable to provide for specific, reasonable and graded penalties ranging from a warning or fixed indemnity to the exclusion from the network (for example, for forgery).

The clearer, more precise and detailed the reporting clause, the less argument there will be between the parties about its application.

The clause must be reasonable and not unfair

This goes without saying, but in practice we often see reporting clauses that are excessively burdensome for franchisees, such as for the information to be provided by franchisees, the costs that this can generate or the rights that the franchisor grants him/herself.

Since 1 December 2020, clauses that create a manifest imbalance between the rights and obligations of the parties are considered unfair and therefore null and void. Reporting clauses that are totally excessive and unjustified are not immune.

The franchisor must therefore be reasonable, not only when defining the reporting obligations but also when applying the reporting clause. In particular, this means asking for only the documents it needs and that it will actually use to make his/her benchmark, and setting balanced conditions.

In any case, a reporting clause will have to be assessed on a case-by-case basis, because what seems reasonable for one franchise network might not be so for another. In this respect, it is advisable to justify the rationale and objectives of the reporting clause in writing, both to ensure that it is understood and accepted by the franchisee and to be able to justify it to a court if there’s a dispute.

The parties must consider related clauses

A reporting clause should not be drafted and applied in isolation and should always take into account related aspects, such as:

1. If the reporting is likely to involve personal data, then the parties’ respective roles and responsibilities will need to be analysed to determine the measures required under the GDPR. In principle, the issue of personal data processing is set at the franchise network’s ‘global’ level, i.e. not just for the reporting clause, to the extent processing takes place at other levels (customer files, employees, loyalty cards). Anyway, the franchisor must draft the franchise agreement’s reporting clause and privacy clause coherently.

Of course, this aspect is not always an issue: it is also possible that the reporting does not involve any personal data, either because it is limited to financial information, such as the annual accounts, or because the franchisor receives correctly anonymised or aggregated data.

2. Other clauses may be triggered as part of the reporting obligation, such as confidentiality clauses or clauses protecting IP rights.

The clause must comply with competition law

If the franchisor also operates its own shops, then it will also be a competitor to its own franchisees. This is a case of dual distribution in which the franchisor is also active at the downstream level, and so competes with its independent franchisees. The question arises about the extent to which the franchisor can obtain financial and operational information from its competitors in such a case.

Under EU law, there is an exception for exchanges of information within the framework of a vertical agreement in a dual distribution scenario, allowing such an exchange of information if the following two conditions are met: (i) it is directly related to the implementation of the vertical agreement, and (ii) it is necessary to improve the production or distribution of the contract goods or services. The EU Commission guidelines on vertical restraints confirm that under a franchise agreement it may be necessary for the franchisor and franchisee to exchange information relating to the application of a uniform business model across the franchise network.

However, these guidelines also list a few types of information that in principle do not meet the two conditions above. For example, it is not permitted for the franchisor to ask for information relating to the future prices at which franchisee intends to sell the contract goods or services.

Conclusion

Benchmarking is essential for improving the franchise network, in the interests of both the franchisor and the franchisees. To do this correctly and appropriately, the franchisor needs information and feedback from franchisees in the field.

It is important that the franchisee adheres to this reporting obligation, which implies that it is balanced, justified and uniform throughout the network, but above all that the franchisor uses it to provide a good benchmark for his/her franchisee(s). The franchisor and the franchisee are a team and should as such work together on the benchmark.