System standards are rules, policies, and techniques that a franchisor requires a franchisee to follow to help maintain the consistency and quality of a franchise. For example, system standards determine franchise location, design, products and services, equipment use, marketing, and even methods of operation. Thus, it is no surprise that system standards are “the glue that holds a franchise system together.” In fact, there are several categories of system standards.

  1. Health and safety standards. These standards help franchises to operate safely and to comply with safety laws. Not to mention, they ensure customer, employee, franchisee, and community safety. For example, food service franchises may require food to be stored, handled, cooked, and packaged a certain way, and employees may have to follow certain sanitary requirements. Another example are fitness franchises, which may require equipment to be clean and sanitized properly and require staff to be certified. Similarly, hotel franchises may have security-related rules to ensure the safety of guests, which can include fire, food, and amenity safety measures.
  2. Trademark and trade dress standards. These standards are important because trademarks and trade dress help consumers identify a franchise.
  3. Operational system standards. These standards cultivate uniformity, brand identity, customer experiences, and even the culture within a franchise system. They might include things like business hours, point-of-sale software use, reporting, and even how products are made or how services are provided.
  4. Financial standards. These standards help franchisees follow a consistent system on reporting sales, managing accounts, and collecting and reporting performance markers. These data points help franchisors and franchisees to assess whether the franchise is operating properly.
  5. Reinvestment standards. These standards ensure that franchisees are maintaining and updating franchise conditions. Some examples may include renovations, replacing fixtures, equipment, or furniture, and upgrading technology. Thus, franchisees may be required to address franchise conditions on a periodic basis.
  6. Suppliers or vendors standards. These standards require franchisees to purchase products or supplies from specific vendors or suppliers. These standards are meant to provide consistency and uniformity to consumers. For example, food service franchises may require franchisees to order their food from a pre-approved supplier or hotel franchises may require franchisees to purchase their towels and soaps from a specific vendor.

Though there are a number of system standards to consider within a franchise system, these six categories are some of the most important and worth noting. After all, system standards are what hold a franchise together.

Best Practices for Modifying System Standards

There are several important considerations that a franchisor should pay particular attention to when updating or modifying system standards.

First, a franchisor should identify and keep the system standards that are critical to the franchise. Some of these critical system standards may include trademarks, trade dress, and the products and services provided by the franchise. Thus, as a best practice, franchisors should be wary of waiving system standards that are critical to the franchise.

Further, a franchisor should also avoid waiving any health and safety standards. Health and safety standards are some of the most important standards within a franchise system, and safety should always remain a top priority. Additionally, maintaining high standards minimizes a franchisor’s exposure to litigation and damage to a franchise’s brand and goodwill. Additionally, it is important to minimize reputational risk. Thus, waiving health and safety standards may also impact how the public views a franchise and may determine a franchise’s credibility.

Moreover, franchisors must ensure they are complying with applicable laws when updating or modifying system standards. Franchisors may either remind franchisees of the local laws and ordinances or implement the strictest requirements under the law. Additionally, franchisors should also consider the legal risks with waiving a standard and should make sure that franchisees are following proper legal procedures. Finally, a franchisor may also consider any effects the updates and modifications may have on the franchise. Thus, it is important to document proposed updates and modifications with any potential risks, costs, or legal implications.

How to Enforce System Standards

In general, enforcement mechanisms are meant to address deviations from system standards and to protect the franchise brand. First, a franchisor may consider investigating deviations by visiting the franchise. During investigations, a franchisor may have an employee or third-party conduct audits, which can include financial, quality assurance, customer experience, or regulatory issue audits. Additionally, a franchisor is encouraged to communicate with the franchisee to address deviations and consider potential remedies. Second, if investigations or communications with a franchisee are unavailing, a franchisor may issue a default or termination notice. A notice of default formally informs franchisees that they must comply with system standards and address any deviations from those standards, or face termination. Third, and as an alternative to default and termination notices, franchisors may charge non-compliant franchisees enforcement fees. These fees incentivize franchisees to comply with system standards and help franchisors to recover the cost of conducting investigations. Lastly, a franchisor may also want to consider interim remedies, such as performance plans, enhanced inspections, or quality assurance evaluations that help improve a franchisee’s compliance with system standards. Interim remedies help to protect the franchise brand and help the franchisor avoid termination, which can be time-consuming and quite expensive.

However, if a franchisor has engaged all plausible enforcement mechanisms and the only way to protect the franchise is by terminating the franchise relationship, then it is in the best interest of the franchise to terminate that relationship.

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