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BASIC FRANCHISE AGREEMENT TERMS
Basic Franchise Agreement
Terms
One of
the most popular way to start your own company is through a franchise; a business
organization in which a well-known firm with a successful product or service –
the franchisor – enters into a contractual relationship with another business –
the franchisee – that operates under the franchisor's name in exchange for a
fee. Franchise agreements vary from franchise to franchise so it would be
impossible to identify every term and issue that should be considered in all
situation. The checklist should be used in conjunction with the franchise
agreement – the document that will set out all the terms and conditions that
will govern your ownership of the franchise – which will be drafted by the
franchisor. In any event, you shouldn’t sign it until you’ve discussed your
options with your attorney.
Issues relating
to the franchise cost terms
q What is
the initial franchise fee? Is any part or the entire initial fee refundable?
q Does it
include an ‘’opening'' inventory of products and supplies?
q What are
the payment terms: amount, time of payment, lump sum or installment, financing
arrangements, etc.?
q Does the
franchisor offer any financing, or offer help in finding financing?
q Are there
any deferred balances? If so, who finances and at what interest rate?
q Does the
contract clearly distinguish between ``total cost'' and ``initial fee,''
``initial cash required,'' or ``initial costs,'' etc.?
q Are there
periodic royalties? If so, how much are they and how are they determined?
q How and
when are sales and royalties reported, and how are royalties paid?
q If royalty
payments are in whole or part payment for services by the franchisor, what
services will be provided?
q Are
accounting/bookkeeping services included or available?
q How are
advertising and promotion costs divided?
q Is a
specified amount of working capital required of the franchisee to cover
operating costs until profits can be made?
q Must
premises be purchased or rented, and are there further conditions on either of
these (from franchisor, selected site, etc.)?
q How and by
whom will the building be financed, if purchased?
q Does the
franchisee have to make a down payment for construction and/or equipment?
Issues
relating to the franchise location terms
q Does the
franchise apply to a specific geographical area? If so, are the boundaries
clearly defined?
q Who has
the right to select the site?
q Will other
franchisees be permitted to compete in the same area, now or later?
q Is the
territory an exclusive one, and is it permanent or subject to reduction or
modification under certain conditions?
q Does the
franchisee have a first refusal option as to any additional franchises in the
original territory if it is not exclusive?
q Does the
franchisee have a contractual right to the franchisor's latest products or
innovations? If so, at what cost?
q Will the
franchisee have the right to use his own property and/or buildings? If not,
will the franchisor sell or lease his property to the franchisee?
q Who is
responsible for obtaining zoning variances, if required?
Issues
relating to the buildings, equipment and supplies terms
q Are plans
and specifications of the building determined by the franchisor? If so, does
this control extend to selection of contractor and supervision of construction?
q Are there
any restrictions on remodeling or redecorating?
q Must
equipment or supplies be purchased from the franchisor or approved supplier, or
is the franchisee free to make his own purchases?
q When the
franchisee must buy from the franchisor, are sales considered on consignment? Or
will they be financed and, if so, under what terms?
q Does the
agreement provide for continuing supply and payment of inventory (by whom,
under what terms, etc.)?
q Does the
franchise agreement bind the franchisee to a minimum purchase quota?
q What
controls are spelled out concerning facility appearance, equipment, fixture and
furnishings, and maintenance or replacement of the same? Is there any
limitation on expenditures involved in any of these?
q Does the
franchisor have a group insurance plan? If not, what coverage will be required,
at what limits and costs? Does the franchisor require that it be named as an
insured party in the franchisee liability coverage?
Issues relating to the operating practices terms
q Must the
franchisee participate personally in conducting the business? If so, to what
extent and under what specific conditions?
q What
degree of control does the franchisor have over franchise operations,
particularly in maintaining franchise identity and product quality?
q What continuing
management aid, training and assistance will be provided by the franchisor, and
are these covered by the service or royalty fee?
q Will
advertising be local or national and what will be the cost-sharing arrangement,
if any, in either case?
q If local
advertising is left to the franchisee, does the franchisor exercise any control
over such campaigns or share any costs?
q Does the
franchisor provide various promotional materials point-of-purchase, mail
programs, etc. and at what cost?
q What are
bookkeeping, accounting and reporting requirements, and who pays for what?
q Are sales
or service quotas established? If so, what are the penalties for not meeting
them?
q Are
operating hours and days set forth in the franchise contract?
q Are there
any limits as to what is or can be sold?
q Does the
franchisor arrange for mass purchasing and is it mandatory for the franchisee
to be a participant buyer?
q Who
establishes hiring procedures initially and through the franchise term?
Issues
relating to termination and renewal terms
q Does the
franchisor have absolute privilege of terminating the franchise agreement if
certain conditions have not been met, either during the term or at the end?
q Does the
franchise agreement spell out the terms under which the franchisor may
repurchase the business?
q Does the
franchisor have an option or duty to buy any or all of the franchisee's
equipment, furnishings, inventory, or other assets in the event the franchise
is terminated for good cause, by either party?
q If the
preceding situation occurs, how are purchase terms determined?
q Is there
provision for independent appraisal? Is any weight given to good will or
franchisee equity in the business?
q Does the
original agreement include a clause that the repurchase price paid by the
franchisor should not exceed the original franchise fee? If so, this eliminates
any compensation for good will or equity.
q Under what
conditions (illness, etc.) can the franchisee terminate the franchise? In such
cases, do termination obligations differ?
q Is the
franchisee restricted from engaging in a similar business after termination? If
so, for how many years?
q If there
is a lease, does it coincide with the franchise term?
q Does the
contract provide sufficient time for amortization of capital payments?
q Has the
franchisor, as required, provided for return of trademarks, trade names, and
other identification symbols and for the removal of all signs bearing the franchisor's
name and trademarks?
Other
points to consider
q Can the franchisee sell the
franchised business and assign the franchise agreement to the buyer?
q Is the
franchise assignable to heirs, or may it be sold by the franchisee's estate on
death or disability?
q Does the
lease permit assignment to any permitted assignee of the franchisee?
q How long
has the franchisor conducted business in its industry, and how long has it
granted franchises?
q How many
franchises and company-owned outlets are claimed, and can they be verified?
q If there
is a trade name of a well-known person involved in the franchise, is he active,
does he have any financial interest; does he receive compensation for work or
solely for use of his name, etc.?
q Are all
trademarks, trade names, or other marks fully identifiable and distinct, and
are they clear of any possible interference or cancellation owing to any
pending litigation?
q What is
the duration of any patent or copyright material to the franchise? If time is
limited, does the franchisor intend to renew, and is this spelled out in the
franchise agreement?
q Has the
franchisor met all law requirements (registration, escrow or bonding
requirements, etc.), if applicable?
q Are there
laws governing franchisor/franchisee relationships, including contract
provisions, financing arrangements and terminations? If so, does the contract
meet all requirements?
