The Critical Factors

A franchise agreement is a contract, which is entered into between the franchisor, and the franchisee and sets out the relationship between the franchisor and franchisee. The franchise agreement will usually appear biased towards the franchisor, which is necessary for the franchisor to maintain control over the franchise system. A franchisor is risking its name and reputation on the franchisee's performance, so it is only fair and reasonable that bit has the right to place certain obligations on the franchisee. Consistency amongst franchise units is a cornerstone of successful franchising – and consistency requires compliance.

Despite common beliefs, there is no such thing as a standard franchise agreement, and no two franchise agreements are alike. This is understandable because franchises cover many types of business in many different industries and have different characteristics. A franchise agreement will be just one of the documents that a franchisee will be required to sign. These may include a non-disclosure/confidentiality agreement, offer to purchase agreement, lease (or sublease) agreement, and a security agreement.

Checklist of Basic Franchise Agreement Terms and Conditions

As franchise agreements vary from franchise to franchise it would be impossible to identify every term and issue that should be considered in every situation. However, this checklist should be a valuable tool if you're interested in buying a franchise

Fees, Royalties and Other Costs

How much is the initial franchise fee?

Is any part or the entire initial franchise fee refundable under any circumstances?

What is the total initial investment?

What are the terms of payment?

Does the franchisor offer any financing, or provide assistance in finding financing?

How much are the ongoing royalties and how are they determined?

How and when are sales and royalties reported, and how are royalties paid?

Is the franchisee required to contribute to an advertising fund administered by the franchisor? If so, how much?

How is the advertising fund administered? Is it National, regional or local?

What are the franchisor's responsibilities regarding accounting of the advertising fund?

Franchisor's obligations to the Franchisee

Are accounting/bookkeeping services included or available?

What degree of control does the franchisor have over franchise operations, particularly in maintaining franchise identity and product quality?

Does the franchisor provide an initial training program? If so, where and when is it presented, what is the duration and is the franchisee responsible for any costs such as travel, accommodation and living expenses.

What ongoing management support, assistance and training programs are provided by the franchisor? Are there any additional costs involved?

Does the franchisor provide promotional aids, point-of-purchase materials, mail programs, etc. and at what cost?

Franchisee's Obligations

Is the franchisee required to maintain a specific amount of working capital?

Is the franchisee required to commit full time and best efforts to the operation of the franchised business?

Is the franchisee required to purchase equipment or supplies from the franchisor, or from a supplier approved by the franchisor?

Is the franchisee required to purchase a minimum product quota?

Is the franchisee required to meet specific performance requirements? If so, what are the penalties for not meeting them?

What controls does the franchisor have out concerning facility appearance, equipment, fixture and furnishings, and maintenance or replacement of the same?

Is the franchisee required to purchase all, or some of their products from the franchisor?

Is the franchisee required to obtain insurance coverage as specified by the franchisor?

Is the franchisee required to name the franchisor as an 'additional named insured' on the franchisee liability coverage?

Is the franchisee required to expend a minimum amount with respect to local advertising?

Are operating hours and days set out in the franchise agreement?

Are there restrictions on what the franchisee can sell?

Premises, Locations and Territory

Are premises required?

Is the franchisee required to lease or sub-lease premises from the franchisor?

If there is a lease, does it coincide with the term of the franchis agreement?

Who is responsible for site selection and lease negotiation?

Does the franchisor determine the plans and specifications for the premises?

Is the franchisor or the franchisee responsible for the development of the premises?

Is the franchisor responsible for supervision of development of the premises?

Who is responsible for selecting the contractor?

How is the development of the premises financed?

Are there any restrictions on remodeling or redecorating?

Does the franchisee receive an exclusive territory?

Is the size of the exclusive territory subject to reduction or modification under certain conditions?

Does the franchisee have a first refusal option as to any additional franchises in the original territory if it is not exclusive?

Termination and Renewal

Under what circumstances can the franchisor terminate the franchise agreement?

Does the franchise agreement spell out the terms under which the franchisor may repurchase the business?

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? If so, how is the value determined and what are the payment terms?

What provisions are there in the event of the death or permanent incapacity of the franchisee? Is the franchise assignable to heirs, or may it be sold by the franchisee's estate on death or disability?

Is the franchisee restricted from engaging in a similar business after termination or expiration of the franchise agreement? If so, for how many years and in what area?

Are there alternative methods for resolving a dispute e.g. mediation and arbitration

Term, Renewal and Assignment

Can the franchisee sell the franchised business and assign the franchise agreement to the buyer? If so, what are the conditions of assignment?

Is the franchisee required to pay an assignment fee?

Does the franchisor have the first right of refusal in the event of an assignment?

What is the initial term of the agreement?

What are the terms of renewal?

Is the franchisee required to pay a renewal fee?

Other Points to Consider

Are all trademarks, trade names, or other marks registered to the franchisor?

Has the franchisor met all provincial legal requirements regarding full disclosure?

What is Considered Negotiable in a Franchise Agreement?

Franchise agreements can generally be considered non-negotiable except for items such as location, exclusive territory and opening date. Most franchisors are generally willing to clarify genuinely ambiguous clauses or correct errors in the franchise documentation. A franchisor may negotiate a point that is specific to a particular franchisee, but will be unwilling to make any changes that will violate the integrity of the franchise system. There may be more flexibility, or opportunity for negotiation, with a new franchisor whose agreement is still evolving and has not yet stood the test of time or the scrutiny of a number of franchise lawyers reviewing it on behalf of prospective franchise buyers.

On the other hand, a franchisor that is so inept that he concedes more than he should or is unwilling to seek proper legal advice suggests that he will be an incompetent manager of the franchise system. A franchisor that in the course of negotiations demonstrates a lack of concern for the well-being of other franchisees or the franchise system as a whole, by agreeing to modifications that will likely adversely affect other franchisees simply to close a sale, may be a franchisor that has no intention of abiding by its contract or is only concerned with its short term gain and not the success of its franchisees.