Franchise Agreement Checklist
This is a contract and you want to understand it. You also want to read it as if you have been in business for two years. You will be surprised how that will change your perspective. This will help you do exactly that.
Every franchise agreement is somewhat different. As a result, it would be impossible to identify every term and issue that should be considered when you are investigating your franchise(s).
Nevertheless, this checklist should be a valuable tool to you particularly if franchising is new to you and you want to feel you have “covered all the bases” in your evaluation.
Please understand that the franchise agreement is a non-negotiable document about 99% of the time. So you want to be comfortable with the language, the stipulations in this agreement before you sign.
You can use the checklist to both understand and review a franchise agreement. Mark each page where you have a question with a Post-It note, then discuss your questions or issues with your consultant, your franchisor or your franchise attorney.
You will find that using the checklist will also make you more familiar with your business model.
~ In addition, it never hurts to “wear the shoes” of an owner to gain a feel for your choice.
~ Change happens in people’s lives. Even if some factors are not relevant today, they may be tomorrow. Franchise Agreement Checklist
Issues Pertaining to the Franchise Cost Terms
What does the initial franchise fee purchase?
Does it include an ``opening'' inventory of products and supplies?
What are the payment terms: amount, time of payment, lump sum or installment, financing arrangements, etc.?
Does the franchisor offer any financing, or offer help in finding financing?
Are there any deferred balances? If so, who finances and at what interest?
Is any part of the initial fee refundable? Does the contract clearly distinguish between ``total cost'' and ``initial fee,'' ``initial cash required,'' or ``initial costs,'' etc.?
Do you understand the differences?
Are there periodic royalties? If so, how much are they and how are they determined?
How and when are sales and royalties reported, and how are royalties paid?
If royalty payments are in whole or part payment for services by the franchisor, what services will be provided?
Are accounting/bookkeeping services included or available?
How are advertising and promotion costs divided?
Is a specified amount of working capital required of the franchisee to cover operating costs until profits can be made?
Must premises be purchased or rented, and are there further conditions on either of these (from franchisor, selected site, etc.)?
How and by whom will the building be financed, if purchased?
Does the franchisee have to make a down payment for construction and/or equipment?
Ask questions, it is your right to know. ~ Learn your potential business by digging into the contract. ~ Post-buy surprises do not happen to informed buyers Issues
Pertaining to the Franchise Location Terms
Does the franchise apply to a specific geographical area? If so, are the boundaries clearly defined?
Who has the right to select the site?
Will other franchisees be permitted to compete in the same area, now or later?
Is the territory an exclusive one, and is it permanent tor 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?
Does the franchisee have a contractual right to the franchisor's latest products or innovations? If so, at what cost?
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?
Who is responsible for obtaining zoning variances, if required?
Issues Pertaining to the Buildings, Equipment and Supplies
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?
Are there any restrictions on remodeling or redecorating?
Must equipment or supplies be purchased from the franchisor or approved supplier, or is the franchisee free to make his own purchases?
When the franchisee must buy from the franchisor, are sales considered on consignment? Or will they be financed and, if so, under what terms?
Does the agreement provide for continuing supply and payment of inventory (by whom, under what terms, etc.)?
Does the franchise agreement bind the franchisee to a minimum purchase quota?
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?
Does the franchisor have a group insurance plan? If not, what coverage will be required, at what costs?
Issues Pertaining to the Operating Practices Terms
Must the franchisee participate personally in conducting the business? If the answer is yes, then ask to what extent, and under what specific conditions.
What degree of control does the franchisor have over franchise operations, particularly in maintaining franchise identity and product quality?
What continuing management aid, training and assistance will be provided by the franchisor, and which of these the service or royalty fee covers?
Will advertising be local or national? What is be the cost-sharing arrangement, if any, in either case?
If local advertising is left to the franchisee, does the franchisor exercise any control over such campaigns or share any costs?
Does the franchisor provide various promotional materials point-of-purchase, mail programs, etc. and at what cost? Similarly, what are bookkeeping, accounting and reporting requirements, if any?
Are sales or service quotas established? If so, what are the penalties for not meeting them?
Are operating hours and days set forth in the franchise contract? Are there any limits as to what is or can be sold?
Does the franchisor arrange for mass purchasing and is it mandatory for the franchisee to be a participant buyer?
Who establishes hiring procedures initially and through the franchise term?
Issues Pertaining to Termination and Renewal Terms
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?
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 either party terminates the franchise for good cause?
If the preceding situation occurs, how are purchase terms determined?
Is there provision for independent appraisal? Is any weight given to good will or franchisee equity in the business?
Under what conditions (illness, etc.) can the franchisee terminate the franchise? In such cases, do termination obligations differ?
Is the franchisee restricted from engaging in a similar business after termination? If so, for how many years?
If there is a lease, does it coincide with the franchise term?
Does the contract provide enough time for amortization of capital payments?