Advantages and Disadvantages for Franchisors and Franchisees Franchising is a business distribution model focused on brand development and

unit expansion based upon the collaboration and combined efforts of both franchisor and franchisee. For the successful entrepreneur and prospective franchisor considering the establishment of a franchise system (i.e., "franchising your business") there are a number of franchising advantages and disadvantages that must be considered. Likewise, for the prospective franchisee looking to buy a franchise there are franchising advantages that should be considered. ADVANTAGES TO FRANCHISORS - some of the advantages to franchising your business include: Capitalized Expansion - Expansion requires the investment of capital and resources that for many successful business owners is limited and, sometimes, difficult to raise. Franchising serves as a source for the capitalized expansion of a successful business. Rather than borrowing funds from lenders, franchisees invest their own funds to expand your business.

Continuing Revenue Streams - Successful franchisors benefit from continuing royalties that are, typically, based upon a percentage of franchisee gross sales and paid on a monthly basis. Brand Development - The Multi-unit expansion associated with franchising serves to supplement and expand the value of your brand. Franchisee contributions to local and regional advertising further serve to expand brand recognition. Economies of Scale - If managed properly the multi-unit expansion associated with franchising results in increased volume purchases and leverage with business suppliers and vendors. Managerial Talent - Franchisee owners - who have invested their own capital and savings typically serve as better managers and operators than paid employees whodo not possess a vested interest in the business. DISADVANTAGES TO FRANCHISORS- Some of the disadvantages to franchising your business, include:

Legal Regulation - Franchising is a regulated activity and requires compliance with federal and state franchise laws. To successfully establish a franchise, franchisors are required to work with an experienced franchise lawyer to establish a solid blueprint for franchising.

Investment - Although franchising serves as a source for the capitalized expansion of your business (i.e., franchisees invest in your expansion), the estabblishment of a franchise system requires the investment of capital to cover legal fees and the cost of establishing a franchising infrastructure.

ADVANTAGES TO FRANCHISEE- Some of the advantages - provided that you choose the right franchisor - include:

Established Brand - Compared to establishing a new business, your franchised business from day one - will possess an established brand recognized by consumers Established Business Systems - Your franchised business will benefit from established business systems and procedures that have been tested and proven in the marketplace. Training and Support - Your franchise business will benefit from the franchisors continued training and support. This includes initial training and support that should be ongoing and extend to your business operations and the continued development of the products or services that you will be offering. DISADVANTAGES TO FRANCHISEE- Some of the disadvantages to buying a franchise, include:

Benefits Could Prove Illusory - If you choose the wrong franchisor, the typical "benefits" associated with buying a franchise may prove to be an illusion. That is there are good franchisors and franchise systems and there are bad franchisors and franchise systems. If you choose the wrong franchisor and fail to thoroughly evaluate the franchise agreement, training, ongoing support and brand recognition may be non-existent Potential for Reduced Margins - As a franchisee you will be required to pay on-going royalties. These royalties, typically, are based on your gross sales and not your profits. So, royalties will impact your profit margin. So, make sure that the franchise opportunity and the value of the franchise system outweighs your additional cost.

Checklist of Basic Franchise Agreement Terms

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 youre interested in buying a franchise. The checklist should be used in conjunction with the franchise agreementthe document that will set out all the terms and conditions that will govern your ownership of the franchisewhich will be drafted by the franchisor. You can use this checklist either before you see the franchise agreement, in order to get an idea of what should be in it, or after you have a copy of the agreement, in order to review its terms. In any event, while you can use the checklist to understand and review a franchise agreement, you shouldnt sign it until youve discussed your options with your attorney.

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 or all of the initial fee refundable? Does the contract clearly distinguish between ``total cost'' and ``initial fee,'' ``initial cash required,'' or ``initial costs,'' etc.? 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?

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 or 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 Terms

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 limits and costs? Does the franchisor require that it be named as an insured party in the franchisee liability coverage?

Issues Pertaining to the Operating Practices Terms

Must the franchisee participate personally in conducting the business? If so, 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 are these covered by the service or royalty fee? Will advertising be local or national and what will 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? What are bookkeeping, accounting and reporting requirements, and who pays for what? 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 the franchise is terminated for good cause, by either party? 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? 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. 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 sufficient time for amortization of capital payments? 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

Can the franchisee sell the franchised business and assign the franchise agreement to the buyer? Is the franchise assignable to heirs, or may it be sold by the franchisee's estate on death or disability? Does the lease permit assignment to any permitted assignee of the franchisee? How long has the franchisor conducted business in its industry, and how long has it granted franchises? How many franchises and company-owned outlets are claimed, and can they be verified? 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.? 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? 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? Has the franchisor provided the franchisee with an offering document package meeting FTC rule requirements or the UFOC format? Has the franchisor met all state law requirements (registration, escrow or bonding requirements, etc.), if applicable? Are there state laws governing franchisor/franchisee relationships, including contract provisions, financing arrangements and terminations? If so, does the contract meet all requirements?

Issues with Franchise Agreement The franchise agreement can contain additions or restrictions that don't seem relevant. These tend to originate from two sources, both of which help to evaluate the company better. The first source--the franchise company itself. It can insert clauses which address future planning strategies and ideas. The second source--the franchise company's attorney. Attorneys can insert clauses designed to protect the future rights of a company, like alternate channel distribution of products or services. These provisions can give you some big clues to a company's potential future plans, so whenever you see them in an agreement, make sure you ask why they're being included.

The franchise agreement can contain clauses that restrict your ability to sell your business. These requirements will affect whatever exit strategy you may have in place, so review carefully. Often, prospective franchisees consider this the least important consideration, but don't be fooled. In actuality, most franchise agreements are for an initial term of 10 to 20 years, and most franchisees leave before that term is completed. The most common of these provisions explains that the person you sell your business to mustmeet the same requirements as all other franchisees that entered the system at that time. Another provision might require you to offer the franchise company a first right of refusal to purchase your business on the same terms and conditions you reach with a third party buyer. There are also usually some transfer fees you will have to pay the franchisor. You should carefully examine any clauses associated with leaving the system so you're aware in advance of the rules you'll have to follow in that event. Always have an attorney review the franchise agreement contract for you. Why have an attorney evaluate it before agreeing to the contract? It's good practice in the normal course of business, as in life, to have all important contracts reviewed; always consider the cost, advantages and disadvantages when deciding whether to sign. It's a fact of life that most people enter into contracts all the time without even reading them, let alone having a lawyer review them. Minor contracts, such as with cell phone companies, will have you commit to a monthly, minimum payment for a few years. Other contracts can be far more substantial-- insurance policies to protect your property and family, or the largest single contract most people enter into-- a home mortgage. Virtually anyone who has a mortgage signed the inch-thick contract without hesitation. As discussed in the first part of this article, most franchise agreements from strong franchise companies are non-negotiable. If you can negotiate, hire an experienced franchise attorney, and get busy working out the best deal possible. If the franchise agreement isn't negotiable, then you need to ask yourself if the potential benefit of a review will be greater than the expense. Ultimately, it will come down to whether you really want the franchise, and if you do, then the contract "is what it is." Virtually all franchise agreements contain a clause that lets the franchise company change the deal-- in material ways, after the fact, without any recourse by the franchisee. This is done by incorporating other documents, as amended from time to time, into their franchise agreement by reference. To make this even more interesting, most such referenced documents are proprietary, meaning you will not receive a current copy nor can you review them prior to signing your franchise agreement contract. This isn't as nefarious as it might sound, but you need to be aware of this power. The most commonly-referenced document is a franchise company's operations manual, which outlines

all rules and requirements in detail for operating the business. This manual also outlines the exact specifications required for building and maintaining the business. These specifications can be changed at any time, and if such a change is made in a referenced document, the franchisee is required to conform under the terms of the franchise agreement. In the real world, this could mean requirements to make more substantial investments into the physical assets of the unit: A new required computer system, remodeling to match a new dcor need, or additional equipment in order to provide a new product or service. Be aware of these possibilities, but also consider the final point below before getting too concerned about this clause. One real-world, non-contractual protection: As a collective group, franchisees have a lot of power. You're in a position where you have to trust the franchise company to do the right thing by you in the future. Unfortunately, you're not going to get all of the protections you might like in the franchise agreement, and that can make people uneasy. However, always keep in mind that you do have one very important real world protection-safety against arbitrary or capricious behavior of the franchise company. If they're out of line, they're not only hurting you, but hurting all of the franchisees. As a collective group, franchisees have "power of the purse" over the franchisor, since virtually all of a franchise company's revenue comes from its franchisees. Most franchise companies recognize this checks-and-balances factor, and the smart ones actively seek franchisee support with important and potentially expensive decisions, such as elected advisory councils, regional meetings and national conventions. As a new franchisee, you may not feel like you have much power, but more experienced franchisees will be protecting their own interests (and by extension, yours), so learn from them and follow their lead when appropriate. Factors to Consider in a Franchise Agreement A franchise agreement, which should usually be drafted by a lawyer, sets out all the terms and conditions which govern the relationship between the franchisor, and each franchisee. It is important therefore, that the agreement be comprehensive and carefully prepared. It is recommended that a standard agreement be drafted with suitable provision for future changes in the operation. Consistency and standardization are also key words that should characterize the relationship with each franchisee as it will avoid problems that might result from treating them differently. The basic goal of a franchise agreement from the franchisor's viewpoint is to protect the proprietary interest, when granting a franchise to the franchisee for the use of the trademark and operations system. It is important that the franchisor maintain control over the franchisee=s operations, however, the control exercised should not limit the franchisee to the

extent that the relationship becomes one of master/servant or of agency. The "control" referred to is embodied in the franchise agreement and the actual course of excessive control would mean the franchisor would be exposed to greater third party liability. The agreement should set out the obligations of the franchisor and the franchisee. The following list of obligations of you, the franchisor, should be considered in conjunction with your goals, and you should include only those obligations you intend to provide on a continuing basis: a) franchisee and managerial staff training; b) franchisee seminars and retraining courses; c) site selection and layout assistance or leasing assistance; d) building plans and specifications; e) provision of an "operations manual"; f) assistance in the opening period including a standard bookkeeping and reporting system; g) specifications of required machinery and equipment purchases; h) continuing consultation; i) periodic inspections for quality control; j) national, regional or local advertising; k) continued protection and renewal of trademark; The cost of providing some of the above services may be shared or carried totally by the franchisee. These fees should be set out clearly in the agreement. The value of your franchise is affected positively by the fact that you are the sole and exclusive owner in Canada of all proprietary and other property rights in your registered trademark once obtained. This fact should be noted in your agreement. Further, you should consider under what terms the territory will be granted to the franchisee. Each franchisee will desire an exclusive territory in order to protect his long-term investment. This may not be in your best interest. It is conceivable that more than one franchise could operate successfully in certain cities. You might consider including a clause stating the exclusive territory to be a certain limited number of square miles so long as the franchisee faithfully performs all his obligations. The franchisee's obligations will be concerned with maintaining the success of the operation and prohibiting any deviation from the operations system you have devised. The following obligations are those commonly imposed on franchisees: a) financial reporting and timely payments b) attendance at various training and retraining programs c) insurance requirements and indemnification provisions d) provision of adequate working capital e) full-time commitment to the business f) use of products or equipment specified by the franchisor and purchased from the franchisor or other approved suppliers g) strict compliance with the franchisor's operations manual

h) a covenant to repair and maintain the franchised premises i) restriction of other goods and services the franchisee may provide on the franchised premises j) a covenant as to proper trademark usage k) partaking in advertising and promotional campaigns as required l) must enter a registered agreement in respect of the franchisor's trademark m) compliance with all federal, provincial and municipal laws and bylaws n) carrying on operations in defined business hours There are three main types of franchising fees: a lump sum initial fee; a monthly royalty fee based on gross sales of the franchise; and an advertising fee usually based on a percentage of growth. In setting the fee structure, you should consider those fees which will reflect the value of the operation and maintain the marketability of the franchise units. The agreement should clearly set out the fee structure. The initial fee should be "payable" on signing the agreement and it should be "fully earned" at that point. It should also be non-refundable on termination of the agreement for any reason. Recall that you are prohibited under the Franchises Act from accepting any payments until after your agreement has been registered and the potential franchisee has received a Statement of Material Facts or Prospectus. In setting the term of the Franchise Agreement, you should consider the amount of the initial investment required by the franchisee so that the term allows amortization of certain capital payments. You may consider granting a right of renewal upon expiration of the term, if the franchisee is not in default of any obligations outlined in the Franchise Agreement. You may charge a "renewal fee" to cover administrative costs and you may charge a further initial franchise fee. These elements should be set out concisely in the Agreement. The Franchise Agreement should provide for default and termination. In the event the franchisee fails to pay any sums due or fails to meet the material obligation, the franchisor may terminate the Agreement after notice of default has been given. In addition, termination of the Agreement may occur immediately in the event of material breaches of the Agreement such as closure or abandonment of the franchise business premises, bankruptcy, insolvency or liquidation of the franchisee; seizure of the premises or goods by creditors; attempted assignment of the Franchise Agreement by the franchisee without consent; disclosure of confidential information; assignment or improper usage of the franchisor's trademark or improper calculation of the franchise fee payable. If there are other ancillary Agreements such as a lease or sublease, a debenture or a mortgage back to the franchisor, you should consider cross-default provisions, with the result that a default under one Agreement is a default under all related Agreements between you and the franchisee. Additional consideration should be given to the rights and obligations to the parties following termination. A term in the Agreement should require the franchisee to cease

representing himself as a representative of the franchisor and must immediately cease to display the franchisor's trademark for any purpose whatsoever. In addition, all operation manuals and other inventory or assets forming part of your business system should be returned immediately. The Agreement should provide that you own the manual at all times or that it will be returned for nominal considerations. The Agreement should grant the franchisor an irrevocable appointment of attorney for the franchisee upon termination, so enforcement of the preceding obligations is possible. As well, the franchisor should be able to enforce such obligations as the immediate transfer of the right to all telephone listings, transfer of a lease Agreement and cancellation of the registered user's Agreement. If you wish to have the right to repurchase the franchisee's equipment, fixtures and building upon termination, the cost should be defined in the Agreement. One method of determining the repurchase price is the original cost less depreciation. It should be pointed out to the franchisee that after a number of years such price will be low or nil. In the alternative, the repurchase price may be fair market value, with a method set out by which the value may be determined. It is suggested that a restrictive covenant be added to prevent the franchisee from entering into a competing business during the term of the Agreement. You should also consider restricting the franchisee=s right to enter a competing business upon termination of the Agreement, for a reasonable time period. In order for the non-competition clause to be valid, it must extend only to those types of business that the parties were carrying on, for a reasonable period of time and area, in order that your interests are protected. This clause should be severable so that if it is found to be invalid, the whole Agreement will not also fail. The franchisee should be precluded from representing himself as a current or past franchisee of the franchisor. These controls are very important for the continued success of your operations. The Agreement should provide that it constitutes the entire Agreement between the parties and no other oral representations form part of this Agreement. If you do make statements or representations upon which the franchisee relies, you must ensure that they are true and complete as there are strict disclosure standards you must meet under the Franchises Act. For example, if an earnings clause sets out a schedule of projected earnings, the data base must be disclosed. You should stipulate that the figures given are estimates only and no assurance is given that the franchisee will ever achieve those earnings. You should consider what terms will operate if you choose to allow the franchisee to sell or assign his interest. The terms should extend to any sale or assignment including a deemed assignment on the transfer of shares of a corporate franchisee or the transfer from an individual to a personally-controlled corporation. The terms may include requiring the franchisee to give written notice of his intentions and the terms of the sale or assignments; further dealings should be contingent upon the franchisor's consent to those terms and conditions; the Assignee or Purchaser must execute a new Franchise Agreement and all ancillary Agreements affecting the Franchise Agreement; the Assignor must terminate the

Franchise Agreement and all ancillary agreements; and there should be payment of a transfer fee from the Assignor to the franchisor for administrative costs. Finally, you should consider a mechanism for settling disputes between the parties.