Franchising.

(What about franchising? Well, I operated two Quickly Beverage Franchise outlets at some point in time -the successful Herrera Makati Outlet and the Ho hum Rustans Outlet.) I still operate a water refilling station and a while back an internet cafe (now shut down). I am interested in Franchises and will start posting tidbits of info on franchising in my blog just for the heck of it.)

Let us start with some definition of terms:

The Franchise Agreement

You’ve probably heard people liken a franchise to a marriage (at any given franchise convention, you will probably hear this comparison at least 5 times). If a franchise relationship is like a marriage, then the Franchise Agreement (FA) is like the Marriage Contract. Before you actually consummate the relationship, you have to sign a legal document that binds you to the other party.

A franchise relationship is a business arrangement and the franchise agreement sets the rules that govern this relationship. For the lay person, a franchise agreement can be quite intimidating with its very elaborate legalese. Here are some of the most common provisions of a Franchise Agreement that will hopefully shed more light on this document.

Term of Agreement

Unlike a Marriage Contract, a franchise relationship is temporary in nature (of course many people will dispute this, including lots of formerly-married showbiz celebrities). Because it is temporary, the FA is specific about how long the relationship is good for – 10 years, 20 years for example. At the end of that period, the franchise is extinguished.

Renewal

The total Term of Agreement may be broken into renewal periods – points in time at which the FA is up for review. At this time, the franchisor may renew the agreement or not depending on how the franchisee has performed. The most common requirement for renewal is that the franchisee has been in good standing, meaning, that the franchisee has met all its financial obligations and has satisfactorily performed based on the standards set in the Operations Manual. The franchisee usually has to inform the franchisor of his intentions to renew before the renewal is evaluated and granted. If applicable, a renewal fee may be charged by the franchisor.

Termination

Conditions for termination are stated specifically in the FA. There are violations that cause automatic termination of the franchise and there are those that may be remedied. Those that may be remedied may also be causes for termination if they are repeated over time or if they are not remedied within a specified period.

Fees

This is the franchisor’s favorite part of the Franchise Agreement because it explains how much and when the franchisor is to be paid. The most common fees are franchise fees, royalties, and marketing contribution.

Franchise Fees are paid at the beginning of a franchise relationship and give the franchisee the right to engage in the business using the franchisor’s name and business system. Royalties, if applicable, are usually a percentage of the franchisee’s sales and are typically paid monthly. The system-wide Marketing contribution is also a percentage of franchisee’s sales and is paid as a

Territory

The Territory section of the Franchise Agreement describes the geographical boundaries within which your business may operate in, or within which no other unit of the franchisor’s businesses may compete. If your territory is exclusive, it means that no other outlet may operate in your territory – whether it’s a company-owned unit or another franchisee’s. Many franchisors only give you rights of first refusal within a given territory: whenever it’s applicable, you will be first given the opportunity to open other outlets in that territory. If you turn it down then it may be offered to another party. This is often an area of dispute because as a Franchise becomes successful, there is a tendency for the Franchise operator to attemp to open new outlets near the exisitng franchise territories. This is exacerbated by the quota system implemented by the Franchise owners such that regional, area or country franchisees are required to open a minimum number of outlets for a given period.

Purchase of Products

Products and supplies used in the franchise system are important to its success. Having a uniform set of merchandise and supplies also assure that there is consistency among company-owned and franchised units. The Franchise agreement will specify that the franchisee may only buy products from the franchisor or from approved suppliers. This general provision may be supplemented by a detailed list of approved suppliers in the Operations Manual.

There are many other sections in a franchise agreement but those mentioned above are the most common.

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:: Bing Tuesday, October 29, 2002 [+] ::
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