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Researching a Franchise

Understanding the Terms of Agreement

Once you’ve signed a non-disclosure agreement the franchisor should hand over a franchise agreement for you to analyse.

Tracy Lee Nicol

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One thing you absolutely should do before signing a single page is have the franchise agreement reviewed by an attorney specialising in franchising so they can draw your attention to any red flags or clauses requiring negotiation. In the mean-time, here are important points to consider when going through your franchise agreement.

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Issues pertaining to the franchise cost terms

  1. What does the initial franchise fee purchase?
  2. Does it include an ‘opening’ inventory of products and supplies?
  3. What are the payment terms: Amount, time of payment, lump sum or instalment, financing arrangements, etc.?
  4. Does the franchisor offer any financing or help in finding financing?
  5. Are there any deferred balances? If so, who finances and at what interest?
  6. Is any part, or all of the initial fee refundable?
  7. Does the contract clearly distinguish between ‘total cost’ and ‘initial fee’, ‘initial cash required’, or ‘initial costs’, etc?
  8. Are there periodic royalties? If so, how much are they and how are they determined?
  9. How and when are sales and royalties reported, and how are royalties paid?
  10. If royalty payments are in whole or part payment for services by the franchisor, what services will be provided?
  11. Are accounting/book-keeping services included or available?
  12. How are advertising and promotion costs divided?
  13. Is a specified amount of working capital required of the franchisee to cover operating costs until profits can be made?
  14. Must premises be purchased or rented, and are there further conditions on either of these (from franchisor, selected site, etc)?
  15. How and by whom will the building be financed, if purchased?
  16. Does the franchisee have to make a down payment for construction and/or equipment?

Issues pertaining to the franchise location terms

  1. Does the franchise apply to a specific geographical area? If so, are the boundaries clearly defined?
  2. Who has the right to select the site?
  3. Will other franchisees be permitted to compete in the same area, now or later?
  4. Is the territory an exclusive one, and is it permanent or subject to reduction or modification under certain conditions?
  5. Does the franchisee have a first refusal option on any additional franchises in the original territory if it is not exclusive?
  6. Does the franchisee have a contractual right to the franchisor’s latest products or innovations? If so, at what cost?
  7. 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?
  8. Who is responsible for obtaining zoning variances, if required?

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Issues pertaining to the buildings, equipment and supplier terms

  1. 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?
  2. Are there any restrictions on remodelling or redecorating?
  3. Must equipment or supplies be purchased from the franchisor or approved supplier, or is the franchisee free to make his own purchases?
  4. When the franchisee must buy from the franchisor, are sales considered on consignment? Or will they be financed and, if so, under what terms?
  5. Does the agreement provide for continuing supply and payment of inventory (by whom, under what terms, etc.)?
  6. Does the franchise agreement bind the franchisee to a minimum purchase quota?
  7. 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?
  8. 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

  1. Must the franchisee participate personally in conducting the business? If so, to what extent and under what specific conditions?
  2. What degree of control does the franchisor have over franchise operations, particularly in maintaining franchise identity and product quality?
  3. What continuing management aid, training and assistance will be provided by the franchisor, and are these covered by the service or royalty fee?
  4. Will advertising be local or national and what will be the cost-sharing arrangement, if any, in either case?
  5. If local advertising is left to the franchisee, does the franchisor exercise any control over such campaigns or share any costs?
  6. Does the franchisor provide various promotional materials point-of-purchase, mail programmes, etc. and at what cost?
  7. What are book-keeping, accounting and reporting requirements, and who pays for what?
  8. Are sales or service quotas established? If so, what are the penalties for not meeting them?
  9. Are operating hours and days set forth in the franchise contract?
  10. Are there any limits to what is or can be sold?
  11. Does the franchisor arrange for mass purchasing and is it mandatory for the franchisee to be a participant buyer?
  12. Who establishes hiring procedures initially and through the franchise term?

Issues pertaining to termination and renewal terms

  1. 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?
  2. Does the franchise agreement spell out the terms under which the franchisor may repurchase the business?
  3. 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?
  4. If the preceding situation occurs, how are purchase terms determined?
  5. Is there provision for independent appraisal? Is any weight given to goodwill or franchisee equity in the business?
  6. 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 goodwill or equity.
  7. Under what conditions (illness, etc.) can the franchisee terminate the franchise? In such cases, do termination obligations differ?
  8. Is the franchisee restricted from engaging in a similar business after termination? If so, for how many years?
  9. If there is a lease, does it coincide with the franchise term?
  10. Does the contract provide sufficient time for amortisation of capital payments?
  11. 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

  1. Can the franchisee sell the franchised business and assign the franchise agreement to the buyer?
  2. Is the franchise assignable to heirs, or may it be sold by the franchisee’s estate on death or disability?
  3. Does the lease permit assignment to any permitted assignee of the franchisee?
  4. How long has the franchisor conducted business in its industry, and how long has it granted franchises?
  5. How many franchises and company-owned outlets are claimed, and can they be verified?
  6. 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.?
  7. 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?
  8. 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?
  9. Has the franchisor provided the franchisee with an offering document package meeting?
  10. Has the franchisor met all law requirements (registration, or bonding requirements, etc.), if applicable?
  11. Are there laws governing franchisor/franchisee relationships, including contract provisions, financing arrangements and terminations? If so, does the contract meet all requirements?
  12. What are you waiting for? It’s time to launch.

Tracy-Lee Nicol is an experienced business writer and magazine editor. She was awarded a Masters degree with distinction from Rhodes university in 2010, and in the time since has honed her business acumen and writing skills profiling some of South Africa's most successful entrepreneurs, CEOs, franchisees and franchisors.Find her on Google+.

Researching a Franchise

How Your Fast Food Franchise Can Attract Quality-Conscious Consumers

In a world where customers are becoming increasingly picky about where they dine and what they pick from a menu, it can be challenging to meet demands.

Diana Albertyn

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“Major foodborne illness incidents and outbreaks seem to be increasing. Even innocent or careless mistakes can sicken guests and ruin a restaurant’s reputation,” says Francine Shaw, President of Food Safety Training Solutions Inc. “Foodborne illnesses are 100% preventable and could be avoided if food service organisations adopted a food safety culture.”

Following a listeriosis scare in South Africa early in 2018, consumers have become more conscious about the foods they eat. Today’s customer is more concerned about the cleanliness of the food they buy over its taste.

“How food is sourced, prepared and served is uppermost with many diners demanding transparency when it comes to where they spend their hard-earned money.” – Franchise Association of South Africa (FASA)

The addition of more nutritious choices to your menu may be attracting health-conscious consumers, but it’s the quality of the regular – and perhaps popular – menu items that may win over consumers concerned with quality and not just calorie content.

Related: 3 Ways To Make Your Franchise ‘Instagrammable’

Here’s how you can ensure your customers are at ease with having their next meal at any of your franchises nationwide:

1. Ensure everyone knows why and how it’s done

Even with buy-in from the top-tier, your food safety efforts will be futile if not incorporated into every training touch point and may appear to be optional, when they should be a priority, says Chris Boyles, vice president for The Steritech Institute. When you have well-trained workers who understand the ‘why’ behind food-quality policies, momentum is built and a culture of food safety is created.

“Through encouraging genuine, comprehensive behavioural shifts, your franchise will protect the brand, safeguard employees and sustain a reduction in risk,” Boyles adds.

2. Build food-quality impetus across the network

As a company that serves food to the public you’re in a position of great responsibility. It’s important to pass this message down to your franchisees too. “Co-operation between the franchisee and their employees in this regard cannot be stressed enough,” says Marcel Strauss, Managing Executive of The Fish & Chip Co. – which was voted the top fish brand in 2012.

To get your franchisees on board with tightened food safety regulations, ensure they’re aware of the looming food-quality changes you’re planning on implementing and the ROI for your brand. This enables them to make budgetary allowance for certain credentials and technology you may require to meet certain standards of food safety.

Related: Why Your Franchise Brand Should Be Culturally Relevant

3. Tell your customers every chance you get

Give consumers a glimpse into your production process by including your quality mission statement on customer-facing materials such as your website, social media pages, profiles on external review sites and menus. “Use stories, images and videos to show your practices in action,” Katy Jones, Chief Marketing Officer at FoodLogiQ explains. “Take customers behind the scenes into internal discussions. Practice is the way you demonstrate your commitment.”

To incorporate quality and safety messaging into customer relations, you need collaboration between your food safety managers and marketing managers.

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Researching a Franchise

The Future Of Franchising Looks Smaller (And Fancier)

Franchises are adding smaller locations and reduced menu options, as niche markets emerge, to attract the customer of the future.

Diana Albertyn

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As the owner of a thriving franchise, you’re well aware of the fact that fluctuations in the world economy has both negative and positive effects on business. When it comes to your successful franchise, tough times could mean adopting new trends or seizing gaps, potentially resulting in a new franchise concept you wouldn’t have otherwise thought of.

“The buzz word in global franchising is ‘flexibility and adaptability’,” according to the Franchise Association of South Africa (FASA). “Whether a result of a need to inject some life into stagnant franchise brands or as a result of the new world order brought about by the recession, franchising is embracing alternative and options in a big way.”

Related: As Consumers’ Tastes Change Can Your Franchise Keep Up?

You can do this by either devising innovative areas to franchise or allowing more flexible ways for franchisees to operate to help with their bottom line. FASA has earmarked these as some of the biggest franchising trends in 2018 and beyond:

Smaller, more cost-effective franchise models

When franchisees don’t have high franchise fees and start-up costs to worry about, they can focus more on what customers want, and deliver. The added benefit of smaller spaces include having fewer employees and reasonable rental.

Among the new frontiers in franchising are the food court losing its legacy as the preferred setting for food franchises, as service stations increase in popularity in the industry. A number of brands – like Steers, Debonairs and Mugg & Bean On-the-Go outlets – are co-locating with major fuel retailers to create fully-integrated accessible centres.

Niche markets are offering one-of-a-kind franchises

“The opportunity to get in on the ground floor of a new franchise trend is also on the rise,” notes FASA. This could be offering a unique gourmet food experience in your outlets or a ‘green’ space of energy saving technology in your operations.

“Consumers have gained control of what they want,” says Morné Cronjé, head of franchising at FNB Business. “It is no longer about what you have on the menu, but how your product or service can be tailor-made to what a customer really wants.”

Founded just five years ago (2013), RocoMamas boasts over 60 franchise outlets, clearly responding to the essence of this trend –allowing consumers to build their own burgers without having to pay for items they’d rather leave out.

Related: Key Franchising Trends To Consider For 2018

Stay ahead of the game

For long-term success, franchisors who want to expand their business should start exploring beyond present circumstances and current predictions.

“2018 will no doubt bring its challenges, however for every challenge there is a window of opportunity to explore. We are advising franchisors to scrutinise these trends carefully, it can definitely give them a boost for 2018,” says Cronjé.

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Researching a Franchise

As Consumers’ Tastes Change Can Your Franchise Keep Up?

More of your customers are eating in, and if you’re not packaging, portioning and pricing your food accordingly, they’re heading to a retailer that does.

Diana Albertyn

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It’s generally believed that it’s cheaper to cook your own breakfast, lunch or supper than to go out and pay a much higher price for the same food in your fridge at home. But today’s consumer’s live fast-paced lifestyles – so food is becoming more about convenience.

31% of 6 022 middle-to-high income South African earners surveyed by BusinessTech, put eating out and entertainment at the top of their list of things they’re most willing to cut their spending on in 2018 to save money. Research by supermarket giant Pick n Pay correlates, reporting an increase in customers buying quality convenience food, not just to entertain at home, but for dining at home.

Related: Driving Your Business Growth Towards More Customers

Consumers are empowered by variety

You’ve heard about the ‘fast casual generation’, aka Millennials? They are demanding healthy, affordable eating experiences. But do you know how this affects the future of the food industry, and your business in particular – because they’re not the only ones adapting their lifestyles.

An increasing number of food brands and chefs are compelled to create complete ranges of new, convenient meal options that are not only packaged, portioned and precooked attractively, but affordable too.

The fastest growing sector of retail foodservice for the past four years has been the convenience store sector. Non-traditional avenues of distribution are growing, gobbling market share while establishing new patterns of consumption, price points, and customer loyalty.

Shoppers are becoming value-focused

A savvy franchise would acknowledge that although pre-packaged and pre-cooked convenience food isn’t a new trend among consumers and supermarkets, it is gaining popularity. “Some of the most notable trends in 2017 were an increasing shift to convenience foods as customers looked for both value and convenience,” says Pick ‘n Pay’s Head of Marketing, John Bradshaw.

Related: 5 Techniques To Leave Customers Grinning And Vowing To Return

Value for money and healthier food choices will continue to be top of the convenience food list for consumer in 2018, as more shoppers cut down on luxuries.

“We’ve seen significant growth in the number of customers looking for an easy way to enjoy a good meal without the cost of eating out,” says Bradshaw.

But he cautions that South African shoppers have always been value-focused, and while the most significant shift Pick ‘n Pay has seen is how all its shoppers, no matter what their income levels, are watching their budgets.

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