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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+.

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Researching a Franchise

Maximise Your Social Media Reach This Holiday Season

Quick and cost-effective, social media is your best tool to reach target markets when it matters most – during the holidays.

Diana Albertyn

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It’s not just the end of the year that can be lucrative for businesses. School holidays and other major breaks during the year present consumers with more time to spend shopping. Why not ensure money is spent at your franchise by capitalising on the minimal cost and maximum exposure of social media?

You don’t have to create entirely new deals or promotions from what you may already have running on your store, but find a way to make it special for your social media followers, suggests Kelly Mason, marketer at Customer Paradigm.

Holiday campaigns on Twitter, benefitting from popular hashtags, streaming live content, and receiving information instead of just distributing it via social media are just some of the ways to stay ahead of the competition.

Related: Why Your Business’ Social Media Marketing Strategy Is Probably Wrong

Know your customers well

The first step to attracting customers and getting them to complete a sale is understanding their customer journey.

“Being able to document where they spend their time online, which social channels they use most, and what they’re reading or watching on those channels is a huge plus. Finding that crucial information is fairly easy to do, thanks to modern-day marketing tools and resources,” advises Paul Herman, ‎VP: Product and Solutions Enablement Group, at Sprinklr, a unified customer experience management platform for enterprises.

The better you understand your customers, the easier it is to reach them through a campaign optimised for their interests.

Master social listening

You could be using social media all wrong in the run up to all your holiday campaigns. Perhaps it’s time you used this platform to listen to your customers?

“Through social listening, marketers can identify major trends and product keywords in their industries,” says Herman. “For instance, knowing those keywords can help marketers identify which social platforms are more popular for a target audience. With that information, they can make smarter decisions about where to spend their money and which products or services to promote on each platform.”

Related: 10 Laws Of Social Media Marketing

Use the information gathered to determine what customers like about your product, what they dislike about it, and how you can improve upon it so they can buy more of it. The more of this data you collect, the better and more effective your interactions with customers will be.

Try something new

50% of consumers look for a video of the product they want to buy before going to an ecommerce store to buy it, according to a 2016 Google survey. “Video can be an extremely effective way to get your customers to take action – in this case, to make a purchase with your store,” adds Mason.

Video adverts are often used as an experimental tool in social marketing and switching it up on platforms such as Facebook Live, Instagram Live, Instagram Stories, or Snapchat – depending on your brand’s activity and your audiences’ interests – can help attract customers during seasonal periods.

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Researching a Franchise

Selling Your First Franchise? Consider These Key Pointers

You’re ready to franchise your business, but who do you sell to and how? Your first few franchisees may be the hardest to acquire, but the process will be smoother if you get some basics right.

Diana Albertyn

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Business experience gained running your independent brand will come in handy, but looking for franchisees is a different ballgame. “We have to attract the right people in enough numbers to make the difference; and, the key to more leads is to have a multi-prong strategy to marketing,” says franchise strategist and expansion expert Lizette Pirtle.

Using media (social, or otherwise), trained experts in franchise sales, and keeping in mind that whoever you sell to will become an extension of your brand, are important considerations before selling your to first franchisee:

1. Use (all) media wisely

Website marketing, print advertising and social media are just some of the many different ways to attract potential owners to your franchise. But the most cost-effect of the three may be a ‘tweet’ or ‘post’ away, says former Director of Marketing at the International Franchise Association and owner of Burris Branding and Marketing, Jack Burris.

Related: To Buy Into A Franchise Or Purchase A Licence? 3 Factors To Consider

“Three out of four people using the Internet are either on Facebook or LinkedIn or Twitter or all of them. Take advantage of social media,” he says.

“There’s typically no cost to play in the space except for the time that you need to invest to build your brand with a social media presence.”

2. Seek out franchise coaches or brokers

While this is a more traditional method of making reliable franchise sales, it’s a great way to form lasting associations that will take you beyond your first few sales. “Using broker networks is a great way to supplement your own efforts. However, you must spend time developing relationships with these people if you want to get results,” advises Pirtle. “Don’t think that just listing your opportunity with them is sufficient.”

Franchise coaches and brokers have multiple options for potential franchisees, so to put yourself high on their list of consideration when prospects enquire, you have to form memorable relationships.

Related: 3 Factors To Focus On When Opening Your First Franchise

3. Always consider the bigger picture

Out of all the people your marketing efforts attract, always keep in mind that few will check all the boxes and compromising could cost you in the long run.

“The franchise relationship is a long-term one. If you’re going to be successful as a franchisor, you should start with the attitude that every franchisee will be someone who you’ll have to live with for years to come. And nowhere is this philosophy more important than when awarding your first franchise,” says Mark Siebert, CEO of the iFranchise Group, a franchise consulting organisation.

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Researching a Franchise

3 Factors To Focus On When Opening Your First Franchise

To become a successful franchisee, there’s lots more to learn. Take notes and this will be an adventure still with its challenges, but less stress.

Diana Albertyn

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Experts and those who’ve gone through the launching, managing and successful running of a franchise will tell you that owning a franchise can be just as risky as owning an independent small business – and it doesn’t get easier after signing on the dotted line. But that doesn’t mean it isn’t worth giving franchising a shot.

“The hardest part of being a franchisee is learning and adopting all the processes that exist in the brand you’re buying into. But it’s important that a customer can walk into any franchisee’s property across the country and have the exact same experience,” says Jeff Chew, Pizza Factory franchisee.

With that in mind, remember the financial, emotional and physical investment you’ve made in this new venture and let it fuel your success, from before you even serve your first customer

1. Financial and intellectual wealth

Don’t buy into a franchise where you might be undercapitalised, advises Paul Durant, a Junk King franchisee.

Related: Expansion Funding Options For Your Growing Business

Keep in mind that running a new business isn’t challenging only mentally strenuous, but financially too, because you’re not always immediately profitable. Ensure you have enough runway for a few years at a loss or minimal profit.

“I did not do a thorough job in my initial research and discovery calls. I used a lot of my own assumptions and luckily they were fairly close,” recalls Durant.

“I would, however, suggest that you ask very detailed questions during the discovery process and listen carefully to the responses. Often what is not said is equally as important as what is said.”

2. Remember the purpose of the manual

The point of buying into the concept you’ve chosen is to ensure success based on a roadmap that’s already been drawn out for you. Straying from this plan unnecessarily is a shortcut to failure. This doesn’t mean you cannot make changes, but always ensure your growth is where it needs to be by following the system completely.

Franchisee Mark Arduino thought he was taking the advice he’d been given countless times: Just follow the system. But he quickly realised he wasn’t when all the franchise-specific training he’d been through was forgotten in favour of easier shortcuts.

“Then I realised my mistake. I came to see that it’s very user friendly. I’m sorry I didn’t use it from the start!” he says.

Related: How To Choose The Right Finance For Your Business Or Property Portfolio Expansion

If you think you have a better way of doing something detailed in the franchisee manual, do your research. Your decision should follow a discussion with your franchisor, then align to the business plan.

3. Learn at every opportunity

It’s great that you have previous experience in business. It’s a huge bonus that could put you ahead of other franchisees in your network. But, always be willing to learn and put your hand up or open a book if you’re not sure. A vast business background doesn’t guarantee automatic success as a franchisee, so be open to learning from others.

“I have learned more from two of the franchisees in my area than I could ever have imagined and I owe my early success in large part to their willingness to help,” says Jeff Steele, a CMIT Solutions franchisee.

It may sometimes seem like you can do it all on your own, but even when you feel you can do anything, you cannot do everything. That’s why you joined a franchise that (hopefully) offers good support structure.

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