03 Nov 2009

EVALUATING A FRANCHISE OPPORTUNITY

Authored by: Michael Lunjevich

EVALUATING A FRANCHISE OPPORTUNITY

When evaluating a franchise opportunity, prospective franchisees must consider important legal and commercial factors before signing on the dotted line. Hadef & Partners highlights the following as a starting point for clients when preparing their business plan.

There are many issues that should be considered depending on the chosen franchise system or business model and sometimes the industry in which you wish to operate. This checklist should be used as a guide only.

Franchisor and system
Who is the franchisor? How well known are they? How is their system unique? How successful is the brand in other countries? Is this an established franchise system or will you be the first franchisee?
 
Territory 
Are you being given a specific area (e.g. UAE) or just the right to open a store in one particular location (e.g. a store within a shopping mall). Are you obliged to open a certain number of businesses within a certain timeframe (i.e. five stores in five years)?

Exclusivity
Are you being granted the exclusive right to use the brand in the territory? Is exclusivity against third parties or does it also include the franchisor?

Term
How long is the franchisor willing to “licence” the use of the brand to you? Are there any renewal/option periods to extend the term? If so, are there any conditions on exercising the option to renew the term?

Fees
What fees are you required to pay? There is usually a one-off initial fee and on-going franchise fees which can either be a set amount per period (monthly/quarterly/annually) or a percentage of your revenues or profits. If it is a percentage of revenues/profits, consider if there are any minimum or maximum amounts. There can also be many other fees including marketing fees, training fees, pre-opening assistance fees, royalty fees and so on. These fees need to be factored into your operating budgets.

Franchisor’s obligations
Consider what exactly the franchisor is giving you in return for the amount(s) you will pay. Will the franchisor attend to marketing for the whole brand that benefits your business or is it up to you to do local marketing? What systems, manuals and training will you be receiving? Make sure that every deliverable the franchisor has promised you is contained in your franchise agreement.

Your obligations
What minimum standards do you have to keep? Do you have to purchase products only from the franchisor? Do you have minimum financial targets, staffing levels, marketing obligations etc? If you are selling products manufactured by the franchisor, do you have to give refunds, fulfil warranties or service requests or does the franchisor do this? What are your confidentiality obligations for the systems, manuals, policies and procedures the franchisors licence to you?

Intellectual property (IP) 
What IP is the franchisor licensing to you? How has the franchisor protected its IP from third parties using it i.e. is there a registered trade mark and if so what “classes” of products are protected?

Premises 
If you rent premises, it is very important your lease term runs alongside your franchise agreement. For example, it is not ideal to have a 10 year franchise agreement but only a five year lease as the landlord may elect not to renew the lease, and you will have to spend further funds refurbishing a new premises. Your lawyer can work with you here to ensure both agreements run parallel.

Termination
What will happen if the business is not successful? Is the franchisor currently involved in any disputes with franchisees or other third parties? Does the franchisor have any rights to take back the franchised business? If there is a dispute with the franchisor, what dispute resolution procedures are to be followed? If the agreement is terminated due to the franchisor’s breach, do you get part of your initial investment back? What is the governing law of disputes and where will disputes be heard?

It is always a good idea to have a lawyer review the franchise agreement before you sign it. Ideally you should involve your lawyer at the early stages of negotiations so that they can work with you to protect your interests and help to get you the most out of your investment.