IS FRANCHISING FOR ME? - UNDERSTANDING THE FRANCHISE CONTRACT

The franchise contract, like the UFOC, is a very important
document. The contract is probably the most important document in
the transaction process. It is a legal commitment which is
binding on both the franchisor and franchisee. In the franchise
contract, the franchisor's promises must be presented to the
franchisee in writing and subjected to careful scrutiny. During
this stage of the buy/sell process, the franchisee must have
competent legal advice regarding the meaning and effect of the
contract.

When reviewing the contract, you and your attorney will need to
determine if it confirms what you have been told. If you find
improprieties in the contract at this point, you may decide to
withdraw from the transaction before committing your time, energy
and money to an agreement that may not be beneficial for you. If,
however, you choose to continue with the process, you may be able
to negotiate favorable terms, but remember by signing the
contract, you are legally bound by the provisions of the
agreement.

The franchise contract consists of two main parts: 1) the
purchase agreement and 2) the franchise or license agreement. For
convenience, occasionally the franchise transaction is split into
two stages. When this happens, some franchise companies have two
contracts, one for each stage, rather than a single contract.
While it isn't necessary to have two contracts, it can be the
better method where there is a comprehensive equipment and
initial services package.

The purchase agreement of the contract covers:

* the franchise package
* the price
* the services to be provided.

The franchise or license agreement covers:

* the rights granted to the franchisee
* the obligations undertaken by the franchisor
* the obligations imposed upon the franchisee
* trade restrictions imposed upon the franchisee
* assignment/death of franchisee
* termination provisions.

A brief explanation of each agreement follows.

PURCHASE AGREEMENT

1. The franchise package. Consists of an equipment or inventory
list. This list must contain all the items the franchisee has
been told to expect. Some franchise companies regard this list as
being confidential and stipulate in the contract that it must be
so treated.

2. The price. The price and the manner of payment will be
specified. This may be cash on signature, although rare. More
often a deposit is required on signature with payment of the
balance to follow on delivery of the equipment or at other stages
of the transaction.

3. The services to be provided. This section outlines or lists
the franchisor's responsibilities to the franchisee. Those
services the franchisor is required to provide the franchisee
before he or she is ready to open for business are called the
initial services. Those services the franchisor provides
periodically are called continuous services. A more detailed
explanation of the services provided by the franchisor are
included in the next section on the license agreement.

FRANCHISE OR LICENSE AGREEMENT

1. The rights granted to the franchisee. The franchisee will be
given the right as it applies to particular circumstances. As a
franchisee there are certain rights that are extended to you.

Your rights include:
* use of trademarks, trade names and patents of the
franchisor.
* use of the brand image and the design and decor of the
premises developed by the franchisor.
* use of the franchisor's secret methods.
* use of the franchisor's copyright materials.
* use of recipes, formulae, specifications and processes and
methods of manufacture developed by the franchisor.
* conducting the franchised business upon or from the agreed
premises strictly in accordance with the franchisor's
methods and subject to the franchisor's directions.
* guidelines established by the franchisor regarding
exclusive territorial rights.
* rights to obtain suppliers from nominated suppliers at
special prices.

2. The obligation undertaken by the franchisor. This item in the
contract tells prospective franchisees what the franchisor will
do for them both before and after start-up. That is why this item
frequently refers to specific contractual obligations detailed in
the franchise agreement, which is attached to the UFOC.

3. The obligations imposed upon the franchisee. Certain
obligations are required of you by the franchisor. These
obligations include:

* to carry on the business franchised and no other business
upon the approved and nominated premises.
* to observe certain minimum operating hours.
* to pay a franchise fee.
* to follow the accounting system laid down by the
franchisor.
* not to advertise without prior approval of the
advertisements by the franchisor.
* to use and display such point of sale advertising materials
as the franchisor stipulates.
* to maintain the premises in good, clean and sanitary
condition and to redecorate when required to do so by the
franchisor.
* to maintain the widest possible insurance coverage.
* to permit the franchisor's staff to enter the premises to
inspect and see if the franchisor's standards are being
maintained.
* to purchase goods or products from the franchisor or his
designated suppliers.
* to train your staff in the franchisor's methods to ensure
that they are neatly and appropriately clothed.
* not to assign the franchise contract without the
franchisor's consent.

4. Trade restrictions. The restrictions imposed upon a franchisee
may prohibit him or her from carrying on a similar business
except under franchise from the franchisor, taking staff away
from other franchisees, carrying on a similar business in close
proximity to other franchised businesses within that chain, and
continuing, after termination of the franchise contract, to use
any of the franchisor's trade names, secrets, and so forth.

5. Assignment/death of the franchisee. The franchisee should
ensure that in the event of death his/her personal representative
or dependent will be able to keep the business going until one of
them can qualify as a franchisee, and that arrangements can be
made to keep the business going until a suitable assignee can be
found at a proper price.

6. Termination provisions. The termination of a franchise is an
event heavily regulated by the franchise laws of 17 states.
Franchise relationship laws in many states specify the conditions
under which a franchisor may terminate or refuse to renew the
franchise, imposing a standard of "good cause," "reasonable
cause" or "just cause" as defined by those laws. Minimum advance
notice usually has an opportunity to cure the default and avoid
termination; notice ranges from five days to 90 days. Many states
also specify circumstances under which the standard notice and
cure requirements need not be met.

In view of the close working relationship that must exist between
the franchisee and franchisor all provisions must be stated
clearly in the contract. In this transaction, no small print
should exist. Make sure, if possible, the franchise contract
contains provisions that are favorable for both you and the
franchisor.


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