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Franchise Opportunity

Ten Questions to Ask Before Signing a Franchise Agreement.

1. What does the initial franchise fee cover? Does it include a starting inventory of
supplies and products?
Ans. The initial franchise fee, which may be non-refundable, is paid at the start of
a franchise relationship thus giving the franchisee the right to engage in the
business using the franchisors name and business system. You may also incur
significant costs to rent, build, and equip an outlet and to purchase initial
inventory. Other costs include operating licenses and insurance. You also may
required to pay a grand opening fee to the franchisor to promote your new
The initial fee sometimes relates only to the franchise right granted to franchisees
and sometimes includes payment for equipment, stock and training. For
presentational reasons it may be sensible to break down the initial fee so that it
does not appear too high which could put off prospective franchisees.
The most important guiding principle concerning the initial fee is that the
franchisor should not make a profit or a substantial profit from the initial fee. The
initial fee is there to reimburse the franchisors very substantial costs in recruiting
a franchisee, providing stock, equipment and training and to make a contribution
to all of the other costs that the franchisor will have incurred. If franchisors make a
profit from the initial fee the danger is that their aim is to sell franchises rather
than having successful franchisees. As already indicated the banks are likely to
look at the initial fee to satisfy themselves that this is not a profit stream for
2. How are the periodic royalties calculated and when are they paid?
Ans. A royalty fee is an ongoing fee that the franchisee pays to the franchisor.
This fee is usually paid monthly or quarterly, and is typically calculated as a
percentage of gross sales.
While the Initial Franchise Fee can be seen as the upfront cost to join as a
member of the franchise system, the royalty payments can be seen as the
ongoing membership fees required to remain that membership. These payments
are collected by the franchisor to fund the franchisor entitys actions, which include
both corporate and franchise-related expenses. The ongoing royalty payments are

how the franchisor makes its money, which it uses to support its franchisees and
further build the business.
Generally, all the support provided by the franchisor through its field consultants,
marketing plans, business strategies, etc., are funded through the Royalty
Payments provided by the franchisees. Additionally, all the administrative costs of
running the franchisors headquarters and staff are funded from the royalty
Lastly, the franchisors efforts to further expand and develop the brand through
recruiting and bringing in new franchisees to the system is funded by royalties.
There are a number of ways that franchisors establish what their ongoing royalty
fee will be. The most common is a percentage of the Gross Sales that the
franchisee earns. Typically this ranges from between five and nine percent. So,
essentially, the franchisee is taking in 91-95% of their gross sales with the rest
going to the franchisor. Gross Sales is the amount of revenues from the sale of
services, goods, and any other products or merchandise by the franchisee, and is
not reduced by any discounts given to employees or family members, taxes, or
In most franchise systems this percentage is fixed, but it can be also be an
increasing or decreasing percentage depending on the level of sales. Some
franchisors require a minimum royalty payment for each period, whether by a
percentage or by a set dollar amount. There are also franchisors that determine
the royalty amount as a set dollar amount based on different sales thresholds.
Further, some franchisors dont require any ongoing royalty payment at all.
3. Are all trademarks and names legally protected?
Ans. The most important thing about buying and operating a franchise is your
access to and right to sell goods (or services) that the public already knows,
trusts, and buys. Unlike businesses that are started from scratch, a franchise gives
you instant name and brand recognition.
Primarily, you get that name and brand recognition by being allowed to use the
franchisor's trademarks, and it's probably the most crucial aspect of almost every
franchise. The franchisor's trademarks are at the heart of the franchise deal: it's
really what you're buying.
Trademarks are words, names, or symbols that both identify goods made or sold
and distinguish them from goods made or sold by others. They're at the core of
name and brand recognition.

Like everything else associated with the business, your rights and obligations with
respect to the franchisor's marks most likely are governed by the franchise
agreement you and the franchisor signed. The terms of franchise agreements, of
course, vary by the type of franchise you're buying, but many franchise
agreements will have trademark provisions in which:
You acknowledge that the franchisor owns the marks and that you have only
the right or "license" to use them
Your right to use the marks lasts only as long as the franchise agreement is in
force, so if the agreement expires and you don't renew it, you can't use the
marks anymore
You agree not to add to, alter or change any of the marks when using them in
the operation of your shop
You're barred from using the marks on anything that is not supplied by the
franchisor or an authorized supplier. For example, you would not be free to
choose any supplier of company shirts featuring the franchisor's logo
You can only use the marks on goods or products that are covered by the
franchise agreement. For example, if your franchise is one for selling
automotive parts, it would probably be a violation of your franchise agreement
if you used the franchisor's logo on hamburger wrappers and sold the
hamburgers in your parts store
You agree to safeguard the franchisor's sensitive information, such as how a
product made or a recipe, by not sharing such information with other persons
outside the franchise "family" and taking measures to ensure that your
employees likewise do not share or divulge the information. Your agreement
not to use or share the information usually remains in force after the franchise
agreement ends. So, after your fast food restaurant franchise ends, you can
continue to make and sell hamburgers, but you can't use any recipes owned by
the franchisor
You're required to report to the franchisor any unauthorized use of the
franchisor's marks that you discover or become aware of
Other than the franchise agreement's provisions for royalty fees, the trademark
provisions are probably the most important aspect of the agreement.

4. Who selects the location of your business?

Ans. The location of your business is as important to your success as having a
good product to offer to your customers. For retail businesses in particular, the
location can make - or break, the business. It is important that the demographic
profiles of people who work or live in the trading area match the target customer
profile for income level and age group.
The franchisor should provide site selection and evaluation guidelines. These
guidelines identify the types of locations best suited to your franchise business
based on a demographic identification of your target customer. These guidelines
are the result of a careful analysis by the franchisor of franchise customers and
their shopping habits. Knowing this information is key to better identifying and
evaluating locations for your franchise business.
Typically these guidelines are provided as a manual outlining step-by-step
instruction on how to implement a site selection survey. The survey, prepared by
the franchisor, consists of a series of questions which are specific to understanding
characteristics associated with a retail location. These questions identify major
assessment criteria such as pedestrian traffic patterns or proximity to other similar
retail competitors. A checklist may also be included to identify internal
characteristics of the site such as availability of utilities or actual street frontage.
The franchisee, when completing the survey, may be asked to include photographs
of the location and the area immediately adjacent to the site.
The site selection survey is conducted by the franchisee. Upon completion the
survey is submitted to the franchisor who is responsible for verifying its accuracy.
The franchisor may request additional information, either from the franchisee, the
sites property manager, or the landlord. This information, in addition to
demographic reports, traffic studies, and other data, is reviewed by the franchisor.
Based on this analysis, the franchisor will then discuss with the franchisee the
merits of a specific location for the franchise business.
It is important that before initiating the site selection process, a franchisor briefs
the franchisee on what the requirements are for a location for the franchise
business. While the franchisee is identifying potential locations, the franchisor
should be available to answer questions and provide general guidance to the
franchisee. Implementing a comprehensive process involving both the franchisor
and the franchisee insures that both parties are establishing the framework for a
strong working relationship. This framework is the basis for a successful long term

franchise partnership.