What to check before you sign

Checklist before you take any steps towards being your own boss.

Print Edition: May 15, 2008

It might not be as complex as setting up your own business, but setting up as a franchisee does require attention to detail. There are papers to sign and fees to pay and you might end up not knowing what you get out of the deal. We spoke to experts and scanned several sources (including ICICI Bank’s SME Toolkit) to prepare a check list of what you should watch out for before you sign on the dotted line. Remember, that this is not legal advice, so get all papers and forms vetted by a professional before you take any steps towards being your own boss.

Franchise fee

• What does the initial franchise fee purchase? Does it include an “opening” inventory of products and supplies?

• What are the payment terms: amount, time of payment, lump sum or instalment, financing arrangements, etc?

• Does the franchiser offer financing, or help in finding financing?

• Are there any deferred balances? If so, who finances and at what interest?

• Is the initial fee refundable?

• Does the contract clearly distinguish between “total cost” and “initial fee”, “initial cash required” or “initial costs”?

• Are there periodic royalties? If so, how much are they and how are they determined?

• How and when are sales and royalties reported, and how are royalties paid?

• If royalty payments are in whole or part payment for services by the franchiser, what services will be provided?

• How are advertising and promotion costs divided?

Franchise location

• Does the franchise apply to a specific geographical area? If so, are the boundaries clearly defined?

• Will other franchisees be permitted to compete in the same area, now or later?

• Does the franchisee have a first refusal option as to any additional franchises in the original territory if it is not exclusive?

• Does the franchisee have a contractual right to the franchiser’s latest products or innovations? Is there a cost attached to this?

Equipment & supplies

• Who has the final approval of plans and specifications of the building (if any)? Does this control extend to selection of contractor and supervision of construction?

• Must equipment or supplies be bought only from the franchiser-approved supplier?

• Does the agreement provide for continuing supply and payment of inventory?

• Is there a minimum purchase quota?

• Does the franchiser have a group insurance plan? If not, what coverage will be required, at what limits and costs?

Operating practices

• Must the franchisee participate personally in conducting the business? If so, to what extent and under what specific conditions?

• What degree of control does the franchiser have over franchise operations, particularly in maintaining brand identity?

• What continuing management aid, training and assistance will be provided by the franchiser, and are these covered by the service or royalty fee?

• What are bookkeeping, accounting and reporting requirements?

• Are sales or service quotas established? If so, what are the penalties for not meeting them?

• Are operating hours and days set forth in the franchise contract?

• Does the franchiser arrange for mass purchasing and is it mandatory for the franchisee to be a participant buyer?

• Who establishes hiring procedures initially and through the franchise term?

Termination & renewal

• Does the franchiser have absolute privilege of terminating the franchise agreement, either during the term or at the end?

• Does the franchise agreement spell out the terms under which the franchiser may repurchase the business?

• Is there provision for independent appraisal? Is any weight given to goodwill or franchisee equity in the business?

• Does the original agreement include a clause that the repurchase price paid by the franchiser should not exceed the original franchise fee?

• Under what conditions can the franchisee terminate the franchise? In such cases, do termination obligations differ?

• Is the franchisee restricted from engaging in a similar business after termination? If so, for how many years?

Other points

• Is the franchise assignable to heirs, or may it be sold by the franchisee’s estate on death or disability?

• Can the franchise be assigned to someone else by the franchisee?

• What innovations has the franchiser introduced since first starting the franchise?

• How selective is the franchiser when choosing its franchisees?

• How many long-term franchisees are there?

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