WEEK 4 Flashcards
also focuses significantly on the franchisee
candidate’s qualifications and experience in business
including the applicable industry and, importantly, solid financial assets to begin and support the franchised
business.
Franchise Application
is a detailed, comprehensive document (typically over 200 pages) covering 23 specific items governed by
federal regulation that is intended to provide the franchisee
candidate with all the relevant information needed to make
a well-informed decision about whether to invest in the
franchise and sign a franchise agreement.
Franchise Disclosure Document (FDD)
is a detailed, comprehensive document (typically over 200 pages) covering 23 specific items governed by
federal regulation that is intended to provide the franchisee
candidate with all the relevant information needed to make
a well-informed decision about whether to invest in the
franchise and sign a ___________. (fill in the blank)
franchise agreement
is divided up into 23 sections and the potential franchisee
must review each of them before signing.
Franchise Disclosure Document
franchisors have an obligation to provide the franchisee with the FDD
at least 14 days before it needs to be signed or before any initial
money is exchanged. The franchisee has a right to a copy of the FDD
after the franchisor has received the application and agreed to
consider it.
Federal Trade Commission (FTC)
Every FDD must include the following 23 disclosure items:
Item 1: The Franchisor and any Parents, Predecessors,
and Affiliates
Item 2: Business Experience
Item 3: Litigation
Item 4: Bankruptcy
Item 5: Initial Fees
Item 6: Other Fees
Item 7: Estimated Initial Investment
Item 8: Restrictions on Sources of Products and Services
Item 9: Franchisee’s Obligation
Item 10: Financing
Item 11: Assistance, Advertising,Computer Systems, and Training
Item 12: Territory
Item 13: Trademarks
Item 14: Patents, Copyrights, and Proprietary Information
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
Item 16: Restrictions on what the franchise may sell
Item 17: Renewal, Termination, Transfer, and Dispute Resolution
Item 18: Public Figures
Item 19: Financial Performance Representations
Item 20: Outlets and Franchisee Information
Item 21: Financial Statements
Item 22: Contracts
Item 23: Receipts
franchisors must disclose corporate information,
including information about affiliated and parent companies of the
franchisor. Item ___ FDD disclosures are designed to provide franchise
buyers with information about the corporate structure of the franchisor,
any affiliated companies, and any predecessors such as a former owner
of the franchise system.
Item 1: The Franchisor and any Parents, Predecessors, and Affiliates
Item __ FDD disclosures are
designed to provide franchise buyers with information about
franchisor management, franchise sales, and franchisee support
team members, including each team members 5 year employment
history.
Item 2: Business Experience
franchisors must disclose certain types of
litigation that currently involves or previously involved the
franchisor, the franchisor’s affiliates, predecessors, and/or
individual management team members identified in Item 2.
Item 3: Litigation
Within FDD Item __ franchisors must disclose whether or not
the franchisor, the franchisor’s affiliates, predecessors, and/or
individual management team members identified in Item 2
previously filed for bankruptcy.
Item 4: Bankruptcy
Within FDD Item ___ franchisors must disclose all upfront fees
that a franchisee must pay to the franchisor before the
franchisee opens the franchised business.
Item 5: Initial Fees
Within FDD Item __ franchisors must disclose all other fees
that a franchisee must pay to the franchisor throughout the
terms of the franchise agreement. These fees typically include
on-going royalties, brand development fund, marketing,
technology, training, and other fees specific to the franchisor.
Item 6: Other Fees
Within FDD Item __, franchisors must include a low to high
estimate of the estimated cost for a franchisee to establish and
open the franchised business. This estimate must include
everything from build-out costs to reserve capital for the first
three months of operation. The biggest expenses in Item __ relate to expenses related to building-out and equipping the
franchised business.
Item 7: Estimated Initial Investment
Within FDD Item __ franchisors must disclose what products
and supplies the franchisee must purchase from the franchisor
or the franchisor’s designated suppliers. Within Item __ the
franchisor must also disclose revenue and rebates that the
franchisor earned from selling source-restricted supplies and
products to franchisees.
Item 8: Restrictions on Sources of Products and Services
Within FDD Item __ franchisors must disclose, in table
format, the franchisee’s obligations under the franchise agreement. This table includes a summary of all legal
obligations ranging from site selection and opening to default
provisions and the __________ upon termination
of the franchise agreement.
Item 9: Franchisee’s Obligations
Within FDD Item __ franchisors must disclose whether
or not the franchisor offers franchisees financing as to
initial fees to be paid by the franchisor or in connection
with the franchised business.
Item 10: Financing
Within FDD Item __ franchisors must disclose the type of
assistance and training that the franchisor will provide to the
franchisee, advertising requirements imposed on the
franchisee, and the required computer and software systems
that the franchisee will be required to purchase and utilize.
Item 11: Assistance, Advertising, Computer Systems, and Training
Within FDD Item __ franchisors must disclose if the
franchisees will be awarded a protected territory, whether or
not the territory is protected, how the territory will be
determined, and instances where the franchisor reserves the
right to operate within the franchisees territory.
Item 12: Territory
Within FDD Item __ franchisors must disclose information
about the trademarks of the franchise system, including,
whether or not they are registered, the registration status, and
whether or not the franchisor has notice of a trademark
conflict or dispute.
Item 13: Trademarks
Within FDD Item __ franchisors must disclose information
about any patents, copyrights and other proprietary
information that is related to the franchise system.
Item 14: Patents, Copyrights, and Proprietary Information
Within Item __ franchisors must disclose what obligations, if
any, the individual franchisees / franchisee owners must have
in the day-to-day operations of the franchised business
including whether or not they must work in the franchised
business on a full time basis.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
Within FDD Item __ franchisors must disclose its control
over what a franchisee may or may not sell as a part of the
franchised business.
Item 16: Restrictions on What the Franchisee May Sell
Within FDD Item __ franchisors must disclose and
summarize the legal rights and obligations related to the
renewal, termination, and transfer of the franchised business.
This item must also include a summary as to how legal
disputes must be resolved between the franchisor and
franchisee.
Item 17: Renewal, Termination, Transfer, and Dispute Resolution
Within Item __ franchisors must disclose if there are any
celebrities or other public figures that have been hired to
promote the franchise system.
Item 18: Public Figures
Within FDD Item __ franchisors must disclose whether or
not it is making any __________
and if it does, the franchisor must provide specific detail
within Item 19.
Item 19: Financial Performance Representations
Within FDD Item __ franchisors must disclose, in five
separate tables, a summary of the franchised and corporate
outlets over the prior three years and a projection as to future
opening in the next year.
Item 20: Outlets and Franchisee Information
Within FDD Item __ franchisors must disclose and include copies of the Franchisor’s Financial Statements.
Item 21: Financial Statements
Within FDD Item __ franchisors must list and attach as an exhibit all
contracts that a franchisee must sign with the franchisor. These
contracts include a sample of the franchisor’s standard franchise
agreement and related agreements such as a development agreement,
site selection agreement, release agreement, and others.
Item 22: Contracts
Within FDD Item __ Franchisors must include two copies of the
receipt page. The receipt page is the page that a franchisee must sign
to confirm and prove the proper disclosure and delivery of the FDD.
Item 23: Receipts
Provides comprehensive information about the franchisor and
the franchise system to potential franchisees.
FDD
KEY ELEMENTS OF FDD
Franchise Information
Business Experience
Litigation History
Franchise Fees
Financial Statements
Franchisee Obligations
Background, ownership, and business
history
Franchisor Information
Experience of the franchisor’s key executives.
Business Experience
Information on any litigation involving the
franchisor.
Litigation History
Detailed breakdown of all fees and costs associated
with the franchise.
Franchise Fees
The franchisor’s audited financial statements.
Financial Statements
Overview of the franchisee’s responsibilities
and obligations.
Franchisee Obligations
is the legal agreement that creates
a franchise relationship between a franchisor and a franchisee.
Franchise Agreement
KEY ELEMENTS OF FRANCHISE AGREEMENT
- Grant of franchise
- Territory
- Term and Renewal
- Fees and Payments
- Training and Support
- Operational Standards
- Advertising and Marketing
- Termination
- Dispute Resolution
Details the rights and obligations of both
parties.
Grant of Franchise
Specifies the geographic area where the franchisee can
operate.
Territory
Defines the duration of the agreement and
renewal conditions.
Term and Renewal
Outlines initial franchise fees, royalties, and
other financial obligations.
Fees and Payments
Describes the training programs and
ongoing support provided by the franchisor.
Training and Support
Sets the standards and procedures for operating
the franchise.
Operational Standards
Details the franchisor’s and franchisee’s
responsibilities for advertising and marketing.
Advertising and Marketing
Specifies the conditions under which the franchise
agreement can be terminated.
Termination
Outlines the mechanisms for resolving disputes.
Dispute Resolution
This manual provides the “do’s and don’ts” – sometimes
referred to as the “secret sauce” – and all the relevant details
of running the business both long term and day-to-day.
Operations Manual
This provides face-to-face and voice-to-voice details, essentially
an extension of the operations manual, to help in running the
business day-to-day.
Training Program
The franchisor must have a program that helps to market and
promote the franchised business and support the franchisees as a
group, generate greater awareness for the franchise brand and
business, and generate new franchises in other territories for the
good of the overall “franchised system.”
Marketing and Promotion Program
ADVANTAGES OF FRANCHISING FOR THE FRANCHISEE
- Business Assistance
- Brand Recognition
- Lower failure rate
- Buying Power
- Profits
- Lower risk
- Built-In Customer Base
- Be your own boss
DISADVANTAGES OF FRANCHISING FOR THE FRANCHISEE
- Restricting Regulations
- Initial Cost
- Ongoing Investment
- Potential for conflict
- Lack of financial privacy
ADVANTAGES OF FRANCHISING FOR THE FRANCHISOR
- Access to capital
- Efficient growth
- Minimal employee supervision
- Increased brand awareness
- Reduced risk
DISADVANTAGES OF FRANCHISING FOR THE FRANCHISOR
- Loss of complete brand control
- Increased potential for legal disputes
5 ELEMENTS OF A SUCCESSFUL FRANCHISE
- Powerful business systems
- Serious brand power
- Innovation
- Powerful franchisee training
- Wealthy franchisees
A franchise without a business system isn’t a franchise. It’s a business at death’s door.
Powerful Business System
If a franchise is “branded” that usually means it’s popular. It also could mean that
it’s been around for a long time, and that’s why finding a location could be
challenging.
Serious brand power
For a perfect franchise business opportunity to survive in our fast-
paced times, its corporate office must always be looking for ways to
innovate.
Innovation
If you’re going to open a franchise, you need to feel confident about running the business.
Powerful franchisee training
The great franchisors are the ones that focus on franchisee profitability.
A franchisor with lots of very profitable franchisees can’t help but grow.
Wealthy franchisees
12 Characteristics of a Successful Franchisee
- Provide benefit to your
community that might otherwise
not be available. - Not afraid to put in the hours
- Work under pressure
- Desire to learn
- Willingness to delegate
- Adaptability and flexibility
- Leader / Communicator
- Team player
- Ask for help
- Focused on results
- Financial fitness
12.Financial capacity
This type of franchise includes not only a
product, service and trademark, but also the complete method to conduct
the business itself, such as the marketing plan and operations manuals.
Business format franchise
Also known as the FDD, or Franchise Disclosure
Document, the disclosure document provides information about the
franchisor and franchise system.
Disclosure statement
is the format for the
disclosure document which provides information about the franchisor and
franchise system to the franchisee.
FDD
A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control.
Franchise
The legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do
Franchise agreement
The person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.
Franchisee
A method of business expansion characterized by a trademark
license, payment of fees, and significant assistance and/or control.
Franchising
The person or company that grants the franchisee the right to do business under their trademark or trade name.
Franchisor
A franchise where the franchisee simply
sells the franchisor’s products without using the franchisor’s method of
conducting business.
Product distribution franchisee
The regular payment made by the franchisee to the franchisor,
usually based on a percentage of the franchisee’s gross sales.
Royalty
The marks, brand name and logo that identify a franchisor which is licensed to the franchisee.
Trademark
The marks, brand name and logo that identify a franchisor which is licensed to the franchisee.
Trademark
