FRANCHISE ASSESSMENT CHECKLIST Franchising is a powerful and brilliant model for business, but there can also be serious risks involved. It is very important to check out franchise opportunities carefully. Thorough preparation is even more important when developing a franchise system. Use this checklist if you are: > evaluating and seeking to understand a franchise purchase opportunity; or > developing a franchise system. 1. The Product/Service and Business System Does a proven business really exist? Is it franchisable? What is its track record? What is special about the product/service? Is it an enduring product/service or a fad? What has been the experience of other franchisees? (Ask them probing questions) Is it a new business? (Be careful if it is) If this is a new franchise system, has there been a pilot franchise? If so, how successful was it? (A successful business does not always make for a successful franchise) Can an inexperienced franchisee learn to operate it? What are the franchisor s plans for expansion? Are they reasonable? Are they too rapid? Can the franchisee expect to make an adequate profit? What assumptions underlie that expectation? 2. The Franchisor Who is the franchisor? Have they been checked out through credit references, banks, people in the trade, company searches? What is the franchisor s reason for franchising (especially if they started franchising recently)? Does the franchisor fully understand franchising and the importance of the franchise relationship? What reputation does the franchisor have in the market place? What franchise experience does the franchisor have? Have they recently appointed a master franchisee? If there is a master franchisee, how well trained are they to be a franchisor? What are current franchisees views on the franchisor? 3. The Franchisee Do you understand franchising and the importance of the franchise relationship? Are you suited to be a franchisee (not everyone is)? What experience do you have? What training is needed? Are you teachable? Are you willing to take instructions and be subject to controls and restrictions? Have you studied good information about franchising? (You should and it is available)
Franchise Assessment Checklist 2 4. Finance Have you taken independent financial advice from a person experienced in franchising? How strong is the financial position of each party? Does the franchisor have sufficient funding for both ongoing franchise operations and what is planned with their franchise development? Does the franchisee have sound funding? What is the combination of initial payments and royalties? Is bank funding required? If so, is franchisor consent required? Does the franchisor have an acceptable debt/equity criteria? Can the franchise business make a profit based on the level of borrowing anticipated? 5. Profit Projections and Representations (PARTICULAR CARE REQUIRED) Is the franchisee given any sales or profit projections or any other assurances with regard to key aspects of the business? Are they oral or written? What assumptions, facts and modelling are they based on? Are they really achievable? Are you relying on any statements/assurances/representations made? (Be wary) If so, record them in writing by mutual agreement. Have the anticipated results been achieved in the past, in this or comparable franchises? What happens if they are not achieved? What other representations have been made? (If a franchisor makes too many, then be careful) Are they recorded in the documents? How cautious is the franchisor when communicating about such matters? (Caution is healthy) How open and transparent is the franchisor with financial data? (Openness is healthy) Are assumptions for projections made clear? (They should be) Are there warnings and disclaimers in relation to relying on information? (There should be although they don t benefit the franchisee, they are a sign the franchisor is careful) Is the franchisee challenged to make their own independent inquiries? Is there an income guarantee? If so, what are the conditions, qualifications and exceptions to that? 6. Exclusivity Are there exclusive products, customers or territories? How well defined is the exclusivity? Can the franchisor alter the territory at a later stage? Is exclusivity conditional upon your performance? Can the franchisor operate in the territory? 7. Terms of Payment Is the franchisor s income related more to upfront fees or on-going revenue from franchisees? (It is generally better if the franchisor s income comes more from revenue-based royalties or something else that fluctuates in line with franchisee revenues although there will usually be a combination of up-front payments and ongoing fees) Are there minimum payments?
Franchise Assessment Checklist 3 Are there any hidden royalties or other payments (such as management fees, administration levies, local advertising costs or IT licensing costs) Are the royalties fixed or related to turnover? Can the franchisor change them? 8. Location Is this chosen by the franchisor? If so, what are the site selection criteria? Have you been advised of the assumptions underlying the site selection criteria? Is it a suitable location? Have you made your own independent inquiries? (You should) What do other franchisees think about the suitability of the site? Do the premises have to be leased from a landlord, or subleased from the franchisor? Who negotiates terms and how much power do they have to negotiate concessions from the landlord? How do the provisions of the lease fit with the franchise agreement? If the franchisor is head lessee and defaults on the lease, what happens to you, the sub-tenant? Are the terms of any lease adequately disclosed and acceptable? Are there any Resource Management or Building Act issues (parking, weather tightness etc)? What additional costs are payable to the landlord under the lease (advertising costs, contributions to maintenance funds etc)? Can the landlord relocate you or cancel your lease if they decide to redevelop the building? 9. Length of Franchise What is the term of the franchise agreement? Is the initial term long enough to recover your investment? What are the renewal provisions? Is renewal on the same terms as the present agreement or on the basis of "the then current franchise agreement"? (This is usual but check with other franchisees whether the franchisor has ever abused this right) Is a further fee or any other costs payable on renewal? How does the term relate to the term of lease? What happens if one expires before the other? 10. Intellectual Property Are there trade marks, logo, patents or unique designs involved? What is their legal status? Are they adequately defined and protected? What rights are there to use them? What profile do the logos, trade marks and franchise name have? Does the franchisor undertake to enforce and protect its intellectual property? 11. Support and Training What training is provided, at commencement and subsequently? Where and when does it occur? Who has to pay for the training? Do you have to satisfactorily complete training to be able to buy the franchise? What other support is available? Is it clearly specified in the franchise agreement?
Franchise Assessment Checklist 4 What has been the experience of other franchisees? Are there franchisee meetings? Who pays for them and how often are they held? 12. Operating Manual Is there a comprehensive operating manual? When was it last updated? What does it show about the franchise system? Are there terms of trade specified in the manual? Are health and safety issues adequately covered? 13. Advertising/Marketing Material Who controls advertising? What is the franchisor s medium/long term marketing strategy? Is the franchisor to advertise on behalf of all franchised outlets? If so, to what extent? Do other franchisees find the marketing strategy acceptable? Does the franchisor vet all advertising? Is there an advertising levy? Does the franchisor charge a levy to its own outlets? Do you have to also undertake local area marketing in addition to the franchisor s national marketing? Does the franchisor have a marketing plan? If so, can you see it? Is there a separate trust account for advertising levies? 14. Purchasing Requirements What restrictions apply to the sourcing of stock, equipment, services and other products? Does the franchisor charge a mark up? What protection do you have against price increases? Do purchase and/or pricing and sales requirements offend competition law? Can you buy elsewhere if it meets required standards? Are those standards reasonable? What does the operating manual say about purchase requirements? Does the franchisor receive any remuneration from suppliers? How secure are the franchisor s supply lines? How dependent is the franchise on secure long term supply arrangements? 15. Resale Price Maintenance Are there terms for resale pricing? Are they legal? Are there maximum or recommended prices? 16. Taxation Have you checked the tax implications? What is the best business structure for you from a taxation perspective? 17. Competition Considerations Can you carry on other businesses or have additional franchises? Can the franchisor inhibit or prevent your involvement in certain circumstances?
Franchise Assessment Checklist 5 Are you restrained from competing after the end or sale of the franchise? Can you own an interest in a competitor business? 18. Insurance What insurance is required? For what risks? Whose interests are to be covered? Must the insurance be with a particular insurer or under a group scheme? If so, what are the benefits of that scheme? Does the franchisor have insurance protection itself? What does it cover? 19. Indemnities Are there indemnities between franchisors and franchisees? Are the indemnities reasonable? Does the franchisor indemnify the franchisee for intellectual property use? 20. Guarantors Is a personal guarantee required? If so, by whom? Are the guarantee provisions reasonable? 21. Variation of Agreement How can the agreement be varied? By the franchisor on notice? Indirectly, by the franchisor varying the operating manual? 22. Temporary Operations Are there provisions for temporary operation in the event of death, illness or default of the franchisee? Are these reasonable? 23. Policing When may the franchisor's representative enter premises, inspect books and demand changes or repairs be made? What reporting is required and what records have to be kept by law and to satisfy the franchisor s requirements? What technology requirements exist? What will they cost? 24. Sale and Assignment by Franchisee Can the franchise be assigned or sold? What are the franchisor s criteria for approval of a purchaser? What is paid to the franchisor on assignment? Are you released from your obligations on assignment? 25. Termination Provisions Are they fair? Are the terms acceptable to your financier?
Franchise Assessment Checklist 6 Can the agreement be terminated for a reason beyond a party's control? What notice is required? Can the franchise be terminated for minor reasons? What happens to telephone and facsimile numbers, email addresses, websites and customers on termination? What happens to stock and advertising material still on hand on termination? If you stay in the premises, what provisions apply about redecorating or re-equipping the premises? Is there any compensation or goodwill payable on termination or expiration? (This is not normal) What happens to a sub-franchise if a master agreement ends? 26. Dispute Resolution Is there a dispute resolution procedure? If so, is it by mediation or arbitration? Are there good communication processes in place to resolve conflict? Are there any existing or past disputes associated with the franchisor or its key personnel? 27. Cooling Off Does a cooling off period apply and, if so, from what date? How much money can the franchisor retain if you cancel the agreement during cooling off? 28. Franchise Association of New Zealand Is the franchisor a member of the Franchise Association of New Zealand (FANZ)? If so, does the franchise agreement require you and the franchisor to comply with the FANZ Code of Practice and Code of Ethics? Have you been given a copy of the FANZ Code of Practice and the Code of Ethics? Have you received and read the disclosure document required by FANZ to be given by its members? Have you obtained information on franchising from FANZ? (You should) For more information and assistance, contact: David Munn (Partner) Email david.munn@gazeburt.co.nz Ph. (09) 414 9800 Michael Bright (Partner) Email michael.bright@gazeburt.co.nz Ph. (09) 303 9279 www.gazeburt.co.nz