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Prepared By: Robert Auerbach Email: robert@auerbach.co.nz Website: www.marketnewzealand.

com/auerbach

Franchise Agreement
checklist
Disclaimer:
These checklists are provided for information purposes only and are no substitute for professional advice, which should be sought prior to entering into any transaction. New Zealand Trade and Enterprise (NZTE) has not verified these checklists and makes no representations as to the completeness, correctness, currency, accuracy or fitness for purpose of the information, or the person that prepared the information. Accordingly, NZTE will not be responsible for any damage or loss suffered by any person arising from the information whether that damage or loss arises from negligence or otherwise.

This document is one of a series of free information tools for exporters to assist businesses through every stage of the export process.
Franchise Agreement Checklist May 2006

For the protection of Robert Auerbach's clients, all names in this document are fictitious. Any resemblance to actual people or companies is purely coincidental. For information or advice, visit www.marketnewzealand.com, ring NZTE on 0800 555 888 or contact your Client Manager.

contents
synopsis ........................................................................................................................ 3 1. the contracting parties ............................................................................................ 3 2. the franchised products .......................................................................................... 4 3. The franchised services .......................................................................................... 4 4. franchised territory .................................................................................................. 4 5. is the franchise exclusive? ..................................................................................... 4 6. is the franchise limited as to the class of customers to whom Company A Malaysia may sell? ....................................................................................................... 5 7. describe Company A New Zealands obligations as the franchisor................... 5 8. describe Company A Malaysias obligations as the franchisee ......................... 6 9. the franchise fee....................................................................................................... 7 10. payment terms of franchise fee ............................................................................ 7 11. term of agreement .................................................................................................. 7 12. minimum requirements to maintain the franchise.............................................. 8 13. use of company a new zealands tech-nology and know-how .......................... 8 14. use of the Company A brand............................................................................. 8 15. manufacturing competitive products................................................................... 8 16. confidentiality and non-disclosure....................................................................... 9 17. sale of franchise ..................................................................................................... 9 18. sub-franchising ...................................................................................................... 9 19. design modifications and improvements ............................................................ 9 20. plant access............................................................................................................ 9 21. audit and inspection rights ................................................................................... 9 22. furnishing financial and management reports.................................................. 10 23. sole supply status ................................................................................................ 10 24. amendments to the articles of incorporation of Company A Malaysia .......... 10 25. subjects to be included in a separate memorandum of understanding......... 12 26. compliance with laws and regulations .............................................................. 12 27. mediation .............................................................................................................. 12 28. arbitration.............................................................................................................. 12 29. governing law ....................................................................................................... 13 30. personal guarantee .............................................................................................. 13 31. any other considerations .................................................................................... 13

Franchise Agreement Checklist May 2006

synopsis
Company A New Zealand proposes to grant Company A Malaysia a franchise to operate a business in Malaysia involving the assembly and sale of popcorn machines. As part of the franchise, Company A New Zealand would undertake to: Transfer to Company A Malaysia all operating procedures, quality control procedures and know-how concerning the assembly of popcorn machines. Sell to Company A Malaysia the key components of popcorn machines. Provide marketing assistance, power system design assistance and technical support to Company A Malaysia. Company A Malaysia, in turn, would undertake to: Conduct the business subject to specific franchise operating rules. Pay a franchise fee calculated as a percentage of its pre-tax profit. Amend its articles of incorporation to provide various safeguards to minority shareholders. The purpose of this checklist is to highlight for the parties consideration these and other issues upon which they would need to reflect the preparation of a franchise agreement.

1. the contracting parties


1.1. The Franchisor: Company A full name <address> <telephone> <fax> <e-mail>

Contact: name

1.2. The Franchisee: Company A full name <address>


Franchise Agreement Checklist May 2006

<telephone> <fax>

<e-mail>

Contact: name

2. the franchised products


2.1. The Franchised Products are popcorn machines designed and manufactured by Company A New Zealand. 2.1.1. Thats a general description of the Franchised Products. Describe, more specifically, the various types of Franchised Products. 2.2. Are there any other products that Company A Malaysia will sell? 2.2.1. Will Company A Malaysia ever sell components, separately, in other words, not as part of a complete popcorn machine?

3. The franchised services


3.1. Will Company A Malaysia ever sell consulting services? 3.1.1. If so, describe.

4. franchised territory
4.1. What is the territory in which Company A Malaysia will operate? 4.1.1. Are sales limited to that territory? 4.1.2. May Company A Malaysia set up operations anywhere in its territory?

5. is the franchise exclusive?


5.1. Can Company A New Zealand grant franchises to other companies within the same territory? 5.1.1. Consider nominating an exclusive territory and a non-exclusive territory. 5.2. Can Company A New Zealand export popcorn machines, or components thereof, to customers within Company A Malaysias territory? 5.2.1. Again, this may depend upon whether Company A Malaysias territory is exclusive, non-exclusive, or part exclusive and part non-exclusive. 5.3. Can Company A Malaysia sell products, or provide services, to customers outside its territory?
Franchise Agreement Checklist May 2006

6. is the franchise limited as to the class of customers to whom Company A Malaysia may sell?
6.1. May Company A Malaysia sell to all customers within its territory or just to a specific class of customers?

7. describe Company A New Zealands obligations as the franchisor


Provide more detailed information concerning each item below: 7.1. Transfer the Build Package. 7.1.1. This should be the detailed package containing instructions, quality control procedures, operating procedures and know-how for the assembly of popcorn machines. 7.2. Provide operational support. 7.2.1. This refers to support on the factory floor, staffing, and other types of operational support. 7.3. Provide quality control support. 7.3.1. The Franchise Agreement should establish appropriate quality control safeguards. 7.4. Supply components. 7.4.1. Specify the types of components. 7.4.2. Specify the terms of supply. 7.5. Provide design support. 7.5.1. This refers to the use of Company As Design Department. 7.6. Provide technical support, know-how and expertise. 7.6.1. Specify what type and how much. 7.7. Provide procurement assistance. 7.8. Provide new product launch and implementation support. 7.9. Transmit drawings. 7.9.1. Specify what types of drawings.
Franchise Agreement Checklist May 2006

7.10. Provide marketing support. 7.10.1. Specify what type and how much.

7.11. Provide use of the Company A name. 7.11.1. Mention trademark registration requirements. 7.12. Provide training. 7.12.1. Specify what type and how much. 7.13. Will Company A New Zealand provide any financial support to Company A Malaysia? 7.13.1. If so, provide details (e.g. Liberal payment terms). 7.14. Is there anything else that Company A New Zealand will provide?

8. describe Company A Malaysias obligations as the franchisee


Provide more detailed information concerning each item below: 8.1. Conduct its business at all times in compliance with the operating rules prescribed by Company A New Zealand. 8.1.1. Furnish more details about these operating rules. 8.2. Maintain a skilled work force. 8.2.1. If necessary, specify the type of skills required. 8.3. Market development. 8.4. Assembly of components and accessories. 8.5. Advertising and Promotion. 8.5.1. Describe Company A Malaysias obligations to promote the Franchised Products. 8.5.2. Will Company A Malaysia be required to commit to spend a certain sum, expressed as a percentage of sales, to promote the Franchised Products? 8.6. Quality control. 8.6.1. Agree to periodic quality reviews. 8.7. Distribution. 8.8. Warranty service.
Franchise Agreement Checklist May 2006

8.9. After sales service. 8.10. Acceptance of technology up-grades and support.

8.11. Will Company A Malaysia ever act as agent for Company A New Zealand concerning a direct sale by Company A to a customer within the territory? 8.12. Other obligations.

9. the franchise fee


9.1. 31% of pre-tax profit (or perhaps an equivalent figure based on sales). 9.1.1. Define pre-tax profit. 9.2. Fair statement of pre-tax profit. 9.2.1. The Franchise Agreement would contain the standard anti-mischief clauses to ensure the full recognition of pre-tax profit. (e.g. Overhead shall not exceed x% of sales.) 9.2.2. The Franchise Agreement would prohibit certain practices that have the effect of reducing pre-tax profit or deferring its recognition. 9.3. Tax considerations. 9.3.1. Is any withholding tax required by Malaysia law to be deducted from franchise fees? 9.3.2. Is there a tax treaty in effect between Malaysia and New Zealand? 9.4. Any other form of compensation. 9.4.1. Initial one off franchise fee. 9.4.2. Fixed annual sum. 9.4.3. Consulting fees. 9.4.4. Travel.

10. payment terms of franchise fee


10.1. Frequency of payment. 10.2. Manner of payment.

11. term of agreement


11.1. Initial term. 11.1.1. What was the effective date of the Franchise Agreement? That is to say, when did Company A Malaysia commence operations.
Franchise Agreement Checklist May 2006

11.1.2. When will the initial term expire? 11.2. Renewal options.

11.2.1. If so, on same or different terms and conditions. 11.3. What are the parties rights and obligations upon termination. 11.3.1. I would assume that, upon termination, Company A Malaysia would stop assembling and marketing popcorn machines.

12. minimum requirements to maintain the franchise


12.1. Establish minimum sales or production volumes during the term of the agreement. 12.1.1. What happens if Company A Malaysia fails to meet the minimums? Normally, failure to meet the minimums gives rise to termination at the franchisors option.

13. use of company a new zealands tech-nology and knowhow


13.1. The Franchise Agreement will include the normal clauses relating to incontestability, action against infringers, etc. 13.1.1. Are there any special clauses that the parties may wish to add that are unique to their particular relationship?

14. use of the Company A brand


14.1. Is the Company A brand registered in the territory in the name of Company A New Zealand? 14.2. Describe any special conditions concerning Company A Malaysias use of the Company A brand. 14.2.1. Once again, the Franchise Agreement will include the normal clauses relating to incontestability, action against infringers, etc. 14.3. Must Company A Malaysia use the Company A brand to the exclusion of other names or brands?

15. manufacturing competitive products


15.1. Can Company A Malaysia handle products which are competitive with the Franchised Products mentioned in 2? 15.1.1. Set limitations. 15.1.2. Define what constitutes a "competitive product". 15.1.3. Establish a time limit. For example, during the term of the Franchise Agreement and ___ years thereafter. 15.2. Can Company A Malaysia sell any other products and services whether or not they are competitive?

Franchise Agreement Checklist May 2006

15.2.1. If so, will Company A New Zealand earn a franchise fee on the pre-tax profit derived from the sale of other products?

16. confidentiality and non-disclosure


16.1. Define what constitutes confidential information and prohibit its disclosure. 16.2. The Franchise Agreement will include the normal clauses concerning confidentiality. Are there any unique aspects to this relationship that deserve special mention? 16.2.1. Company A Malaysia should keep all drawings and other materials sup-plied by Company A New Zealand confidential.

17. sale of franchise


17.1. Can Company A Malaysia sell the franchise? 17.1.1. Describe the procedure if Company A Malaysia wishes to sell the franchise. 17.1.2. Specify the criteria by which Company A may reject a proposed buyer. 17.1.3. Consider giving Company A New Zealand a pre-emptive right or right of first refusal.

18. sub-franchising
18.1. Can Company A Malaysia enter into sub-franchises? (Probably not.)

19. design modifications and improvements


19.1. What happens if Company A Malaysia makes design modifications and improvements to the Franchised Products? 19.1.1. Normally, a franchise agreement will contain a grant back clause meaning that any improvements developed by the franchisee belong to the franchisor.

20. plant access


20.1. Should Company A New Zealand have absolute, unrestricted, access to the plant of Company A Malaysia? (I presume so.) 20.2. Will Company A New Zealand have the right to second an employee to Company A Malaysia? 20.2.1. Provide details.

21. audit and inspection rights


Franchise Agreement Checklist May 2006

21.1. Company A New Zealand should have the right to audit and inspect Company A Malaysias books and records at any time.

21.1.1. I presume that this would be a very broad grant.

22. furnishing financial and management reports


22.1. What information should the financial and management reports contain? 22.1.1. Budgets. 22.1.2. Schedule of sales booked and tendered for. 22.1.3. Schedule of debtors. 22.1.4. Schedule of creditors. 22.1.5. Profit and loss statement. 22.1.6. Balance sheet. 22.1.7. Cash flow statements. 22.1.8. Forecasts of sales. 22.1.9. Forecasts of orders for components. 22.1.10. Marketing Plans. 22.1.11. Other financial or management reports [specify]. 22.2. How frequently should Company A Malaysia prepare financial and management reports?

23. sole supply status


23.1. Will Company A New Zealand act as the sole supplier of main components? 23.1.1. Are there any other components concerning which Company A New Zealand will be the sole supplier? 23.2. Are there any products that Company A Malaysia may buy from third parties even though Company A offers them for sale?

24. amendments to the articles of incorporation of Company A Malaysia


The following issues are more appropriate in the Articles of Incorporation of Company A Malaysia than in a Franchise Agreement.

Franchise Agreement Checklist May 2006

24.1. Change in number of directors and voting rights? 24.2. The following corporate actions should require a two thirds majority of the shareholders. 24.2.1. Issuing shares or other-wise changing the capital structure.

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24.2.2. Expanding the board of directors. 24.2.3. Buying out a shareholder. 24.2.4. Compensation practices. 24.2.5. Entering into a licensing agreement, joint venture or distribution agreement. 24.2.6. Any other transactions between Company A Malaysia and the shareholders, or their affiliates. 24.2.7. Any decision by Company A Malaysia to manufacture main components. 24.2.8. Appointment of accounting firm. 24.2.9. Borrowing money. 24.2.10. Purchasing or selling a substantial asset. (De-fined as possessing a value greater than 20% of total assets.) 24.2.11. Incurring or discharging a substantial liability. (Defined as possessing a value greater than 20% of total liabilities.) 24.2.12. A merger or acquisition. 24.2.13. Any other change in control. 24.3. If allowed under Malaysia law, consider creating two classes of shares, class A and class B. 24.3.1. Establish different rights and preferences as to voting, dividends and proceeds from the sale or liquidation of Company A Malaysia. 24.4. Pre-emptive rights. 24.4.1. Presently, the Articles of Incorporation does not have a pre-emptive rights clause. 24.5. Anti-dilution. 24.5.1. Such a clause prevents dilution of a minority shareholder through the issuance of options or shares to third parties. 24.6. Sale of Shares. 24.6.1. Either party could sell to a third party, subject to a right of first refusal by the other party. 24.6.2. In all other cases where there is no third party, if a party wanted to sell its shares (Selling Party), it would offer them to the other party at fair value.
Franchise Agreement Checklist May 2006

24.6.2.1. Fair value would be determined by an independent chartered accountant. 24.6.2.2. If the other party did not wish to buy the shares, the Selling Party would have to find a third party buyer.

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24.6.2.3. If the Selling Party found a third party buyer, the other shareholder would still have a right of first refusal at that stage. 24.6.2.4. If the Selling Party could not find a third party buyer, then the Selling Party could force a liquidation.

25. subjects to be included in a separate memorandum of understanding


The following subjects may not be appropriate either within the Franchise Agreement or within the Articles of Incorporation. The parties should consider entering into a separate Memorandum of Understanding concerning these issues. 25.1. Dividend policy. 25.2. Repatriation of capital in a hard currency. 25.3. Restrictions against self-dealing (i.e. Transactions between Company A Malaysia and a shareholder or any other company in which a shareholder has an interest). 25.4. Compensation practices. 25.5. Other operational issues not covered by the Franchise Agreement.

26. compliance with laws and regulations


26.1. Company A Malaysia will be responsible for all legal compliances. 26.2. Company A Malaysia will ensure that the Franchised Products meet or exceed relevant standards, etc.

27. mediation
27.1. Do the parties wish to establish a mediation procedure prior to submitting the dispute to arbitration or commencing court proceedings? 27.1.1. Considering appointing a professionally trained mediator from a Big Eight accounting firm.

28. arbitration
28.1. Do the parties wish to provide for the arbitration of all disputes between them? 28.1.1. Consider arbitration in Singapore pursuant to the rules of the SIAC. 28.2. The agreement could provide that the arbitrator may award 31% of Company A Malaysia to Company A New Zealand if the arbitrator determines that Company A Malaysia has committed a material default of the Franchise Agreement.

Franchise Agreement Checklist May 2006

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29. governing law


29.1. New Zealand?

30. personal guarantee


30.1. It is common for the principal of the franchisee to give their personal guarantee. 30.1.1. Will the Company A Malaysia representative give their personal guarantee of the Franchise Agreement?

31. any other considerations


31.1. Jot them down here.

Prepared by: Robert Auerbach P.O. Box 34-555 Birkenhead, Auckland 1330 New Zealand Tel: +64-9-419-2214 Fax: +64-9-418-3651 E-mail: robert@auerbach.co.nz Website: www.marketnewzealand.com/auerbach

Disclaimer:
These checklists are provided for information purposes only and are no substitute for professional advice, which should be sought prior to entering into any transaction. New Zealand Trade and Enterprise (NZTE) has not verified these checklists and makes no representations as to the completeness, correctness, currency, accuracy or fitness for purpose of the information, or the person that prepared the information. Accordingly, NZTE will not be responsible for any damage or loss suffered by any person arising from the information whether that damage or loss arises from negligence or otherwise.

Franchise Agreement Checklist May 2006

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