Franchising

Course Description: The course introduces franchising as a method of retail business in which the
investor/franchisee makes an investment in the form of a franchise fee in exchange for the right to
promote goods, services, and/or processes directly to the public. A franchise usually has a
recognizable name or trademark. Franchising involves the integration of independent companies at
different levels and in different areas of production and distribution. This integration permits more
effective sales and advertising.

Topic3: Franchise Development and Legal Documentation

Learning objectives

 Define a business plan

 Understand how to create an effective franchise business plan
 Discuss the element of a franchise business plan
 Understand what is a Franchise Disclosure Document
 Understand the Franchise Agreement
 Understand the Legal considerations of Franchising

Business Plan

A business plan serves as blueprint for the business. This guides the business, provides direction and
shows where the business is going. Business plan is strategic and refers to a written outline of the
future of your company, a document that tells you what you expect to do and how you plan to do it 1.

Please watch the video: https://www.youtube.com/watch?v=FjWLdTHnbMg

Business Plan Elements

 Executive Summary2

This is a summary of the company, goods and services, opportunities, challenges, approaches,
target market, competition, competitive edge, investment and financial analysis, and
forecasted return on investment. It also answers the questions: How are you going to fulfill
the gap between the marketplace? Is there a potential of growth?

 Business Description

Business information, including the date the company opened, the founders of the business
were and whether they are still involved in the business. This segment will provide a review of
the products and/or services. Description of the market and competition, an explanation of
the business process for delivering goods to the customer and a review of the risks involved
(Kuratko 2019).

1
Retrieved from: www.entrepreneur.com
2
Retrieved from: www.pointfranchise.co.uk
  Industry analysis and background 3

You have to consider the business you are in, your competition and your market place.
(Porter’s 5 Forces Analysis)
o Size of the industry?
o Who are the entities involved? (competitors, franchisors, suppliers)
o How many firms are in the market?
o How many potential customers in the market?
o Key performance factors in order for a company to be successful?
o What do sales and market reports say about the potential growth?
o Determine the government policies and business trends that will affect your company

 Market Analysis and Strategy

This part of the business plan is where you check at the existing market trends, and your
competitors. This considers your potential clients, size of the market, trends in the market,
emerging market, market share and the type of location (Kuratko 2019)

 Description of Day to Day Operations

This explains the hiring, compensation of workers and the development programs that you
and the franchisee can have. This segment helps with providing the necessary goods and
equipment to sell to run the company (Seid and Thomas).

 Marketing Plan

Marketing Plan is a formal document that explains details of an advertisement campaign

implemented by a company to create leads and reach its target market. In this part of the
business plan we need to explain how we are going to sell our products and services, pricing
policy and sales and distribution (Kuratko 2019)

 Management and Organization structure

According to Kuratko (2019) it describes the management team, the key personnel,
compensation plans, employment agreement, recruitment, benefits and retention plans.

 Financing

This section provides information about the finances of the company this includes: Profit and
Loss Statement forecast, Cash Flow analysis for 5 years, break even, cost controls, budget
plans. This also determines the costs needed to start the franchise and the additional funding
required to meet the standard (Kuratko 2019)

 Implementation and Time table

Refers to the timing and objectives, deadlines, milestones and relationship of events (Kuratko
2019)
3
Retrieved from: https://corporatefinanceinstitute.com/
  Appendix or Bibliography

Raising Capital (International Franchise Association)

 Yourself
 Family
 Friends
 Savings and investment
 Partner (Find an angel investor)

An angel investor is referred to as a person who invests in a small business venture and
provides a start-up or expansion capital (Ward, 2020) 4. These are people who have extra
money and are looking for ways to make the value of their money grow. The angel investors
can be: family and friends, Rich individuals and other investor groups.

 Selling personal assets

 Loans

Getting Legal

Franchise Disclosure Document

This is a legal document to be submitted to a prospective franchisee by a franchisor before it can be

sold. The FDD includes 23 disclosure parts that allow a franchiser to reveal details about the
franchisor, the franchise opportunity being offered; fees paid by the franchisor, the legal arrangement
between the franchisor and the franchisee under the franchise laws 5.

According to International Franchise Association the following are the FDD parts:

1. The franchisor- This segment explains the business and its history

2. Business Experience- This segment includes technical and biographical detail about the
franchisors and their managers, directors and executives.

3. Litigation- This segment presents the franchisor and its executives with both present and
previous criminal and civil litigation.

4. Bankruptcy- This section provides information about the franchisor and any management who
have gone through bankruptcy.

5. Initial Fees- This segment provides a list of initial fees and the number and variables that define
the amount of the charges.

6. Other Fees- This section outlines all other ongoing expenses or payments needed to be made.

4
Retrieved from: https://www.thebalancesmb.com/
5
Retrieved from: www.franchiselawsolutions.com
7. Initial Investment- This item is illustrated in table format and contains all the expenses the
franchisee needs to make to create the franchise.
8. Restriction on sources of products and services- This portion contains the limitations the
franchisor has placed on the source of the goods or services.

9. Franchisee’s obligations- This item gives a table of reference indicating where franchisees can
find the obligations they have consented to in the franchise agreement.

10. Financing- Each element outlines the terms and conditions of any funding deals the franchisor
is providing.

11. Franchisor’s Assistance, Advertising, Computer Systems and Training- This segment explains
the services the franchisor would give the franchisee.

12. Territory- This portion defines every exclusive area, and how territories should be modified.

13. Trademarks- This segment provides information and lists of trademarks, service marks and
trade names of the franchisor.

14. Patents, copyrights and proprietary information- This segment provides details about how the
franchisee will use the patents and copyrights.

15. Obligation to participate in the actual operation of the franchise business- This segment
explains the franchisee's duty to engage in the firm's actual service.

16. Restrictions on what the franchisee may sell-The section addresses any limitations on the
goods and services that could be sold by the franchisee to its clients.

17. Renewal, termination, transfer and dispute resolution- This part informs you when and where
you should renew or cancel your franchise, and what your privileges and conditions are when
you disagree with your franchisor.

18. Public Figures-This is where the franchisor utilizes the use of public figures (celebrities or
prominent persons), this segment shows the amount the person is being paid.

19. Financial Performance Representations-Here the franchisor is permitted to give details on the
financial results of the company.

20. Outlets and Franchisee Information-This segment includes current franchised stores and
contact details.

21. Financial statements- This covers audited Financial Reports for the last three years.

22. Contracts-This element sets out all the documents the franchisee would have to sign.

23. Receipts- Potential franchisees must sign a certificate they have received from the FDD
Franchise Agreement

The Franchise Agreement (FA) is the legal document which unites the franchisor and the franchisee.
The formal agreement highlights the rights and responsibilities of both the franchisor and the
franchisee. This includes the duration of the contract, the beginning and ending dates, the extension
terms and the termination of the contract6.

According to Philippine Franchise Association a Franchise Agreement must include the following:

 Terms of Agreement

As stated by Philippine Franchise Association the FA is describing the contract outlining the
type of partnership a franchisee has with the franchisor. The arrangement with a franchise is
temporary in nature the FA will decide how long the agreement would last. The franchise will
be declared null and void at the end of a specified time.

 Renewal

Renewal periods give the franchisor the opportunity to evaluate the FA and thus allow him to
assess whether or not to extend the agreement. Effective output of the franchisee is very
important. Yet a franchise extension does not ensure that the initial terms and conditions of
the agreement will be retained. The franchisor can still charge a renewal fee, if applicable
(Philippine Franchise Association).

 Termination

The Franchise agreement clearly states the ground for termination of the contract. For certain
cases, violations of these terms can be resolved, but if repeated over time or failure to comply
on them will result for termination of the contract (Philippine Franchise Association).

 Fees

According to the Philippine Franchise Association, this segment of the FA outlines the expense
and date wherein the franchisor should be paid. The fees included: franchise fees, royalties
and marketing contribution. The initial franchise fee, may not be refundable and is charged at
the beginning of a franchise relationship, granting the franchisee the right to participate in the
business under the name and business method of the franchisor. Royalties are normally a
percentage of revenue by the franchisee and are generally paid weekly or monthly. System-
wide marketing expenditures often rely on the percentage of sales by the franchisee.

 Territory

Defines the territorial limits under which a franchisee can function, or within which no other
entity of the franchisor can compete (Philippine Franchise Association).

6
Philippine Franchise Association
  Purchase of Products

Consistency of the products and services should be maintained. The FA stipulates that the
franchisee can only purchase from franchisor-accredited suppliers. The Operations Manual
includes a comprehensive list of the authorized suppliers (Philippine Franchise Association).

Obtaining Trademark

As a franchisor you are granting your franchisee a permission to use your name in a franchise.
Trademark issue is a problem for new franchisors. If the term you have selected is already marked or
has no trademark, you may need to reconsider and plan again. Generic or descriptive names are hard
or impossible to protect (Siebert 2016).

Examples:
 Burger King was originally Insta-Burger King
 Denny’s was originally Danny’s Donuts
 Domino’s Pizza was originally DomiNick’s
 Dunkin’ Donuts was originally Open Kettle
 KFC was originally Kentucky Fried Chicken
 Subway was originally Pete’s Super Submarines

Protecting Your Intellectual Property

What is an Intellectual Property?

According to the world intellectual property organization this pertains to the creations of the
imagination, such as inventions; works of literature and art; designs; and words, names and pictures
used in commerce. A key feature of the franchise partnership includes sharing your intellectual
property with your franchisees, which includes your corporate secrets and business processes (Siebert
2016). Confidentiality of trade secret information found in their operations manuals must be
discussed in the FDD and the franchise agreement (Siebert 2016)

Mitigating Franchisee Litigation Exposure

According to Siebert (2016) this refers to contract issues, the two issues that appear vulnerable to
litigation are infringements of franchise law and sales fraud. The avoidance of violations of franchise
law and allegations of fraud are primarily a matter of education, diligence and the recruitment of an
experienced franchise attorney. Checklist by Siebert (2016):

 Collaborate with your franchise lawyer to train all of your salespeople about franchise laws
and ensure they go through training and refresher course once a year so that mistakes will be
alleviated.
 Training should include:
o Franchisee screening and selection process
o Where you are required to register to sell franchises and what questions should the
salesperson ask to evaluate whether the proper registrations are in place.
o When they are going to make disclosure
 o Proper format for disclosure and documentation of that disclosure
o What should not and should be said in the process especially the issues
o Consistency of franchise disclosure document in the sales process
o Conforming with FDD's 14-day rule and the seven-day rule for amended franchise
agreements
o Composing bulletproof emails and record conversations
o Know when they should communicate with the franchise attorney

 Offer similar less rigorous training to non-sales workers that will teach them how to manage
franchise sales without breaking franchise laws and understand how to transfer such leads to
people who are qualified to respond to questions properly.
 Assign someone to be your Compliance Officer
 Make sure that your team is honest
 During their closing interview, ask each franchisee about any mistakes that were made during
the selling process.
 Record all interactions with franchisees and potential franchisees
 Formulate a no-tolerance policy.

The Contractual Liability Trade off (Siebert 2016)

 Prevent incremental exposure to rentals, rented facilities or other transactions related to the
launch of an additional place
 Prevent work-related accidents by following safety protocols
 Prevent employee liability, issues, violations and sexual harassment in the workplace
 Prevent any workplace injury and workers ' compensation costs

Quantifying Risk

To avoid risk we must always abide to the franchise laws. As stated by Siebert (2016) violating the
federal or state laws or legislation, you will be forced to report such offences in your FDD for 10 years.
Since all of your prospective franchisors can see these violations, such disclosures might cost you the
loss of franchise sales. Complying with franchise laws is fairly simple when you employ professional
franchise counsel. The punishments for failure to comply are high (Siebert 2016).

Vicarious Liability Concerns (Siebert 2016)

Vicarious Liability-A franchisor can be held liable because of the actions of its franchisees or
employees of their franchisees. Vicarious liability may occur in circumstances where one party is
accountable for (and has power over) a third party and is incompetent in the execution and exercise
of that responsibility (Siebert 2016).

Example: Mc Donald’s coffee case (Siebert 2016)

A customer called Stella Liebeck suffered third-degree burns on her legs when she poured hot coffee
on herself in a drive-thru franchisee. McDonald's ultimately settled for an undisclosed sum, but
Liebeck was awarded $640,000 at court (reduced by the judge from the $2.8 million that the jury
initially awarded). In the case of McDonald, the franchisor ordered his franchisees to provide coffee
between 180o and 190o F — a temperature that was hot enough to cause third-degree burns — and
the judge noticed that the cup precautions were inadequate

According to Siebert (2016) vicarious liability litigation to injure you as a franchisor would allow
someone to:

 Demonstrate that excessive control was exerted so the employee / franchisee did not function
as an independent contractor.
 Verify that this verification contributed to responsibility.
 Obtain bonus beyond your franchisee's insurance package and your own insurance cover.

Finding the Right Attorney (Siebert 2016)

Siebert (2016) stated that you may want to weigh a variety of factors when selecting your franchise
attorney: industry knowledge, location, company size, franchisor emphasis, transactional emphasis,
franchise experience, price and fee structure.

Unauthorized Practice of Law

According to Siebert 2016 having an experienced attorney you can do the following:
 Prevents conflicts of interest
 Prevent paying for legal documents twice
 Using the law firm for legal proceeding
 Obtain legal expert guidance on the matter
 Rest assured that the firm which produced your legal documents is fully insured in the
extremely probable event of an issue.
 Attorney and client privilege
 Establish good relationship with professionals

Assessment: Quiz

References:

https://www.entrepreneur.com/article/247574#:~:text=A%20business%20plan%20is%20a,Business
%20plans%20are%20inherently%20strategic.

https://www.franchisegator.com/articles/how-to-create-a-franchise-business-plan-12663/

https://learn.marsdd.com/article/industry-analysis-and-competition-using-porters-five-forces/

https://corporatefinanceinstitute.com/resources/knowledge/strategy/industry-analysis-methods/
https://ascelibrary.org/doi/full/10.1061/(ASCE)LM.1943-5630.0000160

Entrepreneurship: Theory, Process, Practice 11th Edition

by Donald F. Kuratko (Author)

https://www.franchiselawsolutions.com/fdd/

International Franchise Association Student Guide

Philippine Franchise Association

www.pfa.org.ph

Franchise Guide

www.franphil.com

Association of Filipino Franchisers, Inc.

http://www.affi.com.ph/

https://www.wipo.int/about-ip/en/#:~:text=Intellectual%20property%20(IP)%20refers%20to,and
%20images%20used%20in%20commerce.

https://aaronhall.com/sample-franchise-
agreement-disclosure-document-
examples/