MODULE 3 PACKET

EM 321- FRANCHISING
MODULE 3 OVERVIEW:

Welcome to Module 3: Navigating the Paper Trail

This module discusses the key subjects in the franchise agreement.Key items in the Disclosure
Document (UFOC) are identified and explained. Furthermore, preparation and implications of
financial statements is recognized and where to get help in franchise issues are identified.

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Module 3 Learning Objectives

After studying this chapter you should be able to:

1. Explain the key subjects in the franchise agreement?

2. Discuss the key items in the Disclosure Document (UFOC)?
3. Identify and discuss what do you have to know about financial statements?
4. Locate where businessmen can get help.

COURSE CONTENT FOR MODULE 3: NAVIGATING THE PAPER TRAIL

ACTIVITY DESCRIPTION TIME TO COMPLETE

SUBJECTS IN FRANCHISE AGREEMENT 1 Hour

Lecture Discussion
Discussion activity ITEMS IN ISCLOSURE DOCUMENTS (UFOC) 1 Hour

Lecture Discussion FINANCIAL STATEMENT 1 Hour

Assessment Module 3 Activity 1 30 Minutes

Lecture Discussion WHERE CAN BSINESSMEN GET HELP 1 Hour

Deadline for module 3 output: 12 March 2021, at strictly 5:00 in the afternoon

LECTURE DISCUSSIONS:

WHAT ARE THE KEY SUBJECTS IN THE FRANCHISE AGREEMENT?

The franchise agreement is more specific than the UFOC about the terms of the relationship
between the franchisor and franchisee.

✔ Use of trademarks. One of the main benefits you receive when purchasing a franchise is the
use of well-known trademarks. This section lists the trademarks, service marks or logos the
franchisee is entitled to use.

• Has the trademark been in operation for a significant amount of time and is it well known? •
Are there any restrictions on its use by the franchisor or franchisee?

✔ Location of the franchise. This section describes the exclusive area or territory granted to
the franchisee.

• Do you have exclusive rights in a certain territory?

✔ Term of the franchise. In this section, the duration of the agreement is specified.

• How long does the agreement last?

• Can the franchisor purchase the franchise before the agreement expires?

• Do you have the right to renew the agreement?

✔ Franchisee’s fees and other payments. In this section, all the mandatory fees are described:
• initial fee and what the franchisee receives for that fee
• royalty payment, what it is based on and when it is due

WHAT INFORMATION IS FOUND IN THE DISCLOSURE DOCUMENT (UFOC)?

The purpose of the UFOC is to provide prospective franchisees with information about the
franchisor, the franchise system and the agreements they will need to sign so that they can
make an informed decision. The Disclosure Document (UFOC)

✔ Item 1: The franchisor, its predecessor and affiliate. This section provides a description of the
company.

✔ Item 2: Business experience. This section provides biographical and professional information
about the franchisors and its officers, directors and executives.

✔ Item 3: Litigation. This section provides relevant current and past criminal and civil litigation
for the franchisor and its management.

✔ Item 4: Bankruptcy. This section provides information about the franchisor and any
management who have gone through a bankruptcy.
✔ Item 5: Initial franchise fee. This section provides information about the initial fees and the
range and factors that determine the amount of the fees.

✔ Item 6: Other fees. This item provides a description of all other recurring fees or payments
that must be made.

✔ Item 7: Initial investment. This item is presented in table format and includes all the
expenditures required by the franchisee to make to establish the franchise.

✔ Item 8: Restriction on sources of products and services. This section includes the restrictions
that franchisor has established regarding the source of products or services.

✔ Item 9: Franchisee’s obligations. This item provides a reference table that indicates where in
the franchise agreement franchisees can find the obligations they have agreed to.

✔ Item 10: Financing Available. This item describes the terms and conditions of any financing
arrangements offered by the franchisor.
✔ Item 11: Franchisor’s Obligations. This section describes the services that the franchisor will
provide to the franchisee.

✔ Item 12: Territory. This section provides the description of any exclusive territory and
whether territories will be modified.

✔ Item 13: Trademarks. This section provides information about the franchisor’s trademarks,
service marks and trade names.

✔ Item 14: Patents, copyrights and proprietary information. This section gives information
about how the patents and copyrights can be used by the franchisee.

✔ Item 15: Obligations to participate in the actual operation of the franchise business. This
section describes the obligation of the franchisee to participate in the actual operation of the
business. 20 An Introduction To Franchising THE IFA EDUCATIONAL FOUNDATION

✔ Item 16: Restrictions on what the franchisee may sell. This sections deals with any
restrictions on the goods and services that the franchisee may offer its customers.

✔ Item 17: Renewal, termination, transfers and dispute resolution. This section tells you when
and whether your franchise can be renewed or terminated and what your rights and
restrictions are when you have disagreements with your franchisor.

✔ Item 18: Public Figures. If the franchisor uses public figures (celebrities or public persons),
the amount the person is paid is revealed in this section.

✔ Item 19: Earnings claims. Here the franchisor provides information that a franchisee can use
to estimate what can be earned from the business.

✔ Item 20: List of franchise outlets. This section provides locations and contact information of
existing franchises.

✔ Item 21: Financial statements. Audited financial statements for the past three years are
included in this section.

✔ Item 22: Contracts. This item provides of all the agreements that the franchisee will be
required to sign.

✔ Item 23: Receipt. Prospective franchisees are required to sign a receipt that they received
the UFOC.
WHAT ARE THE KEY ITEMS IN THE DISCLOSURE DOCUMENT?
Item 7: Initial investment.

✔ Some of these costs are averages or estimates and may vary in your area.

✔ Talk to other franchisees who have been in the system for a year or more to see:

• how much money they needed in the beginning until they became profitable

• how much they were able to draw from the business to support themselves

Item 11: Franchisor’s obligations.

✔ Be sure you understand the services you will get before you open:

• site selection • training

• development assistance

21 ✔ Be sure you know what services you will receive for your grand opening:

• marketing • advertising

• field support

✔ Be sure you know what services you will receive after you begin operating your business:

• training • advertising

• operations
✔ Pay particular attention to those services the franchisor is obligated to provide and the
services they may provide.

Item 17: Renewal, termination, transfers and dispute resolution.

✔ Take your time to understand what rights you will have and what rights you are giving up.

✔ Pay particular attention to any non-compete provisions and your obligations when the
franchise relationship ends.

Item 19: Earnings Claims.

✔ Only 20 to 25 percent of all franchisors provide prospective franchisees with information

about earnings claims. The next best thing to do is to talk to existing franchisees about earnings
potential.

✔ Another good source of information is How Much Can I Make? by Robert Bond. (800-841-
0873 or www.worldfranchising.com). Item 20: List of franchise outlets.

✔ Examine how many units the franchisor has taken back and resold. If this number is high,
this could indicate churning (when the franchisor takes back failed locations and remarkets
them over and over.)

✔ Pay attention to the contact information of the franchisees who have left the system. These
are people you definitely want to talk to.

21 : Financial statements.
✔ Financial statements are the track record of the franchisor. You should be given copies of the
franchisor’s last two or three years financial statements. Take them to an accountant who
specializes in franchising to evaluate.

✔ Remember that the financial condition of the franchisor not only affects its ability to run a
financially successful operation in the future, but it also determines whether it may go under
and you will be left “holding the bag.”

✔ The two key financial statements to focus on are the balance sheet and the income
statement. Make sure they are audited. Item 22: Contracts.

✔ Make sure that all the agreements listed are attached to the UFOC—and read every one of
them

WHERE CAN I GET HELP?

✔ International Franchise Association (IFA), 202-628-8000, www.franchise.org

✔ American Bar Association’s Forum on Franchising, www.abanet.org ☞ forums ☞ franchising

✔ IFA’s Supplier Forum publishes a list of firms that specialize in franchising law,
www.franchise.org

✔ recommendations from other franchisees