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Franchisor - Franchisee Relationship

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Regulated by contract which usually covers:

  • Initial fee
  • Royalty fee/Management fee
  • Capital required from franchisee
  • Territory/Area of operation
  • Duration of license and renewal
  • IPRs
  • Termination

Be Careful!

  • The franchisee is not completely independent. It must comply with the terms and conditions of the franchise agreement.
  • In addition to the initial franchise fee, franchisee must pay on-going royalties and advertising fees. This could result in a substantial up-front outlay in terms of advance payments.
  • Franchisee must be able to balance restrictions and support provided by the franchisor with their own ability to manage the business.
  • A damaged image or franchise system can result if other franchisees perform poorly or the franchisor has financial problems. This could cause disruption to on-going operational support in terms of supply of goods and services.
  • The duration of a franchise is usually limited and the franchisee may have little or no say concerning termination.

Common Mistakes of Prospective Franchisees

  • Not reading, understanding and/or asking questions about the franchisee agreement and other legal documents.
  • Not understanding the responsibilities of a franchisee and the rights and obligations of a franchisor.
  • Not seeking sound legal and financial advice.
  • Not verifying oral representations of franchisor.
  • Not analyzing the local market in advance.
  • Not analyzing the competition.
  • Not making thorough due diligence of the franchisor.
  • Not choosing the right location.
 
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