KEY PROVISIONS OF FRANCHISE AGREEMENTS Claro F. Certeza SPCMBLAW

To ensure uniformity of operations and preserve brand reputation  Each franchisor has its own training program for franchisees and their staff, which can include training done at the franchisee's location or at the corporate headquarters or a combination.  Most franchisors offer on-going support including administrative and technical support. TRAINING/ON-GOING SUPPORT BY FRANCHISOR

 Par. 4, A  Training is given for 2 store manager  Training is given in a training facility or an existing store  Manager to be replace if found not qualified  Attendance at refresher courses is required  Required to allow store to be used as training facility Training

To ensure that the outlet’s location is suited to the franchise concept  Assigned territory. The Franchise Agreement designates the territory in which franchisee will operate  Exclusivity. A designated area is reserved for exclusive exploitation of franchisee. Territory

 Par. 1, D  Grant is limited to one site  Cannot operate the store in any other site without prior written consent subject to payment of fees for evaluating the new site  Cannot conduct a competing business at the site  Cannot sell to third parties for re-sale  Territorial protection is given within the area designated in the attachment to FA – provided franchisee is in full compliance with the FA Territory

A franchise is a privilege that is given for a limited period of time only  Length of Term. The term should be long enough to allow the franchisee to recoup his investment and earn a substantial profit. Franchise Term

Par. 1, D  Term is 15 years  No renewal clause Franchise Term

The FA should state clearly the initial cost of investment to avoid misunderstanding  Franchise Fee. Franchisees are required to pay an initial franchise fee that grants them the right to use the franchisor's trademark and operating system.  Investment. There should be an itemized cost for store construction, insurance, initial inventory, and a schedule for drawdown. Investment

 Initial Fee (Par. 3)  Franchise fee – US $25,000  When payable – concurrently with the signing of the FA  Nature – non-recurring, non-refundable, fully-earned when paid  Investment  Par. 2, C – merely requires the franchisee to secure all financing to develop and operate the store. Investment

Ongoing fees and expenses should be clearly stated to avoid misunderstanding  Royalties. Most franchisors require franchisees to pay an ongoing royalty, usually a percentage of total sales, typically on a monthly basis.  Advertising Contribution. Franchisors require their franchisees to contribute to a fund for national advertising.  Security Deposits. Some Franchisors require their franchisees to make a security deposit to cover obligations that may arise in favor of the franchisor. On-going Fees

 Par. 3, B – royalty is fixed at 4.5% gross sales  Basis for computation – Gross Sales defined in Par. 3, C  Interest on late payments – interest is fixed at 1.5%/ month (under Art no interest shall be due unless stipulated in writing) On-going Fees

To preserve brand reputation, the use of the trademark should be regulated.  Trademark, patent, and signage use. This provision covers how a franchisee can use the franchisor's trademark, patent and signage.  Trademark should be used only in connection with the operation of the franchised store.  Trademark can only be used strictly in accordance the Operations Manual. Trademark

 Par. 5  Ownership – derived solely from the FA and limited to the operation of the store  Goodwill – redounds to the benefit of the Franchisor exclusively  Goodwill – reputation of good name of an establishment (Anderson vs. Posadas, 66 Phil 29)  Cannot use the trademark as part of franchisee’s corporate name Trademark

Success is enhanced by strict adherence to the business format.  Operating protocol. This section details how franchisees run their outlets. Operating guidelines found in Franchisor’s Operating Manual which is made part of the agreement.  Compliance. Compliance with the Operations Manual is monitored thru right of inspection by franchisor’s representatives.  Operations Manual. The manual is only loaned to the franchisee. The contents are to be kept confidential by the Franchisee and must be returned upon termination. Operations

 Par. 8  Operation and maintenance of store in accordance with the Standards is necessary to preserve goodwill.  Agree to operate in accordance with system standards.  Enumerates areas regulated by system standards.  Agreement that system standards prescribed from time to time and communicated to franchisee forms part of the FA.  Commitment that the store shall be under the direct, on premises management by franchisee or manager designated by franchisee. Provisions Re: Operating Standards

 Par. 10, B  Right to conduct audit at any time during business hours without prior notice  Covers financial records and access to computer systems  If there is variance in Gross Sales reported by more than 5%, reimburse cost of inspection and audit  Does not cover operations’ audit Right to Audit

Renewal should be clearly defined. Grounds for Termination if not provided limits the same to substantial breach  Renewal. Absence of renewal provision implies that renewal is subject to mutual agreement. Conditional renewal allows renewal upon franchisee’s meeting certain conditions.  Termination. Grounds for termination is listed to cover violations that are non-negotiable. Further, the effects of termination is clearly defined. Renewal/Termination

The franchise is granted upon reliance to the qualifications of the franchisee, a change in franchisee requires consent of the franchisor  Resale Rights. Some franchisors write in buy back or right of first refusal clauses, which allow the franchisor to buy back the franchise at a rate determined by them or to match any potential buyer's offer who has expressed interest in buying your franchise. Sale of Franchise

 Award of franchise is personal to franchisee.  If franchisee desires to transfer the franchise, Franchisor’s consent is required.  The term transfer includes: Sale, transfer, or pledge of the rights in the franchise.  Approval to issue if franchisee is not in default under the FA and transferee meets the standards for new franchisees. Sale of Franchise

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