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The Kosnar Group Franchise Agreement Questionnaire
The Kosnar Group Franchise Agreement Questionnaire
MEMORANDUM
To:
Date:
_________________________________________________________________________
The federal franchise laws are basically "disclosure" laws. That is, they do not regulate to
any significant extent the terms of the agreement between you, as the franchisor, and a franchisee (the
"franchise agreement").
If any question is inapplicable to your franchise program, respond with "N/A." We have tried
to explain the reasons for many of the questions and have given you a choice of several possible
answers based on our franchising experience, where appropriate. These proposed answers are only
possibilities, not required responses. If you have a different answer, let us know. When responding
to questions on your franchise program, be reasonable and base your responses on any experience
you may have had to make your own business successful. We will review your responses to the
questions and schedule a time to discuss them with you.
This Questionnaire will be used to prepare a franchise agreement for a prospective franchisee
purchasing one single-unit franchise. Responses related to the Fair Franchising Standards are
highlighted in bold. More complex franchise arrangements such as area development (multiple-unit)
agreement, subfranchising (master franchising) and area representative (development agents) require
additional documents and disclosures. Most start-up franchisors concentrate on single-unit sales
initially.
The steps for preparation of your documents once we have received the completed
Questionnaire are: we prepare the franchise agreement and the exhibits for your review and
comment; we then have you complete our Questionnaire for the disclosure statement; we then
prepare the disclosure statement for your review and comment. The full document package will then
1
be finalized.
2.000 Description of Your Franchise System. Please describe as clearly and succinctly as
possible your franchising concept and the trade name under which company-owned units and
franchised units will be operated.
(a) Will the franchisee always have secured a site before signing the franchise agreement,
or will you sometimes designate a reserved area within which he or she may select a
specific site, which will occur after the franchise agreement is signed?
Specific site
Reserved area
Describe:
(b) Will the franchisee be solely responsible for selecting a site, with your approval?
Yes No
(c) If a site may be selected after the franchise agreement is signed, how long will the
franchisee have to select a site? We generally suggest up to 6 months from the date
the franchise agreement is signed: __________ months
(d) If a site is not selected within the time period, do you want right to terminate the
agreement?
Yes No
If yes, what portion of the franchise fee or other prepaid items would you refund?
Yes No
(f) Can the franchisee solicit business outside his or her area of dominant influence
through the use of an 800 number, catalog, direct mail or other advertising or
solicitation method?
Yes No
4.000 Protected Territory. Many franchisors give, and most franchisees expect, a protected
territory within which no other franchisee or company unit will be located. However, not
granting a protected territory gives you the most flexibility in determining the number of units
a market can handle. Please give thought as to whether you want to provide a protected
territory. The Fair Franchising Standards require you to give a franchisee reasonable
market protection.
Other - Describe:
5. Relocation. There may be circumstances beyond the control of the franchisee which causes
a loss of the premises. Will the franchisee be permitted to relocate the premises within the
reserved area but not within a protected area of another franchisee, upon:
Other:
If you allow relocation will you charge a fee to cover your costs?
Yes No
A franchisor will occasionally offer a right of first refusal to a franchisee for additional units
close to a franchisee's existing unit. If you desire to open a company unit or franchised unit
in a county (or other area) that already has an existing franchise, do you want the closest
franchisee to have a right of first refusal to purchase that proposed franchise?
Yes No
7. Duties of the Franchisor. You, as a franchisor, will provide certain assistance and services
to the franchisee in exchange for the payment of an initial franchise fee and on-going
royalties. Please give serious consideration to your duties. A failure by you to fulfill your
duties may cause you to breach the franchise agreement. The following is a list, which is not
intended to be exhaustive, of possible franchisor services. Please let us know which services
you intend to supply:
On-site evaluation
_________________________________________________
___________________________________________
_________________________________________
Provide franchisee with leads for a working capital line of credit, term loan
and/or equipment lease financing
Accounting systems
__________________________________________
Forms. Specify:________________________________________
(i) Location:
(ii) Duration:
(iii) Content:
(v) Charges per trainee imposed by you, if any, for training: $__________; and
the franchisee will be responsible for travel, lodging and meals of the
attendees:
Yes No
(vii) How many people do you require to receive training (for example, individual
franchisee and manager)?
(viii) How will you determine whether training was satisfactorily completed (for
example, objective written test, based on your sole discretion, in your
reasonable judgment, etc.)?
(ix) If the franchisee and/or its manager fails basic training management, will you
retrain the franchisee and/or its manager or terminate the agreement?
retrain terminate
(x) If you terminate the franchise agreement, will you refund any of the initial
franchise fee and other fees?
Yes No
(i)0 Manuals:
Operation manuals
Marketing manuals
Accounting systems
__________________________
__________________________
Will you provide periodic on-site assistance and inspection of the installation of
furniture, fixtures, equipment, signage, etc. to make sure that it conforms to
applicable standards before the opening date?
Yes No
How often?
Yes No
Yes No
Other:
Other:
Do any of the above require the franchisee to pay additional fees and costs?
Yes No
If yes, specify:
Are computers and computer software which you own and develop (not "off-the-
shelf") an integral part of your franchise operation?
Yes No
If yes, describe:
8.000 Fees and Payment Requirements. Describe in detail all initial, recurring and isolated fees
or payments the franchisee is or may be required to pay to the franchisor or persons affiliated
with the franchisor, or which the franchisor or such affiliated person imposes or collects in
whole or in part on behalf of a third party.
Usually the initial franchise fee, which may run from a few thousand dollars to a
hundred thousand dollars or more, is paid in full at the time the franchise agreement is
signed. Sometimes the franchisor is willing to take a portion of it in cash and a
portion payable over time evidenced by a promissory note. A deferral of a portion of
the initial franchise fee may create tax problems we will need to discuss. Please let us
know the amount of the franchise fee and when and how it is payable.
The initial franchise fee is non-refundable except under certain conditions which may
be:
The franchise agreement is not accepted by the franchisor at its home offices
within 30 days
The franchisee fails to obtain a suitable site within _____ months of signing
the franchise agreement
Will the initial franchise fee and other initial payments be subject to an escrow
agreement?
Yes No
Usually, a franchisee will pay you a weekly, monthly or quarterly royalty fee during
the term of the franchise agreement, either of a fixed amount or as a percentage of
weekly/monthly/quarterly gross revenues. We generally prefer a percentage of gross
revenues instead of a fixed amount. Please designate the royalty fee and circle the
royalty period.
______________________________________________________
You may want to require the franchisee to pay you a lump sum of several thousand
dollars to be used for special grand opening advertising expenditures when his or her
franchised business first opens, or require the franchisee to spend such amount
directly. Is a grand opening advertising fee going to be charged?
Yes No
If no, will you require the franchisee to spend any stated amount directly?
Yes No
If yes to either, let us know how much, and describe what the expenditure would be
used for.
Yes No
Yes No
Yes No
If yes, what would be the highest percentage of monthly gross revenues you
may require to be contributed to the marketing fund?
Franchisor Only
Joint
(800) -
(iii) Regional Cooperative Advertising. When you have more than one franchisee
in an area of dominant influence (ADI), do you want to have the right to form
and require the franchisee to join a regional advertising cooperative?
Yes No
We assume that any amounts paid to the cooperative will be credited against
any local advertising requirement.
Yes No
If you or an affiliate will be supplying accounting services to the franchisee, will there
be a fee?
Yes No
(i) If you or an affiliate are supplying software to the franchisee, will there be an
initial fee?
Yes No
Yes No
Yes No
(h) Other Initial or Recurring Fees to You or Your Affiliates (not to unrelated third
parties) If yes, describe how much and under what circumstances:
Construction Fees:_____________________________________________
Opening Inventory:____________________________________________
Other:_______________________________________________________
As discussed below, there will be certain provisions relating to the transfer of the
franchise by the franchisee. In such event you will want to impose a transfer fee at
least to reimburse you for your out-of-pocket expenses in investigating and
approving the transfer and the transferee and training of the transferee and his or her
manager. Transfer Fee of $____________________
We would suggest that the royalty fee and advertising contributions be made no later
than Wednesday of each week for the preceding week or the 10th day of each month
for the preceding month.
Yes No
Weekly Monthly
Yes No
If yes:
____________________________________________________________
If any payment due to you is not paid when due, we recommend that you reserve the
right to impose a late charge to cover your administrative costs in collecting a late
payment. Do you want to have a late charge provision?
Yes No
If yes, how much should the late charge be? $______________ (for example, $100).
In addition to a late charge, you may want to charge interest on late payments
because you have lost the use of the funds. We recommend the lesser of: (i) 18% per
annum; or (ii) the maximum rate of interest permitted by law. Do you want to charge
interest on late payments?
Yes No
You may want to secure the franchisee's obligations to you including monies due you
or claims you are to be indemnified for by one or more of the following security
devices:
______________________________________________.
9.000 Duties of the Franchisee. In order to maintain uniformity and quality control over the entire
franchise system, you will impose certain duties upon the franchisee. Please give serious
consideration to the duties you want your franchisee to undertake. The following is a
list, which is not intended to be exhaustive, of possible franchisee duties. Please let us know
which duties you want your franchisees to undertake:
Yes No
Other:
(c) Construction and Opening Requirements:
When should business open? ________ days from the date of the franchise
agreement.
Can the franchisee use the premises for other than the operation of the
franchise business?
Yes No
____________________________________________________________
____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Will more than one full-time manager be required to be present during normal
business hours?
Yes No
Yes No
What products or services must the franchisee purchase from the franchisor
or an affiliate of the franchisor?
_____________________________________________________________
_____________________________________________________________
Yes No
Yes No
Do you have any secret recipe products, private label products or other trade
secrets that are part of the franchise system? If yes, describe generally:
____________________________________________________________
_____________________________________________________________
(j) Credit Cards and Other Methods of Payment:
Visa
MasterCard
American Express
Diner's Club
Discover
Checks
______________________________________________________
Is there a professional association that you will require the franchisee to join?
Yes No
Yes No
We assume you will want to reserve the right to impose upon the franchisee
the obligation to renovate and upgrade the franchised premises at his or her
own expense when you determine it to be necessary or appropriate in the
future.
Yes No
If yes, how often? Every ___ years; how much? $___________ every ___
years ("Capital Expenditure Limitation").
Yes No
Do you want to place any restrictions on the net worth of the franchisee to
ensure sufficient capital is available to fund the franchise?
Yes No
If yes, please describe:
Please list any other duties that you want the franchisee to perform:
10.000 Proprietary Marks. The proprietary marks (for example, your trademarks) constitute the
cornerstone of your franchise system. Some franchisors make no representations with
respect to the proprietary marks, others do. Typically, franchisees want the franchisor to
stand behind the trademarks. How much responsibility you want is up to you.
Franchisor will take all steps reasonably necessary to preserve and protect the
ownership and validity of the proprietary marks.
Yes No
Franchisor will indemnify the franchisee for any lawsuit arising out of any
infringement claims against the proprietary marks as long as the franchisee has used
the proprietary marks in accordance with the franchise agreement?
Yes No
The franchise agreement will provide that the franchisee can use the proprietary
marks only in connection with the franchise business. You will want to reserve for
yourself the right to use the proprietary marks in your company units and to grant
licenses and franchises to others to use the proprietary marks outside the franchisee's
protected territory, if any. Do you also want to reserve the right to sell, even if in
your franchisee's protected territory, directly to particular segments of your industry
such as national accounts, grocery chains, other special groups, etc., without having
to go through the franchisee? This may give you some benefit but it must be
specifically carved out of the franchise agreement. Otherwise, it may later cause
dissention among, or litigation by, your franchisees. Please give us your thoughts in
this regard:
11. Accounting and Records.
(a) How long should the franchisee keep his or her records? We suggest 6 years.
_______ years.
(b) How frequently do you want the franchisee to send you reports?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
Quarterly reports within _____ days from the end of each quarter. Specify
type of information.
_____________________________________________________________
_____________________________________________________________
(d) Annual financial statements for each fiscal year prepared by an independent
certified public accountant. The Fair Franchising Standards do not allow
audited financials before a franchisee is found to be underreporting.
12.000 Insurance. The franchise agreement will provide for the franchisee to carry certain types of
insurance coverage for its and your benefit. In this regard, you will need to discuss with
your insurance agent the types and amounts of coverage that make sense for your
franchisees' operations.
Yes No
_____________________________________________________________
_____________________________________________________________
We suggest that you receive evidence of proper insurance at least 10 days before the
franchised business opening and that you receive at least 30 days' written notice of any
cancellation or modification of the franchisee's insurance.
Product liability insurance covering all products sold to you by us or our Business
Affiliates in the minimum amount of $_______;
Other: _____________________________________________________________
Yes No
If yes, will you create this immediately or at some point in the future?
_______________________. If it's in the future, under what circumstance will it be created
(for example, a number of franchisees, time certain, etc.)? Please specify:
If a franchise advisory council is to be created, on what will it advise? You can have more
than one council.
Advertising
Marketing
Operations
__________________________________________________________________
The Fair Franchising Standards contemplate that the franchisees form an independent
franchisee association which will elect its own directors and officers, develop its own
agenda, retain its own lawyers and other advisors and eventually, collectively negotiate
issues and agreements with you.
Yes No
Who will pay the costs? ___________________________________________________
Some franchise agreements provide that the franchisor has the option to purchase the
franchisee's business at some specified time (for example, death of franchisee) and at some
valuation formula. Do you want a purchase option?
Yes No
At what valuation?
Do you want to implement a "key man" life insurance program whereby life insurance is
issued on the franchisee, the proceeds of which go to the franchisor as beneficiary, to be used
to purchase the franchise back upon the death of the franchisee?
Yes No
We normally put in the franchise agreement that you have the absolute right to sell
the franchising company or otherwise transfer the franchise agreement without any
consent or approval by the franchisee. This gives you absolute flexibility in case you
go public, merge, sell out, etc. Do you want it another way? The Fair Franchising
Standards require that your buyer have sufficient business experience, aptitude
and financial resources to competently assume your obligations.
Yes No
(b) We normally put in the franchise agreement that the franchise may be transferred
from an individual franchisee to a wholly-owned corporation if certain conditions are
met (for example, individual franchisee or manager remains as full-time manager,
corporation is newly organized and owns only the franchised business, individual
franchisee remains personally liable, etc.). Do you agree with this arrangement?
Yes No
(c) Transfer by the Franchisee:
The franchise agreement should contain provisions governing the death or disability
of the franchisee. What requirements do you want to impose in this event?
The franchise agreement should contain a provision allowing you a right of first
purchase or a right of first refusal on the same terms of any proposed transfer of the
franchise. The Fair Franchising Standards allow a right of first purchase but
not a right of first refusal. Do you want a right of first purchase on transfers?
Yes No
Yes No
(f) Securities offerings by the Franchisee:
A franchisee may want to sell stock in his or her company either through a public or
private stock sale. Subject to certain state law restrictions, you may not want to
allow such offerings, because, among other reasons, they may result in many
strangers owning the franchisee who are additional investors with whom you may not
want to deal. Also, to comply with the securities laws, the franchisee may be required
to prepare stock offering materials that may describe its franchise, the franchise
concept and your relationship to the franchisee. You will need to undertake the
burden to make sure that the information in such materials about you is as accurate as
possible and does not include confidential information. If you want to allow private
or public offerings in the franchisee, we normally require the franchisee to submit the
materials for your prior review and approval and require the payment of a substantial
offering fee. If you want to allow private or public offerings on such a basis, please
let us know.
Yes No
Comments:
The franchise agreement will contain numerous events of default, some occurring
automatically (for example, bankruptcy), others occurring after you give notice (for example,
abandonment of the premises) and still others after you give notice and give an opportunity
to cure (usually 30 days) (for example, a default in payment obligations). The Fair
Franchising Standards do not allow "insolvency" alone to be an event of default. After
you have read the default and termination part of the franchise agreement you may let us
know if there are any other events of default you would like to include.
After termination, the franchise agreement generally contains several provisions imposing
upon the franchisee the obligations to: (a) cease operations as part of your franchise system;
(b) pay all amounts due you; (c) discontinue the use of your name; (d) at your election, assign
the lease of the premises to you; (e) agree not to compete with you; and (f) return the
manuals and other confidential information, etc. In addition to these standard provisions,
please give thought to the following:
(a) Your purchase rights - Do you want the right (but not the obligation) to purchase any
assets of the franchise, such as those items bearing your proprietary marks?
Yes No
If yes, what types of assets and under what valuation method (fair market value,
lower of franchisee's cost or book value, etc.)?
(b) Liquidated damages - If the franchisee continues to operate after termination, you
may want to have a liquidated damages provision. A liquidated damages provision
sets in advance what the parties agree will be the amount of your damages for a
default. The amount must be reasonable, or it will be considered an unenforceable
penalty. Also, if you choose liquidated damages, it may be your only remedy
available, preventing you, for example, from obtaining an injunction against further
breaches.
No liquidated damages
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
A franchise agreement normally provides that during its term and for a period thereafter (for
example, 24 months) a franchisee cannot compete with you within a given area. Covenants
not to compete generally are enforceable against franchisees in Florida and certain other (but
not all) states, but only if they are reasonable in scope, duration and geographic location. In
this regard, please let us know whether you want to impose covenants not to compete after
termination of the franchise due to franchisee's default.
Yes No
Other than the franchisee, who should be restricted by such covenants? Stockholders in
the franchisee who own at least _______% of stock; officers of a corporate franchisee;
directors of a corporate franchisee; partners in a partnership franchisee who own at least
_____% of the franchisee; spouses of the above persons; other:
___________________________________.
Mediation
Arbitration provision
No Arbitration provision
(b) If arbitration is not selected, the right to trial by jury may be waived by you and the
franchisee and have all the issues decided by a judge. The Fair Franchising
Standards do not allow for a waiver of jury trial.
(c) Do you want to limit you and the franchisee to any recovery to actual damages and
not to punitive damages. The Fair Franchising Standards do not allow for a
waiver of punitive damage claims.
Yes No
20.000 Initial Term. How long do you want the term of the franchise agreement to be? You do not
want it to be perpetual and the franchisee wants it to be long enough for him or her to
reasonably amortize his or her investment. Terms generally vary from 5 to 20 years, usually
10 years. Your term will be:
Five Years
Ten Years
Twenty Years
___________ Years
______________________________
_______________ Years
(b) Notice to Exercise Option: How much notice would you require? We suggest not
less than 9 nor more than 12 months prior to the end of the initial term
__________________________________________________________________
No Option Fee
$___________________________
_______% of then initial franchise fee then being charged to new franchisees
22.000 Authority. To avoid having too many levels of authority authorized to sign a franchise
agreement or any amendments, or to give any consent or approval on your behalf, authority
may be limited to one or two people. At the early stages it may be appropriate that the
president of the franchising company be the only person authorized to sign a franchise
agreement or any amendments thereto, and to give any consent or approval required under
the franchise agreement. Please let us know who will have authority for you:
________________________________________________________________________
*******************
There will be other provisions in the franchise agreement that will be included, although not
discussed in this Questionnaire. In addition, this Questionnaire may not have included all of your
ideas or concepts. If we have not addressed something please let us know.
We hope that this exercise has been helpful in your formulation and initial fine-tuning of your
franchise program. We look forward to going over this Questionnaire and any other questions or
comments you may have and then to drafting your franchise agreement.
Sincerely,
Carl J. Kosnar