1) Initial Fee

Initial upfront payment made to obtain the rights to the business format and trade/service mark(s) or trade name(s) for a specified period.

Franchisor will source or advise the right location to setup the franchise, facilitate in the design, layout and renovation of the outlet and provide consultant on running the business.

Franchise Tips: Find out what kind of services/ goods will be provided from the proposed site. Is the surrounding business complimenting your franchise or threatening it?

2) Royalty/ Management Fee

On-going payment made normally on a monthly basis to the franchisor. A certain percentage of the gross or fixed monthly sales go to the franchisor. The franchisor in return provides management services, joint advertising/ marketing/ promotions, improve operating procedures and new products/ services development, etc.

Franchise Tips: Work out the monthly amount to be paid by the franchisee based on projected sales.

3) Franchise Agreement

• The franchisor’s lawyer draws up agreement.
• It is a legal contract between the franchisor and franchisee. It clearly specifies the terms and conditions, rights and obligations, period of contract and termination terms.

Franchise Tips: - Negotiate if necessary - Consult people before signing the contract if not familiar with the terms spelt.

4) Tenure Or Period Of Contract

• Defined by franchisor
• The longer the legal contract, the more one has to pay to participate in the franchise. The franchisor may or may not require franchisee to pay additional cost for renewal of contract.

Franchise Tips: Important to find out the validity period of the contract and the sum to pay to join the franchise.

5) Compliance With Contract

• Franchisees must abide to the terms and conditions specified in the contract to maintain the reputation and image of the franchisee. Both franchisor and franchisee have the right to terminate the contract.

Franchise Tips: Successful franchisees usually run their franchise business according to the franchise system and not by their own way.

6) Working Capital

• Set aside funds for overheads such as utility bills, employee salaries, purchase of goods and services and management fees.

 Franchise Tips: Get the franchisor to provide an estimation of the detailed working capital required.

7) Payment Terms

• Cost franchisor will provide credit terms for goods/ services purchase from them. The period of payment will be defined by the franchisor as the term of payment. It can be up to 30 or 60 days normally.

8) Renovation Cost

• Cost to be borne by the franchisee at the start. This is part of the upfront cost that the franchisee needs to prepare.

9) Supply Of Goods And Services

• A minimum order of goods and services is required to be purchased from the franchisor. Some franchisors may expect 100% of the order to be made through them to ensure quantity and uniformity of product and services.

10) Territory

• Usually the franchisor will not encourage more that an outlet to be setup within the same territory, unless it can support a large number of franchisees throughout the country. This varies with the nature of the business.

Franchise Tips: Does the franchisor provide territory protection? (i.e. does not allow another franchise to operated within 300m circumference)

11) Terms of Termination - 3 Ways:

(a) When contract expires

(b) A breach of term(s) in the franchise agreement

(c) Franchisee opts to withdraw before contract expires