Section 6 of 6

6. Do you want to own a shareholding in your franchisee? i.e. a subordinated equity structure where you own a percentage of the franchisee company.

NO
You should consider adopting a Development Structure

A Development Structure allows you to grant a third party (i.e. a Developer) the right to exploit a designated territory by opening Outlets of your franchised business and/or providing your services themselves. Developers therefore need to have considerable financial and other resources. We can advise you further regarding this structure if necessary.

There are two ways that you can adopt the Development Structure:

1. You can enter into a Development Agreement with the Developer which incorporates both the development schedule/targets and provisions relating to the operation of the Outlets of your franchised business and/or the provision of your services; or
2. You can enter into a Development Agreement with the Developer which sets out the development schedule/targets and a Unit Franchise Agreement which sets out the provisions relating to the operation of the Outlets of your franchised business and/or your services.

We can assist you with drafting the Development Agreement, the Unit Franchise Agreement (if required) and other relevant agreements as well as advising you on the legal and commercial issues that you will need to consider.

YES
You should consider adopting a Subordinated Equity Structure

A Subordinated Equity Structure is usually used together with a Development Structure where the Franchisor wishes to own a shareholding in the Developer. This may be for a number of reasons.  To facilitate this structure, the Franchisor and a third party create a new subordinated equity company and enter into a Subordinated Equity Agreement. The new subordinated equity company acts as the Developer and you (the Franchisor) grant the Developer the right to exploit a designated territory by opening Outlets of your franchised business and/or providing your services themselves.

We can advise you further regarding this structure. We can also assist you with drafting the Subordinated Equity Agreement and the Development Agreement and other relevant agreements and discuss other legal and commercial issues that you will need to consider.

Other points to consider

There are several other issues that you may need to consider or discuss with us further. We set out some example issues below:

• Do you have your know how and method of operations in written format? i.e. do you have an Operations Manual?
• Have you conducted an audit of your Intellectual Property (trade names, logos, trade marks etc.)?
• What fees will you charge?
• Will you require the Franchisee to give financial guarantees (either individual or corporate) in respect of its financial obligations?
• Will you expect the key individuals of the Franchisee’s business to enter into an Undertaking of Confidentiality and Non-competition?
• Prior to entering into the franchise relationship will you wish to run a pilot franchise operation?
• Prior to entering into the franchise relationship will you seek to legally protect any Confidential Information you disclose and or take a deposit from a potential Franchisee