Introduction

Franchise contracts stipulate the conditions under which a franchised outlet is to be operated and, in particular, the rights and obligations of both parties. In this chapter, we examine the terms of franchise contracts, with special emphasis on the monetary contract terms, namely franchise fees, royalty rates, ongoing fixed payments, and advertising fees. These fees, as mentioned in Chapter 1, are not used in traditional franchising and, therefore, this chapter is really about monetary contract terms in business-format franchising.

As we will see in more detail in Chapter 4, if the franchisor is to maximize its profit, economic theory generally suggests that it should tailor its franchise contract terms for each unit and franchisee in a chain. In practice, however, contracts are remarkably uniform within chains and thus insensitive to variations in individual, outlet, and specific market conditions. Indeed, a business-format franchisor most often uses a single business-format franchising contract – a single royalty rate and franchise fee combination – for all of its franchised operations that join the chain at a given point in time. In her survey of 130 business-format franchised chains, for example, Lafontaine (1992b) found that 42 percent of her respondents offered their contracts on a take-it-or-leave-it basis with another 38 percent allowing some negotiations, but only for non-monetary terms. Thus, uniformity, especially for monetary terms, is the norm.