The Kosnar Group2306 Wales Drive

Cardiff by the Sea, CA 92007Phone: (760) 632-8402Mobile: 619-994-2258Fax: (760) 632-0772

MEMORANDUM

To:

From: Carl J. Kosnar

Re: Questionnaire to Assist in Structuring the Franchise Agreement

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").

This Questionnaire focuses on information relative to the various types of provisions to be included in your franchise agreement. Please try to answer the questions as fully as possible. If you are unable to answer any questions completely, respond as best you can.

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

1

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 be finalized.

ALL RESPONSES SHOULD BE TYPEWRITTEN OR NEATLY PRINTED - Attach separate sheets as necessary -

FRANCHISE AGREEMENT QUESTIONNAIRE

1. Identity of Franchisor. Please give us the name of the franchisor, type of organization (for example, corporation, partnership) and state and county of organization. We would suggest that you give consideration to forming a new entity to become the franchising company to protect not only your personal assets but also the assets of your existing company. There are some accounting reasons to do this as well if your present company does not have audited financial statements.

(a) Name of entity:

(b) Type of entity: (for example, corporation)

(c) State of organization:

(d) Principal business address (including county):

If already formed, send us your corporate minute book or partnership agreement.

2. 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) Franchising Concept:

(b) Trade name under which all units will do business:

3. Site Selection.

(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?

If no, what remedy do you want? ______________________________________

(e) Can the franchisee engage in take-out or home delivery?

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. 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.

No Protected Territory - street address only

Circular area having a ______ - mile radius from the premises

An area having _________ persons or houses, etc.

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:

Loss of lease, through no fault of the franchisee?

Casualty to the premises?

Condemnation of the premises?

Other:

If you allow relocation will you charge a fee to cover your costs?

Yes No

If yes, what is the amount of the fee? $_______________________________________

6. Franchisee's Right of First Refusal.

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:

(a) Site Selection Assistance:

Written site selection criteria

On-site evaluation

Written approval of site

_________________________________________________

(b) Lease Assistance:

Written franchisee/tenant lease negotiation checklist

Prior written approval of lease

___________________________________________

(c) Plans and Specifications:

Loan of a sample set of standard building plans and specifications and/or standard recommended floor plan

Loan of specifications of your requirements for design, decoration, layout, equipment, furniture, fixtures and signs

Specifications for employee uniforms

_________________________________________

(d) Business Planning Assistance

Review and comment on franchisee's business plan

Provide franchisee with leads for a working capital line of credit, term loan and/or equipment lease financing

(e) Business Systems:

Accounting systems

Cost control systems

Portion control systems

Inventory control systems

__________________________________________

(f) Forms and Schedules:

Forms. Specify:________________________________________

Schedule of items required to be purchased.

Schedule of items recommended to be purchased.

Schedule of sources for required purchases.

Schedule of sources for recommended purchases.

Schedule of your specifications for required items that may be purchased from any source.

Schedule of your specifications for recommended items that may be purchased from any source.

(g) Employee Information and Assistance:

Employee hiring information

Pay scale guidelines

Standardized interviewing/selection system

(h) Basic Management Training:

(i) Location:

(ii) Duration:

(iii) Content:

(iv) When training is to be conducted:

(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

(vi) Is any particular person required to be trained (for example, individual franchisee, president of corporate franchisee, or any employee of franchisee)?

(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

If yes, please state what amount will be withheld by you:

(xi) Other comments:

(i) Manuals:

Operation manuals

Marketing manuals

Employee training materials

Retail promotional/advertising packages

Pamphlets and other printed materials

Accounting systems

__________________________

__________________________

(j) Pre-Opening Inspection:

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

If yes, what will it entail?

How often?

(k) Pre-Opening, On-Site Training, Opening Supervisor:

(i) Will there be pre-opening, on-site training?

Yes No

How many days, if any, before grand opening? _________ days

How many days, if any, thereafter? ________ days

What will such a training program entail?

(ii) Will you supply an opening supervisor?

Yes No

What will the supervisor do?

Who will pay for his or her expenses? ____________________________

(l) Grand Opening Assistance:

Coordinate expenditure of grand opening advertising fee

Other:

(m) Continued Assistance:

Periodic visits by a field representative

A telephone line solely for informational assistance.Will it be toll-free? Yes; No

Consultation on such matters as operations, advertising, promotion and business methods

National and regional advertising campaigns using franchisees' advertising contributions

Promotional methods and materials

Pre-approved radio scripts and camera-ready television commercials

Continuing advisory assistance in the operation and promotion of the franchised business

Refresher and advanced training programs and seminars

Special assistance at cost

Research and development of new products, services, introductions and techniques

Other:

Do any of the above require the franchisee to pay additional fees and costs?

Yes No

If yes, specify:

(n) Software License:

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. 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.

(a) Initial Franchise Fee:

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 basic management training

The franchisee fails to obtain a suitable site within _____ months of signing the franchise agreement

If refundable, how much will be refunded? $

Will the initial franchise fee and other initial payments be subject to an escrow agreement?

Yes No

If yes, describe escrow: ______________________________________________

(b) Royalty Fee:

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.

Fixed royalty fee of $_________________ per week/month/quarter

Variable royalty of _________% of weekly/monthly/quarterly gross revenues

Minimum weekly/monthly/quarterly royalty fee of $__________ (regardless of gross revenues) commencing on the _______ full calendar month after the opening date

Varying percentages of _____% up to $_______________ of annual gross revenues; _____% from $_______________ to $_______________ of annual gross revenues ________________________________________________________________________________________________

______________________________________________________

(c) Grand Opening Advertising Fee:

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.

(d) Advertising Contributions:

(i) National and Regional Advertising. In many franchise systems the franchisor creates a special marketing fund to administer the advertising contributions paid by franchisees for regional and national advertising. Do you want such a marketing fund?

Yes No

Will company units be required to contribute to the same extent as franchisees?

Yes No

In most franchise programs the franchisee pays a certain percentage of his or her weekly/monthly/quarterly gross revenues or a flat fee to the franchisor to be put in a special marketing fund to be used by the franchisor for regional and national advertising on behalf of all the franchisees. Sometimes the franchisor requires an initial contribution to the marketing fund to kick it off. We generally recommend a percentage fee.

Initial Contribution of $__________________.

Continuing weekly/monthly/quarterly contribution of $_________

Continuing weekly/monthly/quarterly contribution of ______% of weekly/monthly/ quarterly gross revenues

Minimum weekly/monthly/quarterly advertising contributions of $______________ (regardless of gross revenues) commencing on the _______ full calendar month after the opening date

Sometimes a franchisor will reserve the right to increase the amount of advertising contributions under certain circumstances. Do you want to reserve the right to increase the amount of the advertising contribution?

Yes No

If yes, what would be the highest percentage of monthly gross revenues you may require to be contributed to the marketing fund?

Fixed fee of $_________________ per week/month/quarter

Variable fee of _________% of weekly/monthly/quarterly gross revenues

If yes, will this be a franchisor-only decision or a joint decision with a majority of the franchisees. The Fair Franchising Standards require a

joint decision.

Franchisor Only

Joint

(ii) Local Advertising by the Franchisee. In addition to requiring the franchisee to contribute a certain amount to the marketing fund for regional and national advertising conducted by you as discussed above, you may require the franchisee to spend a certain amount for local advertising. Local advertising is advertising that the franchisee conducts (subject to your approval) in his or her local market area. This would include one or more of the following:

A fixed amount of $______________ per week/month/quarter

A variable amount equal to ______% of weekly/monthly/quarterly gross revenues

A sign in the premises indicating that you have franchise opportunities available and for people to call you at a designated telephone number. Your (800) number:

(800) -

A Yellow Pages ad in the ____________ section of the local Yellow Pages

(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

If yes, how much should the franchisee contribute?

A fixed amount of $______________ per week/month/quarter

A variable amount equal to ______% of weekly/monthly/quarterly gross revenues

We assume that any amounts paid to the cooperative will be credited against any local advertising requirement.

Yes No

(e) Accounting Fee:

If you or an affiliate will be supplying accounting services to the franchisee, will there be a fee?

Yes No

If yes, how much? .

(f) Software Fee and Fees for Programming Services:

(i) If you or an affiliate are supplying software to the franchisee, will there be an initial fee?

Yes No

If yes, how much? $____________.

(ii) Will there be an on-going fee?

Yes No

If yes, how much? $____________.

(iii) Will there be fees for programming services?

Yes No

If yes, how much? $____________.

(g) Additional Training Fee:

If refresher training or advanced management training is supplied, will there be an additional fee?

Yes No

If yes, describe how much and under what circumstances:

(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:

Site Selection and Lease Negotiation Fees:_________________________

Construction Fees:_____________________________________________

Rent and Other Lease Payments:_________________________________

Sublease Administration Fee:____________________________________

Opening Inventory:____________________________________________

Additional Inventory: _________________________________________

Fee for Lost Manuals (for example, $200):_________________________

Other:_______________________________________________________

(i) Transfer Fee:

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 $____________________

(j) Payment Schedule:

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

If none of the above, your suggestion:

(k) Payment System:

Nowadays a franchisor often is not willing to rely on "the check's in the mail" and will set up a procedure in the franchise agreement to allow the franchisor to access the franchisee's operating account to make all required payments due from the franchisee to the franchisor. Do you want to reserve the right to establish a payment system?

Yes No

If yes:

Special operating account

Electronic funds transfer system

Pre-authorized transfers through the use of special checks

____________________________________________________________

(l) Late Charge:

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).

(m) Interest on Late Payments:

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

If yes, how much should the interest be? $______________________

(n) Security for Performance:

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:

A security interest in the business assets of the franchisee

Security deposit of $_________________________.

Letter of credit of $_________________________.

______________________________________________.

9. 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:

(a) Selection of a site

(b) Initial Permit and Certifications:

Permits and certifications must be obtained to commence construction

Permit must be obtained to dispense liquor at the premises?

Yes No

Other: (c) Construction and Opening Requirements:

When should construction commence? ________ months from the date of the franchise agreement.

When should construction be completed? ________ months from the date of the franchise agreement.

When should business open? ________ days from the date of the franchise agreement.

(d) Use of the Premises:

Can the franchisee use the premises for other than the operation of the franchise business?

Yes No

If yes, what other type of business?

____________________________________________________________

____________________________________________________________

(e) Cash Register Requirements:

What types of P.O.S. System, if any, will be required in recording gross revenues (for example, non-resettable cash registers)?

_____________________________________________________________

_____________________________________________________________

(f) Management of the Franchised Business:

Will more than one full-time manager be required to be present during normal business hours?

Yes No

If yes, how many? ___________

Must all full-time managers receive training directly from you?

Yes No

(g) Purchases from the Franchisor or Affiliates:

What products or services must the franchisee purchase from the franchisor or an affiliate of the franchisor?

_____________________________________________________________

_____________________________________________________________

(h) Approved Specifications and Sources of Supply

Will you have approved specifications for product purchases?

Yes No

Will you have a list of approved suppliers?

Yes No

(i) Trade Secrets:

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:

Will the franchisee be required to maintain certain credit card relationships and other non cash methods of payment?

Visa

MasterCard

American Express

Diner's Club

Discover

Checks

______________________________________________________

(k) Telephone and Answering Service:

How many telephones? At least _________ telephones

How many lines? At least _________ lines

Answering service after business hours

Telephone answering machine

Public pay telephones installed in _____________ area of premises.

A dedicated operating telephone line and telephone number to be used by only you to monitor accounting and operational information via a modem provided by the franchisor? or franchisee? (circle one)

(l) Professional Affiliation:

Is there a professional association that you will require the franchisee to join?

Yes No

If yes, describe _______________________________________________

(m) Customer Surveys:

Do you want to reserve the right to require your franchisees to participate at their expense in any customer surveys and marketing surveys you want to perform using responses from the franchisees' customers?

Yes No

(n) Franchisee's Performance Standards:

Many franchisors do not impose a minimum sales requirement or other performance standard as a condition to the continuation of the franchise agreement. However, you may end up in a situation where the franchisee is not working as hard as you would like him or her to work. Therefore, you may want to consider some sort of performance standard such as a minimum sales or purchase requirement, etc. One of the potential problems with an absolute minimum is that it may fail to take into account circumstances beyond the franchisee's control such as economic conditions, shortages, etc. Please give us your thoughts in this regard.

(o) Renovation and Upgrading:

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").

(p) Liquidated Damages for Sale of Prohibited Products or Services. We suggest you have a provision requiring the franchisee to pay some daily penalty for selling unapproved products or services.

Yes No

If yes, how much? $ .

(q) Financial Covenants:

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:

(r) Other Duties:

Please list any other duties that you want the franchisee to perform:

10. 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.

(a) The franchisor's representations as to the proprietary marks:

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

(b) Secondary Marketing Opportunities.

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?

Weekly reports by _____ of each week. Specify type of information:

_____________________________________________________________

_____________________________________________________________

Monthly reports by the _____ day of each month. Specify type of information:

_____________________________________________________________

_____________________________________________________________

Quarterly reports within _____ days from the end of each quarter. Specify type of information.

_____________________________________________________________

_____________________________________________________________

(c) Sales records and sales tax returns

(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.

Compiled Reviewed Audited

(e) Other: ______________________________________________________

12. 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

Insurance may include:

Commercial general liability insurance, completed operations and independent contractors coverage in the amount of $______________ per person and $__________________ per occurrence

Workers' compensation coverage in the amount of $__________/ $____________/$_____________ and employer's liability insurance

Fire, vandalism and an extended coverage insurance

Automobile liability insurance of not less than $_____________

Commercial blanket bond in the amount of $_____________

License bond of $______________

Errors and omissions insurance of $______________/claim and $______________ in the aggregate

Advertising liability insurance in the maximum amount of $______________

Products liability insurance in the amount of $___________/claim and $____________ in the aggregate

Builder's risk insurance of at least $_____________ in case of any construction and renovation

_____________________________________________________________

_____________________________________________________________

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.

What insurance will you maintain?

Franchisor errors and omissions insurance in the minimum amount of $_____;

Product liability insurance covering all products sold to you by us or our Business Affiliates in the minimum amount of $_______;

Commercial general liability insurance in the amount of $______per person/or occurrence for bodily injury and property damage combined with a general aggregate of $________; and

Other: _____________________________________________________________

13. Franchise Advisory Council or Independent Franchisee Association. In many franchise systems, a franchise advisory council is created when there are a sufficient number of franchisees to justify a council. This is either set forth in the franchise agreement or when the franchise agreement is silent, it just evolves. In most cases it is best for the franchisor to be a guiding force in the creation of the franchise advisory council. The reason for this is that you do not want the advisory council to take on an adversarial position with you. You want the council to give you constructive ideas and criticisms and thereby minimize as much as possible an "us vs. them" situation. Do you want the franchise agreement to reserve for you the right to create the franchise advisory council?

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

New Product and Services Suggestions

__________________________________________________________________

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.

Independent Franchisee Association Yes No

14. Annual Convention.Do you plan to have an annual convention with your franchisees?

Yes No Who will pay the costs? ___________________________________________________

15. Franchisor's Option to Purchase.

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

If yes, under what circumstances?

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

If yes, how much insurance? $ . Who pays for the premiums? .

16. Transfer of Interest.

(a) Transfer by the franchisor:

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

Yes, Fair Franchising Standards

If yes, please describe:

(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 franchisor normally imposes certain restrictions on the franchisee's ability to transfer his or her interest in his or her company or in the franchise agreement. This is because of the personal relationship between the franchisor and the franchisee. However, because it is the franchisee's business and he or she has developed a certain equity in the business, it would be unfair to totally restrict transfers by the franchisee or its owners. Therefore, a fair compromise is for you to impose a set of reasonable conditions to any transfer. These conditions may include:

Your waiver of your right of first purchase [see Section 16(d)]

Satisfaction of all of franchisee's accrued obligations

Franchisee not in default under the franchise agreement

Franchisee executes a general release to you (Don't check if you want to satisfy the Fair Franchise Standards).

Transferee: assumes franchise agreement; or enters into the standard form franchise agreement you are then offering to new franchisees

Transferee is approved by you

Transferee must renovate the franchise business

Transferee must assume lease or acquire title to the premises

Transferee or its manager must satisfactorily complete basic management training

Franchisee must pay the transfer fee as described in Section 8(i).

(d) Death or Disability of 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?

Franchise must be transferred in accordance with franchise agreement within _____ days of death or disability

Franchisee's heirs or guardian shall succeed to the franchisee's interest in the franchise without qualification

Franchisor has an obligation to purchase the franchise

(e) Right of First Purchase.

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

Do you want this right of first refusal on transfers?

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:

17. Default and Termination.

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

Liquidated damages of $________________ per day

Liquidated damages of a lump sum of $_____________ (for example, 36 months of royalty and advertising contributions)

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

18. Franchisee's Covenants.

Covenants Not to Interfere or Compete:

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

If yes, for how long? ________________________________;

In what area? _______________________________________________________;

What types of activities would be considered competitive by you?

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: ___________________________________.

19. Arbitration; Waiver of Jury Trial; Waiver of Punitive Damages.

(a) Reasonable minds are divided on whether to require arbitration or litigation of franchise disputes. The arguments in favor of arbitration include that it's cheaper, faster, and more private. The arguments against arbitration are that the arbitrators are more inclined to "split the difference," the arbitrators are not as professional as judges, the discovery process is limited, legal precedent is not necessarily followed, the arbitration award is not appealable and that many times it ends up not being quicker or cheaper. It appears that a person's opinion as to arbitration is based on his or her most recent experience, if any. We would appreciate your thoughts:

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.

Waive right to trial by jury

Don't waive right to trial by jury

(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. 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

______________________________

21. Option to Obtain Successor Franchise Agreement. An option to obtain a successor franchise agreement may be preferable to a renewal of the existing agreement. The reason for this is to give you flexibility in changing certain provisions of the franchise agreement due to changes in the franchise system, changes in technology, inflation, demographic changes, etc., particularly, the right to increase the royalties and advertising contributions and to reduce the size of any protected territory. The Fair Franchising Standards require unlimited "evergreen" rights to renew provided your renewal conditions are met. In this regard we need to know:

(a) Length of Successor Term:

Same as initial term; or

_______________ 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

__________________________________________________________________

(c) Option Fee: Normally on a renewal or execution of a successor franchise agreement, the franchisee usually does not pay the entire initial franchise fee again but rather something less ranging from 75% of the initial franchise fee then being paid by new franchisees, down to several hundred dollars merely covering your out-of-pocket costs in issuing a new agreement. We suggest something in between such as 50% of the initial franchise fee then being paid by new franchisees: The Fair Franchising Standards require that there be no renewal fee.

No Option Fee

$___________________________

_______% of then initial franchise fee then being charged to new franchisees

22. 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