CFC Franchise Agreements & Contract Law 2

Question 1

What is 'constructive termination' in franchise law?

Accepted Answer

Actions by the franchisor that make it impossible or impractical for the franchisee to continue operating

Answer

Constructive termination occurs when the franchisor's actions—such as encroachment, withholding support, or unilaterally changing key terms—effectively force the franchisee out of business without formal termination.

Question 2

What is a 'renewal term' in a franchise agreement?

Accepted Answer

A new franchise period granted after the initial term expires, often under updated terms

Answer

A renewal term allows franchisees to continue operating after the initial term ends, typically requiring them to sign the franchisor's then-current franchise agreement which may contain updated terms.

Question 3

What is the legal significance of a 'personal guarantee' in a franchise agreement?

Accepted Answer

It makes an individual personally liable for the obligations of the franchisee entity

Answer

A personal guarantee makes an individual (typically the franchise owner) personally responsible for all financial obligations of the franchisee business entity, even if it operates as an LLC or corporation.

Question 4

What does 'liquidated damages' mean in a franchise termination clause?

Accepted Answer

A pre-agreed amount of compensation payable upon breach or early termination of the agreement

Answer

Liquidated damages are a pre-determined compensation amount agreed upon in the contract to address losses from a breach or early termination, avoiding the need to calculate actual damages after the fact.

Question 5

Under the FTC Franchise Rule, how many calendar days before signing must a franchisor provide the FDD to a prospective franchisee?

Accepted Answer

14 calendar days

Answer

The FTC Franchise Rule requires franchisors to provide the FDD at least 14 calendar days before any agreement is signed or any money is paid by the prospective franchisee.

CFC - Certified Franchise Consultant Practice Test

CFC - Certified Franchise Consultant Practice Test

CFC Franchise Agreements & Contract Law 2