Franchised businesses differ from other businesses in a number of ways. They offer the ability to run your business using the franchisor’s “system” in a way that allows you to gain benefit from the name, marks, brand, image, and general “know-how” of a well established and generally more expansive organisation.
Whilst operating a franchised business provides you with a great number of benefits, there are also a number of pitfalls that you need to look out for when entering into a franchise agreement.
The Franchising Code
Franchising in Australia is governed by the provisions of the Franchising Code of Conduct (“the Code”) which regulates the conduct of both franchisors and franchisees. It also provides penalties for non-compliance.
What Documents Should I Receive as a Franchisee?
The Code requires that at least 14 days before you enter into the franchise agreement or make a non-refundable payment to the franchisor, the franchisor must provide you with a copy of the following documents:
- A copy of the Code;
- A copy of the franchisor’s “Disclosure Document”; and
- A copy of the franchise agreement.
The Disclosure Document is designed to provide you with information about the franchise so that you can make an informed decision as to whether or not you wish to enter into a franchise agreement with the franchisor.
Although it is important that you consider all of the information contained within a Disclosure Document, I generally advise my clients to pay attention to the following:
- The experience of the franchisor, including the experience of its directors and key personnel;
- Whether the franchisor has been involved in previous litigation or other Court proceedings;
- The details of other current franchisees and their respective locations;
- The number of franchisees that have exited the system during the past three financial years;
- The fees payable by you during the franchise term, including any additional costs and expenses that may be passed on to you by the franchisor; and
- The franchisor’s financial reports and accounts for the past three financial years.
Your franchise agreement is just like any other contract and as such it is imperative that you read it and fully understand it before signing it. You should pay particular attention to the following:
- Whether or not your site and/or territory are exclusive to you and whether or not the Franchisor can grant additional franchises within your area, or even operate their own business in competition with you.
- The extent of the fees, levies, and/or other expenses that you are required to pay under the franchise system.
- The exact nature of the rights that you are granted under the franchise system and the restrictions on your use of the franchisor’s brand.
- Whether or not the lease of your business premises is to be held in your name or in the name of the franchisor.
- Whether or not you are required to undertake a fit-out or refurbishment of the business premises during the franchise term.
- The extent of the training/assistance that will be provided to you by the franchisor at the beginning of, and throughout, the franchise term.
- The process that is involved should you wish to sell your franchised business at some stage in the future.
Entering into a franchise agreement is a significant undertaking. It is essential that anyone considering entering into a franchise agreement seeks legal advice before doing so.
Please contact me if you have any questions regarding a franchised business, or franchising in general.