4 Legal Issues to Consider When Buying a Franchise

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Table of Contents

• 1. Buying a Business
• 2. Familiarise Yourself with the Franchise Agreement, Disclosure Document and Code of Conduct
• 3. Intellectual Property Protection
• 4. Exit Strategy
• Key Takeaways

When you are looking into buying a franchise, it is crucial to grasp the legal aspects surrounding franchising in Australia. These legal aspects include:

• reviewing franchise agreements carefully to understand your obligations as a business owner;
• navigating intellectual property rights; and
• ensuring compliance with regulatory frameworks.

There are several key legal considerations you should keep in mind before committing. It is essential to be fully aware of both the obligations and the rights involved before you decide to sign on the dotted line. This article will explain four key legal issues to consider when buying a franchise.

1. Buying a Business

When you buy a franchise, you are essentially acquiring the rights from the franchisor to run a business under their brand. Although different from starting your own business, many of the same considerations apply. You need to:

• register your ABN;
• understand your tax obligations; and 
• be aware of any responsibilities regarding employees. 

Also, you must ensure you can meet the ongoing financial commitments of the franchised business. If the franchisor doubts your financial viability and ability to meet these obligations, they may reject the sale.

It is crucial to conduct due diligence to assess all the business’s benefits and risks. Since you are acquiring an established franchise, evaluate its history and the market it operates.

Understand why the current franchisee or franchisor is selling the business. How long have they been in business? Is the location suitable or hindering the business?

Before you finalise buying a franchise, ensure the franchisor has obtained all necessary permits and approvals required by regulations and protection laws. Non-compliance can lead to penalties for both you and the franchisor.

2. Familiarise Yourself with the Franchise Agreement, Disclosure Document and Code of Conduct

Before you commit to any franchise, it is crucial to review the franchise agreement and disclosure document thoroughly. These documents outline how the franchise operates and can impose strict requirements on you, the franchisee. The franchise agreement and disclosure document will detail the terms and conditions of the franchise relationship, including:

• fees;
• royalties;
• territory rights;
• operational guidelines;
• termination clauses; and 
• any dispute resolution mechanisms set by the franchisor. 

Fees under the franchise agreement vary depending on the franchise brand, so it is essential to ensure you can cover them both now and in the future.

You should also understand your rights and obligations under the Franchising Code of Conduct. This Code offers certain protections to franchisees like yourself and serves as a guide to what the franchisor can or cannot require of you. For instance, the Code might forbid the franchisor from demanding certain types of fees and costs.

3. Intellectual Property Protection

Franchisors grant franchisees rights to use their brand in franchise agreements. This includes:

• trademarks;
• trade secrets;
• proprietary business processes; and
• and other intellectual property, such as:
  • ingredients;
  • recipes; and 
  • ways of providing services. 

As a franchisee, you must ensure that the franchisor provides you with the necessary licenses or permissions to use their intellectual property rights and that they cannot retract them overnight, leaving you in breach of the agreement. You should also consider whether any franchise agreement you enter into adequately protects your interests in the event of disputes over intellectual property rights or breaches of confidentiality.

4. Exit Strategy

Having an exit strategy in place before investing in a franchise is crucial. Some franchisors may even require this or provide training to ensure their franchisees are aware of the steps needed to build a business ready to sell. Similarly, some franchisors have already built a resale program that all franchisees must follow as part of their operational manual. Buying a franchise with this system already in place ensures that there is an exit strategy and that the franchisor is open to franchisees wanting to sell their stake in the business at some point.

It is also essential to be aware of how the franchisor can terminate the agreement and the process they must follow. The franchise agreement’s termination clause should provide this information and state the obligations of both the franchisee and franchisor in case of termination. Notice will have to be given, and the franchisee may be required to meet additional legal costs.

Negotiating Franchise Agreements Factsheet

When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.

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Key Takeaways

Before you commit to buying a franchise, make sure you understand your legal obligations and rights. Take the time to thoroughly review all documents, including the franchise agreement, disclosure statement and code of conduct, to ensure clarity. It is also important to consider crucial aspects such as protecting intellectual property rights and planning for a smooth exit strategy too.

If you have any questions about your legal obligations when buying a franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.