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3 Mistakes to Avoid When Entering A Franchise Agreement

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Entering a franchise agreement can often come with some complications. Therefore, it is essential to go over each aspect of the agreement with care, so you do not make any mistakes. Otherwise, you could sign an agreement that does not adequately support the franchise relationship. Furthermore, if you do not understand franchisor obligations correctly, you may risk breaching the prescriptive disclosure requirements when entering into a franchise agreement.

This article will outline three common mistakes when entering a franchise agreement and how to avoid them.

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1. Rushing the Recruitment Process

Time is an essential factor when it comes to recruiting the right franchisees for your franchise. For instance, it is a good idea to research and plan an effective advertising strategy to contact as many potential franchisees as possible. Further, if you spend too little time advertising the franchise opportunity, you may restrict yourself to a small pool of candidates.

Additionally, it may be helpful to take some time to develop selection criteria to help you assess potential applicants. In some cases, franchisors may prefer a rigorous interview process before taking the franchisee on. In contrast, some franchisors might allow potential franchisees to spend time within the core business to help them better understand their role. 

If you have existing franchisees within the franchise model, you might suggest that the applicant gets in touch with them. This way, the applicant gets a feel for the day-to-day running of the franchise business.

Moreover, you will need to take some time to develop interview questions. Some franchise owners tend to ask franchise-focused questions during this stage. However, this is not always a good idea. Asking broader questions about your applicant will help you gain a better understanding of their:

  • experiences;
  • qualifications;
  • work ethic; and 
  • goals.

Therefore, setting aside the right amount of time to conduct the recruitment process before entering into a franchise agreement will ensure you find a franchisee who is the right fit for your business.

2. Not Having Your Documents In Check 

The franchise agreement is not the only legal document you must provide franchisees before they join your business. For example, the Franchise Code of Conduct (‘the Code’) requires you to disclose specific information to prospective franchisees through a disclosure document.

A disclosure document consists of a range of important information about your franchise, including:

  • your previous business experience as a franchisor;
  • any disputes with former franchisees, alleged breaches of the franchise agreement, or illegal activity relating to the operating of the franchise;
  • the contact details of your current franchisees;
  • details of any costs franchisees might face before opening their business site (i.e. purchasing new equipment);
  • different franchise territories;
  • the suppliers you want franchisees to source particular products from if applicable; and
  • what rights franchisees have to the franchise’s branding and any other intellectual property.

Furthermore, you must provide prospective franchisees with the disclosure document at least 14 days before signing the franchise agreement. If you fail to fulfil your disclosure obligations under the Code, you may face severe penalties, including significant fines.

Additionally, you must supply prospective franchisees with a key fact sheet at least 14 days before signing the franchise agreement. The disclosure document is often quite lengthy, so the key facts sheet outlines vital information within the disclosure document. Therefore, the key facts sheet is critical to helping franchisees navigate and understand the disclosure document.

Lastly, you must provide prospective franchisees with an information statement. This standard document created by the Australian Competition and Consumer Commission (ACCC) highlights some of the fundamental rights and obligations in a franchise relationship. You must also provide franchisees with a copy of the Code itself. 

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A lawyer’s oversight can be critical when drafting your franchise agreement. This is because lawyers understand your legal obligations as a franchisor and will be able to detect wording within the agreement that is unfair or unclear. 

Compliance With the Law

When constructing a franchise agreement, you must comply with the legal requirements. For example, the Code limits what you can include in a franchise agreement. These limitations include:

  • restraint of trade clauses that prevent franchisees from working elsewhere once the franchise agreement ends;
  • terms outlining who pays for legal costs and settling disputes;
  • clauses that give you the power to make changes to the franchise agreement;
  • terms that allow the general release of your liability; and
  • waivers of any statements you make to a franchisee.

Where your franchise agreement contains clauses inconsistent with the Code, it may be difficult to enforce these provisions. Ultimately, a lawyer can ensure your franchise agreement is consistent with the Code and, therefore, legally enforceable.

Clauses That Facilitate Business Growth

A franchise lawyer will have a good understanding of which terms you should include in your agreement to facilitate the growth of your franchise. This includes clauses that:

  • protect your business’s intellectual property;
  • charge royalty fees to franchisees;
  • deal with the franchisee’s occupation of the business premises either through a direct lease with the landlord or a licensing arrangement with you; and
  • limit what goods and services the franchisee can source.  

Signing the Franchise Agreement

A lawyer can ensure that the actual signing of the agreement follows the correct procedures under the Code. Furthermore, a lawyer will ensure that you include a:

  • signed ‘franchisee’s statement’ acknowledging that the franchisee has had a reasonable opportunity to read and understand the franchise documents at least 14 days before signing the franchise agreement;
  • complete receipt page from the disclosure document;
  • complete ASIC Business Name Authority; and
  • legal advice certificate and accountants certificate acknowledge that you have encouraged the franchisee to seek independent advice.

Key Takeaways

To avoid some common mistakes when entering a franchise agreement, you should:

  • take your time to recruit new franchisees;
  • have your disclosure document, key facts sheet and information statement ready to give your new franchisee; and
  • seek legal advice to help with the drafting of the franchise agreement.

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

Frequently Asked Questions

What is a franchise agreement?

A franchise agreement is a contract that binds a franchisor and a franchisee. The agreement outlines the rights and obligations of the franchisor and franchisee whilst the agreement is in force and the period after the agreement ends.

What is a disclosure document?

A disclosure document includes a range of important information about your franchise. It helps prospective and current franchisees make business decisions concerning the franchise system.

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