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If you are looking to purchase a franchise business, it is likely that the franchisor has provided you with a document or two along the way. This is particularly true if you are in advanced negotiations with a particular franchisor. But, what does the big bundle of documents that you receive from the franchisor actually cover? The franchise agreement is one of five key documents that you can expect to receive from the franchisor. This article will go through a few important points about franchise agreements, to help you get a better understanding of how this document will affect your business.

Is a Franchise Agreement Required?

The Franchising Code of Conduct (the Code) requires that every franchisor should provide a franchise agreement to prospective franchisees. Essentially, this document is the contract between yourself and the franchisor. However, it is different to other commercial contracts, in that its terms are also governed by the Code.

As the Code does not set out a required form or consistent ‘look’ for the franchise agreement, there is a great deal of variance from agreement to agreement. Therefore, the franchise model itself will determine the length and details of a specific franchise agreement.

When Should I Receive the Franchise Agreement?

Under the Code, you must receive the franchise agreement at least 14 days before you can sign it. Otherwise, the code does not detail any further requirements on when you should receive the franchise agreement during the process of purchasing a franchise.

Buying an Existing Franchise

If you are buying an existing franchise from an outgoing franchisee, you will likely receive a copy of the franchise agreement after you have made an offer to purchase the business.

However, you should not complete the sale without first receiving and going over the franchise agreement. In most circumstances, the franchisor can insist that you enter into a contract where the terms differ from what the seller was originally operating under. 

What Should My Franchise Agreement Contain?

A franchise agreement is a contract which contains the:

  • key terms of the business;
  • franchisee’s obligations;
  • franchisor’s obligations; and
  • procedures that will be relevant as you operate the business.

Common Contract Clauses

Your franchise agreement will contain many clauses commonly found in commercial contracts more generally. Some of these include:

Clause Information
Term Firstly, the franchise term is the duration of years that the agreement will operate. If not renewed at the end of the term, the agreement will expire.
Territory The territory is the place where you are contractually able to carry on your business. Furthermore, this clause will often also specify where you can market your franchise business and take referrals for new businesses.
Fees All of the fees that must be paid and the mechanics for making these payments will be detailed in the franchise agreement. 
Governing Law

When purchasing a franchise business that originated overseas, you should ensure that your documents have been amended to reference Australian law.

When purchasing an Australian franchise, however, your franchise agreement may reference a state jurisdiction. For example, food franchise businesses around Australia might operate under different state food safety laws.

Confidentiality

Your franchise documents will include information relating to the business’ systems and intellectual property (IP) in a lot of detail.

Therefore, a franchise agreement will commonly specify your obligation to keep that information confidential. Often, this requirement will also apply after you leave the franchise business.

Termination

The Code provides that there are very specific circumstances where a franchisee or franchisor can terminate the agreement. These circumstances will be set out in your franchise agreement. This ensure that all parties to the agreement can assume a level of certainty.

Just as your franchise agreement will have a fixed term, the agreement may also set out the circumstances where you can exit the agreement before its expiry.

 

Clauses on the Franchisee’s Obligations

Your franchise agreement will also contain many clauses that are specific to the business relationship you will have with the franchisor. Furthermore, it will also contain clauses on your obligations as the owner of a franchise. Some common clauses in your agreement regarding this obligation may include your:

  • responsibility to comply with the business’ operations systems;
  • duty to meet the franchisor’s training and performance standards;
  • reporting requirements;
  • supply arrangements and requirement;
  • responsibilities to staff;
  • responsibilities to personnel in your local area;
  • promotion and marketing practices; and
  • performance criteria.

Clauses on the Franchisor’s Obligations

Additionally, some common clauses in your agreement will deal with the franchisor’s obligations to you. Some of these obligations include providing ongoing:

In addition to the parties obligations, the franchise agreement will also be a reference point and impose contractual obligations at all points of the franchise life cycle. Some of these reference points might be the:

  • renewal provisions;
  • termination provisions;
  • dispute resolution process; and
  • breach procedures.

The Code also has provisions containing these, so it’s important that the franchise agreement is consistent with the terms of the Code.

Key Takeaways

Even when purchasing a ‘simpler’ everyday business operating under a franchise model, it is essential to understand the obligations and rights within your franchise agreement. This will ensure that the terms of the agreement are implemented in your day to day business operations. If you have any questions about a franchise agreement, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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