When you buy a business, you generally receive one contract from the business owner or their lawyer setting out the terms of sale. However, you can expect to receive numerous documents when you buy a franchise, including the franchise agreement. The franchise suite of documents is a good representation of the intricately structured and unique opportunity you are being presented with as a franchisee; being the opportunity to become part of a network of other businesses that are recognised by a single brand. To assist and support every franchisee, the Franchising Code of Conduct (‘the Code’) prescribes a specific timeframe and manner in which a franchisor must provide these documents to you for your consideration.
This article will outline the five documents you can expect to receive in the process of buying an existing or greenfield franchise. Additionally, it will cover the applicable protections afforded to you by the Code. It is important to note these documents are to be provided to every franchisee, regardless of the type of franchise or industry. Some industries or franchise models require additional documentation to be provided (for example, lease documents).
1. Franchise Agreement
The franchise agreement forms a legally binding contract between you and the franchisor. Often, the agreement will also identify a guarantor who is a party to the agreement in their individual capacity.
The Code does not specify the particular form or content of the agreement. However, generally, the agreement will heavily detail the following arrangements:
- whether or not the franchisor is offering you an exclusive or non-exclusive territory;
- whether you have to supply all of the goods or services sold by the franchise;
- payment arrangements (including the initial franchise fee, ongoing royalties or marketing costs);
- your right to use the intellectual property of the franchise and reciprocal obligations of confidentiality;
- whether there are reporting requirements or minimum performance criteria;
- the circumstances in which either party may terminate the agreement; and
- your operational obligations.
2. Disclosure Document
The Code requires a franchisor to provide every franchisee with a degree of transparency across the historical, financial and operational features of the franchise network and the franchisor themselves in the disclosure document. The document is characterised by a form and structure that is prescribed by the Code. In this way, there is uniformity between the types of information a franchisor must provide to every franchisee regardless of the franchise network you wish to join.
It can be helpful to carefully consider the historical data and financial information concerning the viability of the franchise. However, ultimately, a disclosure document is not a document that you must ‘agree to’ in a similar manner in which you can agree (or negotiate) the terms of a franchise agreement. It is not a contract but a point in time snapshot.
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3. Key Fact Sheet
The key fact sheet is a short document that was introduced by amendments to the Code in July 2021. Indeed, the Code prescribes the form a franchisor must use and complete. It is a high-level ‘snapshot’ summary of the disclosure document. Additionally, its intention is not to be a comprehensive summary or a substitute for perusing the contents of the disclosure document. Instead, the purpose of the key facts sheet is to provide every franchisee with a shorter, more accessible document that highlights the identifying features of the franchise network you are contemplating joining.
By reading the key fact sheet, you should have a clearer picture of:
- how long the franchisor has operated the franchise system in Australia;
- whether there have been any major disputes in the franchise network;
- the number of franchise businesses in the franchise system;
- whether the franchisor is offering an exclusive territory;
- whether the franchise has an interest in a lease that will be used for the operation of the franchise business;
- the initial payment you need to pay on signing the franchise agreement;
- the approximate capital set up costs of the franchise business; and
- what happens at the end of the franchise agreement
4. Information Statement
The information statement is a brief four-page document produced by the Australian Competition and Consumer Commission (ACCC) that provides you with general information and that assists you to learn more about franchising. The document outlines the risks and benefits of being a franchisee. Additionally, it includes a helpful list of questions you should ask a franchisor.
5. Franchising Code of Conduct
The final document to complete the suite of documents that every franchisee can expect to receive is a copy of the Code. The Code is the primary source of legislation that regulates franchising in Australia. It is provided to you to directly access the source of law that governs your rights and obligations as a franchisee. In addition, the Code sets out the process that is to apply:
- before you sign any documents; and
- during the franchise term.
Key Takeaways
Every franchisee should expect to receive a suite of documents that, together, form a more complete and transparent picture of the franchise network you are considering joining. It requires serious commitment to become a franchisee for a set number of years. Therefore, you should make sure you read and understand this important set of documents. If you are a franchisee and need help with reviewing any franchise documents, 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.
Frequently Asked Questions
The franchise agreement forms a legally binding contract between you and the franchisor. It will outline the details of the franchise arrangement.
The disclosure document provides the franchisee with information about the historical, financial and operational features of the franchise network and the franchisor themselves.
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