The nature of franchise relationships means that franchisors will almost always have more bargaining power and control over the terms of the Franchise Agreement. Franchisees are sometimes left asking the question: How do I protect my interests?
Protecting the Franchisee Interests
In order to establish an even playing field with your franchisor, you should be careful in the pre-contractual negotiation phase, to ensure you are signing an agreement you are actually happy with, as opposed to simply a pro-forma document issued by the Franchisee. Franchises may seem like a ‘safe bet’, given the relatively low rate of failure, but you should never assume that your franchisor is solvent or that the business is financially viable. Further, inclusions in franchise agreements such as restraints, confidentiality clauses and termination obligations can have severe (and expensive!) consequences when the franchise is at an end, even though it may seem like a long time away.
To protect your right as franchisee, get your franchise lawyer to undertake a full review of all franchise documents, including the Franchise Agreement and the Disclosure Document.
A thorough investigation (also known as ‘conducting due diligence’) into the history of the franchise should help you determine whether or the not the franchise would be a successful business venture. According to the Franchising Code of Conduct, franchisors must give all potential franchisees a copy of the Code, a copy of the Franchise Agreement in its signable state, and, of course, the Disclosure Document. In addition, they must give franchisees an information sheet on the benefits and drawbacks of entering a franchise in general. It is also a requirement that the franchisor provide the disclosure document at least 2 weeks before entering into the Franchise Agreement.
That material is given to you for a reason; read it. And while you’re doing so, note anything you don’t understand, or are not happy with. Your franchising lawyer should be able to assist in interpreting and, where appropriate, negotiating the terms of, the documents.
Eventually, you’ll be required (upon entering the Franchise Agreement) to sign an acknowledgment stating that you read and understood the documents and had the opportunity to seek advice. During the Due Diligence of the business, you want to get as much information as possible on every aspect of the business including its legal standing and previous matters, its financial viability and its reputation in the market. The franchisor and associates must have their details in the disclosure documents.
In addition, you can look into the trademarks of the company, and any history of bankruptcy of either the franchisor or its associates. Don’t forget to check whether the franchise system has been approved/accredited by your financier.
Finally, speak with the previous and current franchisees, the details of which should also be available in the disclosure document, and ask them to tell you about their experiences working in the system. After all, the best way to learn about the operation of the franchise, is to ask people actually operating a franchise.
Important questions to ask before signing
Make sure you understand the terms and conditions of the Franchise Agreement and ask these questions to assess your readiness to enter any franchise relationship. This is not an exhaustive list and consultation with a franchise lawyer is highly recommended.
- Have you received all disclosure documents?
- Does the franchisor have a good track record for compliance in the business?
- Do you have exclusive right to a particular area, or may the franchisor allow other franchisees/competitors to operate within your area?
- Was there another franchisee in your area previously? What happened?
- What is the term/renewal? Do you have any right of renewal/extension?
- What will you have to pay to set-up, maintain and operate the business?
- Who will hold the lease? If the franchisor holds the lease, are they merely licensing you to use the premises or are you subleasing?
- Is the lease term at least as long as the franchise term?
- What costs are involved in renovating/fitting out the premises? What contribution, if any, will the landlord/franchisor contribute to these expenses?
- What happens with your franchise agreement if the franchisor sells their interests? Will your existing agreement be affected?
The Importance of Negotiation
More often than not, the more established franchise networks will give all prospective franchisees the same standard form franchise agreement. They will argue that, to ensure consistency, the terms are non-negotiable. This discourages many prospective franchisees from ever attempting to enter into any robust negotiations with the franchisor.
In our experience, however, even larger franchises will exercise discretion for reasonable requests and amendments, particularly when a reasonable explanation is offered.
To protect your commercial interests to the greatest extent possible, you should consult a franchise lawyer and an accountant. Seek further advice on insurance from a broker, not to mention advice on the different taxation implications that apply to the different business structures.
As a franchisee, it is important you get as much help as you can before making such a huge decision and signing on the dotted line. Entering into a Franchise Agreement is a big commitment, and should not be taken lightly. Speak with a franchise lawyer about reviewing the various documents and conducting a thorough due diligence on the franchisor. For an obligation-free consultation, contact LegalVision on 1300 544 755.
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