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A franchise is a way of doing business. It is a business relationship where the Franchisor (owner of the franchise) assigns the right to several Franchisees to market and distribute the goods and services of the franchised business. The main attraction of Franchising, which explains why many individuals go out and buy a franchise business is the opportunity for Franchisees to run their own business but have the advantage of selling a well known brand.

The franchise arrangement is typically documented by both the Franchisor and the Franchisee in a Franchise Agreement. This is a legally binding document spelling out the rights and responsibilities of all of the parties.

Would a franchise suit you?

The following table sets out a number of matters to consider to help you assess whether you possess the necessary skills to successfully operate a franchise

Do you have the personal and business skills required to run a franchise business?

  • Management ability;
  • Knowledge of the franchising industry;
  • Ability to comply with the requirements of the Franchise System (for example, training and other brand requirements);
  • Knowledge of the franchising rules; and
  • Communication and Networking skills

What are the benefits if you buy a franchise?

  • Purchasing a business with an established brand and reputation;
  • Advertising power (often nationwide);
  • A support network from the Franchisor and fellow Franchisees; and
  • A level of autonomy running your individual franchise

Things to look out for when considering the purchase of a franchise

  • Territory – will the franchise have an allocated territory? Is this territory exclusive? If it is not exclusive, another franchisee could open up in your territory and take your customers;
  • Has the Franchisor made disclosure to you under the Code? Four key documents must be provided to you in the disclosure process to allow you to assess whether you wish to proceed:
    • an information statement;
    • a disclosure document;
    • a copy of the franchise agreement; and
    • a copy of the Code.
  • Pursuant to the Code, the franchisor is required to act in good faith in its business dealings with you. Obviously, this requirement also applies to you. This obligation applies from the pre-contractual negotiations until the termination of the agreement.
  • What are the franchise fees? Both with regard to the establishment of the business and ongoing expenses payable throughout the duration of the Franchise.
  • What are the requirements of the franchisor for initial and ongoing training throughout the franchise relationship.

Before buying a franchise

Before you take the plunge and spend your hard earned money on a franchise, we suggest you do the following (at a minimum):

Step 1: Research and verify the proposed franchise

Before committing to purchasing a franchise we suggest that you:

  • Get professional advice from an accountant, business expert and legal expert;
  • Establish the proposed setup fees and ongoing fees for the business including franchise fees in addition to other fees such as lease and license fees and employee wages;
  • Determine whether the franchise is a viable business opportunity;
  • Speak to current and former franchisees in the proposed franchise;
  • Verify disclosure information provided by the Franchisor;
  • Consider the proposed arrangements for occupation of any premises from which to run the business. For example, will you be required to commit to a lease or will you occupy a premises under licence agreement with the franchisor holding the lease? If the latter applies, what is the lease term? Will there be a problem with renewal of the lease and hence the ability to conduct the franchise business?
  • Consider the term of the franchise agreement. Can you renew the term? Can you end the agreement if you need to? Can the business be sold and the franchise agreement assigned?

Step 2: Have an understanding of the Franchising Code of Conduct

Amendments to Code took effect in January 2015 and we draw your attention to the following:

  • In all dealings with the Franchisor you will be required to act in good faith. This is a mutual obligation and applies to pre-contractual negotiations in addition to the conduct of the parties throughout the franchise relationship.
  • Four key documents must be provided to you in the disclosure process by the franchisor to allow you to assess whether you wish to proceed:
    • an information statement;
    • a disclosure document;
    • a copy of the franchise agreement; and
    • a copy of the Code.
  • You should note that the disclosure document you receive may differ from the requirements of the new Code. This is as franchisors are able to use their existing disclosure document until 31 October 2015. After 31 October 2015 it will become mandatory that all disclosure documents comply with the Code.
  • The franchisor cannot require you to undertake significant capital expenditure during the term of your franchise (although there are some exceptions). You should read your disclosure document carefully noting that the franchisor can require you to meet any expenses set out in your disclosure document.
  • For all franchise agreements signed on or after 1 January 2015, the franchisor cannot require you to:
    • sign a document releasing the franchisor from liability towards you or waiving any verbal or written representations made to you;
    • bring an action or proceeding in relation to a dispute (including mediation), in a State or Territory outside that in which you are based; and
    • pay the franchisor’s costs in relation to settling a dispute.

If your franchise agreement contains such a clause, it will have no effect.

Step 3: Obtain legal advice

Before entering into any franchise agreement, it is important that you obtain legal advice to:

  • ensure that the franchisor has complied with the Code;
  • understand the costs you may face in buying and running the franchise; and
  • ensure that any other licence, lease or distribution agreement that is part of the franchise agreement is in order.

Conclusion

If you are considering buying a franchise, speak to one of LegalVision’s experienced franchise lawyers today – obtaining advice before you enter into any documentation is crucial.

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