The purchase or establishment of a franchise business, or more specifically a franchised cafe, involves a serious financial commitment. Often, the ongoing expenses and obligations of operating a franchised cafe are hidden in the piles of paperwork involved in such a transaction, so it is important to obtain independent legal advice on these issues before signing on the dotted line.
Franchise Fees
Being part of a franchise means that you will be paying some form of franchise fee. This can take the form of royalties (i.e. a percentage of your turnover paid on a regular basis), an annual flat franchise fee, advertising or marketing fees, and/ or local promotion fees. There are an unlimited number of the types of fees that you could be charged. The main thing you need to consider is whether you will be able to afford these fees. Franchisors or vendors of franchised businesses will do their best to sell you their franchise and tell you about its benefits, but you need to take a minute to sit down and figure out a good business plan and cash flow forecast to see whether your potential business will be able to afford the associated franchise fees at all.
Operations manuals
The operations manual is a document provided by the franchisor, and its terms are, generally, binding on the franchisee. The operations manual will generally set out the day-to-day practicalities of running your franchise business, including what kind of products you can sell, e.g. cupcakes, coffees, combo deals etc. Most franchisors will restrict you to only selling the products that are set out in the operations manual or as otherwise approved by them. In addition, some franchisors may also set out to restrict how you should cook, create or brew these products.
Sometimes, the restrictions imposed by the Operations Manual can negatively impact on the operation of the franchise business, which can hinder the overall profitability of the franchise.
For example, if the operations manual states you may only purchase supplies or equipment from a certain supplier, you could be paying extra for the item, i.e. it could be available cheaper elsewhere. Make sure that before you enter into the franchise agreement you know what kind of obligations that the operations manual will place on you, and that you will be able to fulfil them. If you’re unsure, contact our franchise lawyers and we’ll be happy to review the documents for you.
Express warranties and representations
Warranties and representations are legal terms for certain information that are communicated to you by another party to a contract, in this case, the franchisor. For example, a franchisor may give you a guarantee on the amount of income you will make, or how much you will be required to pay for the fit out of the premises. If the franchisor tells you anything that is to your benefit, make sure that you always write it down and have it included in the franchise agreement, or at least have the franchisor acknowledge what they have told you in writing. The Franchising Code of Conduct no longer allows a franchisor to waive such comments, so it is important anything said or communicated by the Franchisor which you relied upon in signing the agreement is recorded in writing.
Conclusion
Franchises are a great way to start or acquire your own business, and one of the most common forms of franchises is in the café industry. As with any contract, though, you should always make sure that you know exactly what you are signing up for. If you have any questions, feel free to contact LegalVision on 1300 544 755, and we’ll get one of our specialist franchise lawyers to give you a hand.