What You Need to Know: Negotiating With a Potential Franchisee

The pre-contractual stage of entering into a franchise agreement is incredibly important for any franchisor. The Franchising Code of Conduct has strict rules that need to be complied with, particularly when it comes to representations. This means that a franchisor cannot simply say anything they would like to convince a potential franchisee to sign a franchise agreement. This article will run through the key points you need to consider when communicating and negotiating with a potential franchisee.

Act in Good Faith

The franchisor has an obligation to act in good faith. Acting in good faith means:

• To be honest;
• To take other party’s interests into consideration; and
• To act in good conscience.  

By keeping this concept of good faith in mind throughout the negotiation stage, you will not only be complying with the Franchising Code of Conduct, but you will also ensure that you do not give false representations.

False Representations

The Franchising Code of Conduct prevents you as a franchisor from waiving any verbal or written statements made during negotiations. In practice, this means any clauses relating to representations, warranties or an entire agreement may be void. As a franchisor  you need to be wary of any statements you make regarding:

• Sales estimates;
• Financial forecasts;
• The level of assistance you can provide to a franchisee;
• The amount of upfront costs required;
• The right to terminate the agreement;
• The operation of the franchise territory or marketing area; and
• The general operation of the franchise system.

It may also be worthwhile for a franchisor to review any marketing materials or information packages provided to a franchisee to make sure all statements are true and correct.  An important tip is not to overemphasise or promise anything that you cannot fulfill.

What are the Consequences of Not Complying with the Franchising Code of Conduct?

If the franchisor fails to comply with the Franchising Code of Conduct, this could cause issues if disputes in the franchise arise between you and the franchisee. One common cause of action that a franchisee tends to rely on is misrepresentation and misleading and deceptive conduct. Misrepresentation refers to a false representation, whereas misleading or deceptive conduct refers to the franchisor’s general conduct. It needs to be proven that the statement and/or conduct had led the franchisee to enter into the agreement.

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By following the above best practice tips on your pre-contractual negotiations, you will be more protected from any future claims.

Questions about your franchise agreement of the Franchising Code of Conduct? Let out Franchise Lawyers know on 1300 544 755.