In Short:
Before signing a franchise agreement, it is essential to understand the key documents involved, including the franchise agreement, disclosure document, and Information Statement for Prospective Franchisees. These documents are governed by the Franchising Code of Conduct and require a minimum 14-day consideration period for due diligence. Ensure that you ask the right questions and seek independent legal and financial advice before committing to the agreement.
Tips for Businesses:
Make the most of the 14-day consideration period by reviewing the franchise agreement and disclosure documents carefully. Reach out to current and past franchisees to gain a better understanding of the franchisor’s operations. Independent legal and financial advice is crucial to fully comprehend the risks and obligations before signing the agreement.
Summary:
This article provides guidance for Australian businesses considering signing a franchise agreement. LegalVision, a commercial law firm, specialises in advising clients on franchise agreements and the legal obligations under the Franchising Code of Conduct.
On this page
- What is a Franchise Agreement?
- Key Terms Commonly Included in Franchise Agreements
- Information Statement for Prospective Franchisees
- Why Is the Disclosure Document Important?
- Can I Sign the Franchise Agreement Before the Return Date?
- What Else Should I Ask the Franchisor?
- The Importance of Independent Professional Advice
- Key Takeaways
- Frequently Asked Questions
Signing a franchise agreement comprising anywhere from 50 to over 100 pages of material can confuse even an experienced business person. With some guidance, however, you can familiarise yourself with the key principles. This article will provide you with a road map of the key franchise documents to expect when signing on to become a franchisee. It will also outline key questions to ask your franchisor before signing a franchise agreement.
What is a Franchise Agreement?
A franchise agreement is a document that contains the key responsibilities a franchisee and franchisor owe each other.
Unlike other commercial contracts, the form and content of the franchise agreement are guided by the requirements set out in the Franchising Code of Conduct (‘the Code’). This is a mandatory industry code governed by the Australian Competition and Consumer Commission (ACCC).
Key Terms Commonly Included in Franchise Agreements
While each franchise agreement differs between systems, most cover the following key areas:
- Key commercial terms and fee structures – including initial franchise fees, ongoing royalties, marketing contributions, and any other payments you must make to the franchisor;
- Training and support expectations – outlining the initial and ongoing training the franchisor will provide, and the operational support available during the agreement;
- Product and service restrictions – specifying the products or services you must offer, approved suppliers you must use, and restrictions on what you can sell;
- Marketing requirements and reporting obligations – detailing your obligations to contribute to marketing and provide financial and operational reports;
- Dealing with breaches, termination and disputes – explaining when the agreement can be terminated, the process for addressing breaches, and resolving disputes; and
- Intellectual property restrictions and confidential information provisions – setting out how you can use the franchisor’s trademarks, branding and systems and your duty to protect confidential information.
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Information Statement for Prospective Franchisees
The Information Statement for Prospective Franchisees is a mandatory document that every franchisor must provide to you under the Code before you sign an agreement. This is a standardised document prepared by the ACCC, where prospective franchisees in Australia receive the same Information Statement for Prospective Franchisees regardless of which franchise system they are considering.
The purpose of the Information Statement for Prospective Franchisees is to ensure you understand the fundamental nature of franchising before making your commitment. It serves as an educational tool and warning document, setting out in plain language:
- the key risks and benefits of becoming a franchisee;
- the legal relationship between franchisors and franchisees;
- your rights and obligations under the Franchising Code of Conduct;
- the importance of conducting due diligence before signing;
- warnings about the financial risks involved in franchising; and
- guidance on seeking independent legal and financial advice.
Why Is the Disclosure Document Important?
The Code requires franchisors to provide you with a franchise agreement accompanied by a disclosure document. This document provides details about the franchise network generally, alongside additional information relating to:
- how the business operates and whether any exclusivity is provided;
- restrictions on you as a franchisee;
- the fees you will pay; and
- whether there will be specific approved equipment, products and suppliers.
The disclosure document will also provide a list of current and former franchisees. It is a good idea to contact as many existing and past franchisees as possible before you sign the franchise agreement. Speaking directly with franchisees provides insight into how the franchisor operates. This is often not evident from reading the franchise agreement and disclosure documents alone.
You should also check whether the franchisor is a related entity to the supplier of any products. If so, they may not be supplying the products at the most competitive rates in the market. This is for you to confirm with existing franchisees.
Despite the wealth of information provided in the disclosure document, to ensure you have the complete picture, you should nevertheless conduct your own due diligence assessment before signing the franchise agreement.
Can I Sign the Franchise Agreement Before the Return Date?
The Code also prescribes a minimum 14-day consideration period from when you receive the franchise agreement and disclosure document. This is your opportunity to:
- conduct your due diligence with the information in your disclosure document;
- seek financial advice from your accountant; and
- seek legal advice on the key terms and risks.
You can sign during this period, but the franchisor must wait 14 days after providing the required documents before signing or risk penalties.
We highly recommend you use the full 14-day consideration period (and any additional time you may need) to thoroughly conduct your due diligence, seek professional advice, and make an informed decision about whether the franchise opportunity is right for you.
What Else Should I Ask the Franchisor?
There is no limit or set requirement on what you should ask the franchisor. The answers to your questions will vary on a case-by-case basis depending on your circumstances, the specific franchise system and the nature of the business.
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You should ask the franchisor any questions you need to make an informed decision and fully understand the opportunity.
Some key points you should inquire with the franchisor about include:
- whether you have all the background information regarding the franchise business;
- if there is a positive perception of the franchisor from the public and existing franchisees;
- what plans the franchisor has for the future of the franchise business;
- what the competition in the market is;
- if they know the reasons for past franchisees transferring or selling their businesses;
- if you will be required to achieve a minimum level of performance;
- in what situations would the franchisor provide you with a breach notice and what you need to do if you get given one; and
- What the process of selling the business is if you wish to exit the franchise.
The Importance of Independent Professional Advice
The franchisor may not be able to answer all your questions or may not be the best placed to provide certain advice.
For example, franchisors cannot provide you with legal or financial advice tailored to your personal circumstances. Therefore, seeking independent advice from qualified professionals, including lawyers, accountants and business advisors, is crucial. These advisors can review the following:
- franchise documents;
- assess the financial projections;
- evaluate the legal risks; and
- help you understand how the franchise opportunity fits with your individual goals and circumstances.
Key Takeaways
Before signing on as a franchisee, ensure you understand all the related documents that accompany the franchise agreement. Ultimately, the documents should reflect everything you have discussed with the franchisor during the negotiation process. Your franchise agreement should incorporate any arrangements your franchisor has promised to you.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced franchise lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
You can sign a franchise agreement before the 14-day consideration period ends. However, the franchisor cannot sign the agreement until at least 14 days after they provide the disclosure document and franchise agreement. You should use this time to conduct due diligence and obtain legal and financial advice before committing.
The disclosure document helps you assess the franchise opportunity before signing the agreement. It outlines key information about the franchise network, including fees, restrictions, suppliers and existing franchisees. You should review this document carefully and contact current or former franchisees to better understand how the franchisor operates in practice.
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