What is a franchise agreement?

A franchise agreement is a document which contains the franchisee’s business and other obligations, as well as the franchisor’s business and other obligations. For example, a franchise agreement will often contain the franchisee’s obligations relating to performance criteria, payment of fees (royalties, marketing fees, training fees, transfer fees, termination fees, utility levies etc.), marketing, reporting, training, supply of products and services, territory etc. Similarly, the agreement will often contain the franchisors obligations relating to approved equipment/products/suppliers, advertising/marketing, assistance and support, client enquiries etc. franchise agreement is required to be accompanied with the franchisor’s disclosure document. This disclosure document provides further detail on these business and other obligations.

Before signing the franchise agreement, ask yourself:

  • Do I have all the background information regarding the franchise business?
  • What is the history of this franchise business in the marketplace? Is there a positive perception of the franchisor from the public?
  • Has the franchisor expressed plans for the future of the franchise business? If so, is it a sustainable plan?
  • Is there competition in the market? Do I have an exclusive area where only I can sell the products/services of the franchise business? If so, will this affect the success of the franchise business?
  • Do I fully understand all the documentation that I have received from the franchisor? (accounting, legal and general business advice would help with this)
  • Do I have the financial backing to afford the initial establishment costs and all other costs (as well as all living costs) as well as fees in order to establish the franchise business and continue the business throughout the term?
  • Will you be required to achieve a minimum level of performance;
  • In what situations would the franchisor give you a breach notice and what you need to do if you get given one?
  • Are there other franchisees in the system and what are the reasons for past franchisees transferring or selling their businesses?
  • How does the franchisor intend on growing the business (for example, marketing expenditure etc)?
  • Is the franchisor related in any way to the supplier of the goods/stock/equipment you are being obligated to buy from?
  • How will you go about selling your business if you want out.

 Any more additional tips before I sign this agreement?

  • Make sure that anything you have spoken about with the franchisor in relation to your franchise agreement and agreed upon is incorporated into the franchise agreement;
  • Ensure you understand all of the related documents, that is, the disclosure document, the franchisors manual, the franchising code and all annexures to the franchise agreement itself.
  • If you have any questions on the negotiation process or the agreement terms, make sure you consult a specialist franchising lawyer first. The franchising lawyer should provide more information on your obligations and rights of the final agreement.
Lachlan McKnight

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