What Do I Need to Know Before Signing a Franchise Agreement?

Signing a franchise agreement comprising anywhere between fifty to over a hundred pages of material can cause even an experienced business person to be confused. 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 some key questions you should ask your franchisor before signing a franchise agreement.

What is a Franchise Agreement?

A franchise agreement is a document which 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 Consumer Commission.

Information Statement

The information statement is a standard document the franchisor must issue you under the Code. A copy is also readily available online. 

It is a standard cautionary document setting out the key risks and benefits of becoming a franchisee. 

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 further details about the franchise brand, alongside additional information relating to:

• how the business operates; 
• your obligations as a franchisee; 
• the fees you will pay; and
• the approved equipment, products and suppliers you will need to use;  

It is a good idea to contact as many existing and past franchisees as possible before signing the franchise agreement to get a greater understanding of what your role will be like. Their details will be listed in the document. 

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 something 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 window of 14 days within which you can review the franchise agreement before signing. 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.

A franchisor can face heavy penalties if the franchise agreement is signed sooner than 14 days after the time you receive all documents to which you are entitled. 

What Else Should I Ask the Franchisor?

Some key points you should inquiry 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.

Key Takeaways

Before signing on to be a franchisee, ensure you understand all of the related documents which accompany the franchise agreement. Ultimately, the documents should reflect anything you have spoken about with the franchisor during the negotiation process. Your franchise agreement should incorporate any arrangements your franchisor has promised to you. If you have any questions about the process of becoming a franchisee, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.