When buying a franchise business, it is important to consider both the risks and rewards of joining an established brand. If you are purchasing a franchise business for the first time, you may have several legal questions Franchise Code of Conduct (the Code) and how it applies to you. If you have already received franchise documents from the franchisor, you may also have questions about whether your franchise agreement is ‘standard’ or similar to other business purchase contracts you may have received in the past.
This article will identify 5 key questions you should ask your franchise lawyer before committing to a business purchase.
1. How Does the Franchise Code of Conduct Protect Me?
The Code provides a legislative framework which applies to you, the franchisee, no matter which Australian state or territory you are based in. By imposing disclosure and process requirements on the franchisor, the Code contains some built-in protections for you.
However, it is important to note that the Code does not guarantee franchise systems are profitable or that this franchise is right for you. There are definitely attractive and profitable franchise systems, but there are also some franchise systems that are high-risk. Through appropriate advice and due diligence, you should be able to determine whether a franchise is right for you.
2. What Are the Franchisor’s Disclosure Obligations?
The Code requires that the franchisor provides two documents to a prospective franchisee. These are the:
Typically, the franchise agreement will set out the franchisor’s obligations to you with regards to providing:
- ongoing training;
- support; and
- marketing assistance.
One sign that a franchise system may not deliver desired results is the franchise agreement containing limited franchisor obligations. Franchisors should be prepared to commit contractually to some minimum support obligations to their franchisees to ensure they are best equipped for success.
The Code also imposes obligations on a franchisor to give financial disclosure upfront – this information should be contained in the franchise disclosure document. Practically, this means where a franchisor has been operating for more than two financial years, they must provide a copy of either:
- their financial reports for the last two financial years; or
- an independent audit report provided by a registered company auditor.
Even if a franchisor’s company has only recently been incorporated, the franchisor should still have the company accounts audited. Again, not doing this may be a sign they are not as professional and organised as they first appear.
In addition, the disclosure document should list all current franchisees in the network and their contact details. This is very valuable information. Contacting a few of the existing franchisees will give you a gauge on the health of the network.
3. What Leasing Documents Can I Expect to Receive?
Unless the franchise business model you are looking to join allows you to work from a mobile unit or to work from home, the franchisor will commonly provide you with legal documents which specifically relate to the lease of the business premises.
You may receive a copy of a sub-lease or licence agreement, which will have been prepared by the franchisor’s solicitor to give your rights to access and operate from the premises. These documents will indicate that the franchisor:
- has found a premises for the business; and
- intends to hold the lease as head tenants and sub-let or grant you a licence to occupy the premise.
Under these arrangements, you are more vulnerable to being removed from the premises. This is because the franchisor holds the head lease. Generally, if you do not pay franchise fees, the franchisor will be able to terminate the licence to occupy. Again, legal advice will help you decide if this arrangement is best for you.
If the franchisor does not specify a site for the business, this might cause some issues. Securing a site can be a time-consuming process. If you pay franchise fees in the hope of securing a site without one being specified in the franchise agreement, you may be waiting for some time for the business to operate.
4. What Happens at the End of My Franchise Term?
Many franchisors will offer a franchisee the right to operate a business using the franchise brand and operation systems for a fixed-term. As a franchisee, when the franchise agreement comes to an end, you can no longer use the brand and the systems. Instead, you will need to look to the terms in your franchise agreement to see whether you have the option to renew.
Additionally, where you do have an option to renew the agreement for a further term, you should ask your franchise lawyer about:
- what processes you need to follow to validly exercise your option to renew; and
- how much the renewal fee will be.
More often than not, there will be specific requirements that the franchisee will need to meet in order to exercise their option to renew.
5. Can I Sell My Franchise Before the End of My Term?
When you first look into buying a franchise, you are likely not considering what will happen if you decide to sell the franchise. It is not uncommon that your circumstances may change, and when the time comes for you to consider your options for selling the business, the need for franchisor consent is easy to overlook.
While the franchise agreement gives you the right to operate the franchise business yourself, if you wish to sell the franchise, it is typically required that you:
- seek the franchisor’s consent; and
- follow any other directed procedures. Generally, this will involve applying to the franchisor in writing to seek their consent to transfer the franchise to the incoming purchaser.
Before you commit to purchasing a franchise, it is important to understand the key protections and requirements contained in the Code. An experienced franchise lawyer will be able to advise you on whether the franchisor’s documents or commercial practice is ‘standard’. Key questions to ask a franchise lawyer are:
- what protections does the Code provide?;
- what are the franchisor’s disclosure obligations?;
- should the franchisor provide leasing documents?;
- what happens at the end of the franchise term?; and
- is it possible to sell my franchise before the end of the term?
If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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