What is the Cooling-Off Period in a Franchise Agreement?

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Table of Contents

• Before Signing Your Franchise Agreement
• After Signing Your Franchise Agreement
• When You Should Terminate Your Agreement in the Cooling-Off Period
• Will the Cooling-Off Period Always Apply?
• What Are the Expenses?
• What Costs Are Not Refunded?
• What Are Your Legal Obligations?
• Key Takeaways
• Frequently Asked Questions

If you are considering purchasing a franchise, you should be aware of your cooling-off rights. Franchise agreements are lengthy and can be difficult to exit once entered into. Therefore, as with any business decision, it is important that you seek professional advice, understand your rights and obligations under the franchise agreement and conduct thorough due diligence. This article will discuss your rights regarding the cooling-off period and other measures in place to assist with the decision-making process.

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Before Signing Your Franchise Agreement

Generally, before the franchise agreement is issued, franchisees will have to pay an initial deposit. Depending on your franchisor, some of this deposit may be refundable if you choose not to proceed. However, your franchisor will likely deduct the legal fees for preparing your franchise documents.

Once you have received your copy of the franchise agreement, you will have at least 14 days to: 

• have the documents reviewed;
• negotiate any changes to the documents with the franchisor; and
• consider your options. 

The Franchising Code of Conduct (the Code) provides that you cannot sign the franchise agreement for at least 14 days after you have received it. You can use this time to have your franchise agreement reviewed and consider whether you want to proceed before paying the non-refundable franchise purchase fee.

If you need extra time to consider the decision or make additional due diligence enquiries, you can discuss this with the franchisor. The 14-day cooling-off period is the minimum amount of time, not the maximum. Franchise agreements are usually for a period of five years or more, so it may be worth taking additional time rather than rushing into a decision. 

After Signing Your Franchise Agreement

Once you have signed the franchise agreement, it becomes a legally binding contract. However, if you change your mind about the decision, the Code will allow you to terminate the agreement within 14 days. This is your cooling-off period. The 14 days start from the earlier date of:

• signing the franchise agreement; or
• payment of the initial franchise fee.

If you choose to exercise your rights under the cooling-off period, you will be entitled to a refund of your franchise fee payment. The franchisor must return the money paid within 14 days of you terminating the agreement. There are penalties under the Code if the franchisor fails to comply. However, the franchisor will be able to keep their reasonable expenses. The franchisor must set out these expenses in the franchise agreement.

The cooling-off period is a good safety net for new franchisees to mull over the big decision. However, it should not be relied upon without first being sure of the termination provisions and the money retainable by the franchisor.

When You Should Terminate Your Agreement in the Cooling-Off Period

Choosing to exercise your rights under the cooling-off period should be at your own personal discretion. Some common reasons for early termination include:

Will the Cooling-Off Period Always Apply?

The cooling-off period only applies to new franchisees. It does not apply to: 

• renewals; 
• extensions; or
• transfers of existing franchises. 

It is still important to have a renewal and extension of a franchise agreement reviewed and consider the changes being made. The franchisor can change a number of terms in the franchise agreement at renewal, including introducing new fees or increasing existing fees. However, the disclosure document information could also be quite different, and the franchisee may not have received a disclosure document since they first signed the franchise agreement. 

What Are the Expenses?

The reasonable expenses might be substantial, particularly when training has taken place before the franchisee took advantage of the cooling-off right to rescind. As such, you might not be refunded the total amount paid to the franchisor.

Once you have entered into the franchise agreement, it is likely that you will have paid additional expenses to the franchisor. These may include any:

• costs paid to franchise solicitors or accountants in seeking advice about the legality of the franchise documents;
• monies paid in establishing the appropriate business structure (company, trust, partnership etc.) and setting up means to protect assets;
• expenses for ABN or business name registration, or registration with any organisation to which the franchisor requires you become a member;
• expenses regarding leasing premises and negotiating lease terms;
• expenditures on renovating or fitting-out the premises of the proposed site of the franchise;
• money spent on marketing for the business (print materials, proper signage, online promotional campaigns etc.);
• equipment purchase or hire expenses;
• fees incurred in being financed by a bank;
• money spent on stock; and
• money spent on staff uniforms/clothing.

What Costs Are Not Refunded?

Some of the above expenses, the franchisor will only partially refund. Those that are not refunded will form what is known as your ‘sunk costs’ for the unsuccessful investment. This will likely be the franchisor’s legal fees for issuing the franchise agreement. However, it could also include any number of the above expenses and the franchisor’s recruitment and administration costs.

What Are Your Legal Obligations?

Even after the franchise agreement has been terminated during the cooling-off period, some of the legal obligations under the franchise agreement may continue for some time. These provisions might include: 

• the restraint of trade clauses; 
• the uses of trademarks; and
• other restrictions on the use of confidential information or trade secrets to which the franchisor has rights.

An early exit is better than a late one if you are uncertain about the franchise opportunity. However, you should know that, after exercising the cooling-off provision, you will almost always be in a worse financial position than if you had never entered the agreement in the first place. Be careful about agreeing to enter into a franchise arrangement if you have not had a franchise solicitor review all of the necessary documents. Pretend the cooling-off period is not an option and decide on that basis.

Key Takeaways

You do not need to sign your franchise agreement for at least 14 days after it is issued. You have a 14-day cooling-off period from the date of signing the franchise agreement or payment of the franchise fee. The Franchisor is obliged to refund any payment within 14 days of your exercise of the cooling-off period. However, you may not be able to recover all of your expenses if you exercise the cooling-off period termination. Further, you will still be bound by some clauses of the franchise agreement if you terminate within the 14-day cooling-off period. The main lesson here is not to enter any agreement without first seeking legal advice from a franchise lawyer and potentially an accountant.

For franchise assistance, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions