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Normally, new franchisees, after having signed a franchise agreement, or paid a fee (whichever comes first), are entitled to a weeklong cooling-off period during which they can take the time to consider whether this decision is the right decision.

Under the Franchising Code of Conduct (the Code), a franchisee is entitled to exit out of a franchise agreement and be refunded within two weeks any money paid to the franchisor, provided he or she, within the one-week period, expresses a desire to exit the agreement.

The franchisor is, however, within their rights to hold onto a portion of the money to pay for ‘reasonable expenses’. These expenses ought to be stipulated in the agreement from the outset – something a franchise solicitor would certainly be able to help with.

Essentially, as a new franchisee, you have a week to change your mind about going ahead with the agreement. You can take solace in the fact that you have this grace period within which you can recover nearly all expenditures.

Although the cooling-off period is a good safety net for new franchisees to mull over the big decision, it shouldn’t be blindly relied on without first making sure you’re ready and willing to become bound by the terms of what can be a very lengthy contract between you and the franchisor.

Will the Cooling-Off Period Always Apply?

The cooling-off period will last for seven days from the date you first:

  • signed the franchise agreement; or
  • made the first payment.

The benefit of the cooling-off period only applies to new franchisees and not to:

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

There are legal and financial costs that must be taken into account before you sign any franchise agreements. Despite the cooling-off period, you will not be refunded the total money paid because of these other obligations.

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 invested amount.

Also, once you’ve entered into the agreement, it’s probable that additional expenses will have been paid to the franchisor. These may include any of the following:

  • any costs paid to franchise solicitors or accountants in seeking advice about the legality of the franchise documents;
  • any 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;
  • any expenditures on renovating or fitting-out the premises of the proposed site of the franchise;
  • any money spent on marketing for the business (print materials, proper signage, online promotional campaigns etc);
  • equipment purchase or hire expenses;
  • any fees incurred in being financed by a bank;
  • money spent on stock; and
  • anything spent on staff uniforms/clothing.

The Code also allows the franchisor to retain certain costs which they have reasonably incurred. These reasonable costs should be set out in the franchise agreement and disclosure document, and will usually include the franchisor’s legal expenses or any training costs.

Furthermore, if you signed a lease agreement at the same time as the franchise agreement, you may be financially liable for the lease if it does not provide a cooling-off period.

What Costs Are Not Refunded?

Some of the above expenses will only be partially refunded. Those that are not will form what is known as you ‘sunk costs’ for the unsuccessful investment.

What Are the Legal Obligations?

Even after the franchise agreement has been terminated following the employment of the cooling-off period, some of the legal obligations under the initial agreement may continue for some time. Some of the provisions in the agreement that continue to apply, despite ending the franchise agreement, include things like:

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

Typically, the franchisor will monitor the termination process and ensure that the franchisee does the following:

  • returns any manuals and intellectual property (IP) to the franchisor;
  • transfers the business name to the franchisor;
  • removes any signage or marketing material which contains the IP of the franchisor;
  • complies with any restraints of trade; and
  • complies with any other termination requirements set out under the franchise agreement.

As such, although an early exit is better than a late one, you should know that, after enlivening 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 haven’t had a franchise solicitor review all of the necessary documents. Pretend the cooling-off period is not an option and decide on that basis.

That said, if you, for some reason or another, cannot continue with the agreement as franchisee, the cooling-off period is an important safety net and should be utilised when necessary.

Key Takeaways

There are many reasons why you may choose to end your franchise agreement.  The cooling-off period provides potential franchisees with the opportunity to end a franchise agreement for various reasons. The right is a useful safety net for franchisees, but should not be their sole protection. As a prospective franchisee, you should:

  • research the franchise;
  • ensure that you are willing and able to operate the franchise; and
  • approach the franchise agreement seriously and without the intention of exercising the cooling-off right.

This said, if you find yourself in a situation that makes it necessary to exit the agreement, you should exercise your right to use the cooling-off period. 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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