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, a franchisee is entitled to 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 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

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.

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.

Conclusion

There are many reasons why you may choose to end your franchise agreement. The main lesson here is not to enter any agreement without first seeking legal advice from a franchise solicitor and perhaps an accountant. Let the franchise solicitors or LegalVision help you make this important and difficult decision.

Emma Jervis

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