In Short
- Conduct thorough due diligence, including reviewing all franchise documents and the franchisor’s history.
- Negotiate franchise agreement terms to ensure they align with your commercial interests.
- Seek independent legal, financial, and business advice before signing a franchise agreement.
Tips for Businesses
Before signing a franchise agreement, ensure you fully understand the terms, including security obligations, renewal rights, and costs. Speak with current and former franchisees for insights. Don’t assume agreements are non-negotiable—proactively seek adjustments to protect your interests and consult professionals for guidance.
As a franchisee, you must know the risks of joining a franchise network. Typically, franchisors hold greater bargaining power and influence over the terms of the franchise agreement. To safeguard your interests and prevent a one-sided, potentially exploitative relationship, it’s crucial to take proactive measures. This article will guide you in understanding your rights under the Franchising Code of Conduct (the Code) and provide steps to ensure your protection as a franchisee.
Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.
This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.
Protecting the Franchisee’s Interests
To try and establish an even playing field with your franchisor, you should be diligent during the pre-contractual negotiation phase. You should carefully review the terms of your franchise agreement and ensure that it reflects your commercial interests and requirements rather than simply accepting the standard form document provided by the franchisor. Feel empowered to negotiate terms that better serve you and adequately protect your interests.
While franchises may often appear a safer option than other small businesses, it is critical not to assume that your franchisor is financially stable or that the business model is foolproof. Be mindful that specific provisions in franchise agreements can have significant and costly implications at the end of the term. These provisions may include:
- restraints;
- confidentiality clauses and Intellectual property;
- guarantee and indemnity; and
- termination obligations
Due Diligence
As a franchisee, you should undertake due diligence into the franchise’s history as it is essential for determining your franchise’s viability as a business venture. The Code requires franchisors to provide several key documents to help you undertake the necessary due diligence as a franchisee. This includes an information statement outlining the benefits and drawbacks of entering a franchise agreement.
Using these resources and other educational tools can equip you with the knowledge needed to make informed decisions during your due diligence process.
Continue reading this article below the formWill the Franchisor Provide Me With Documents?
Franchisors are obligated to provide all prospective franchisees with the following documents:
- a copy of the Code;
- a copy of the franchise agreement in its final, signable form;
- the disclosure document; and
- a key facts sheet.
On entering the franchise agreement, you must also sign an acknowledgement stating that you read and understood the documents and had the opportunity to seek legal, accounting and business advice. During due diligence, you will want to get as much information as possible on every aspect of the business, including the franchise network’s:
- legal standing and previous matters;
- financial viability; and
- reputation in the market.
The disclosure documents should include detailed information about the franchisor and its associates. Additionally, investigate the company’s trademarks and check for any history of bankruptcy involving the franchisor or associates. Verifying whether your financier has approved or accredited the franchise system is also advisable.
Speak With Previous Franchisees
Engaging with current and former franchisees may assist you in gaining a comprehensive understanding of the franchise system. A compliant disclosure document should provide their contact details.
Speaking directly with these individuals can gather firsthand insights into their experience operating within the franchise network, giving you invaluable information when assessing the practical realities of running a franchise.
However, former franchisees may have confidentiality obligations limiting how much they can discuss.
Security
As a franchisee, it is crucial to understand the types of security you may be asked to provide under the franchise agreement, lease or other related agreements. This could include:
- bank guarantees;
- personal or director guarantees; or
- security deposits.
These help safeguard the franchisor, lessor or other third parties if you face significant financial difficulties.
You should also consider the liability for your business assets, such as equipment or stock, which may be registered on the Personal Property Securities Register (PPSR). Understanding the different security options and their implications ensures that your assets are protected and prepared for any financial challenges.
Essential Questions to Ask Before Signing
Before committing to any franchise agreement, you should fully understand the terms and conditions. Here are key questions to consider, though consulting a franchise lawyer for a more comprehensive review is highly recommended:
- Have you received all the required disclosure documents?
- Does the franchisor have a good track record of compliance in the industry?
- Do you have exclusive rights to a specific territory, or can the franchisor allow other franchisees or competitors to operate nearby?
- Was there a previous franchisee in your area? What was their experience?
- What are the terms of renewal? Do you have any right to renew or extend the agreement?
- What are the costs associated with setting up, maintaining and operating the business?
- Who holds the lease for the premises? If the franchisor holds the lease, are you subleasing or licensing the right to use the premises?
- Does the lease term align with the term of the franchise agreement?
- What are the costs of fitting out the premises, and will the landlord or franchisor contribute?
- How will the franchise agreement be impacted if the franchisor sells its interests to a third party?
The Importance of Negotiation
Established franchise networks often present standard franchise agreements to prospective franchisees. This often suggests that the terms are non-negotiable to maintain consistency.
However, more extensive franchises may still be willing to make reasonable adjustments if you provide a sound rationale. Therefore, it is important not to shy away from negotiating the terms of your agreement that are in your best commercial interest.
If you rely on a promise from the franchisor to enter into the agreement, ensure it is clearly written and referenced in the contract to help enforce the promise. The Code prohibits blanket waivers of pre-contractual representations, so documenting these promises is crucial to avoid potential disputes in the future.
Legal Assistance
To protect your commercial interests effectively, it is crucial to consult a franchise lawyer and an accountant. Additionally, seeking advice on insurance from a broker and understanding the tax implications for various business structures is recommended.
Key Takeaways
Before entering into a franchise agreement, you should take these essential steps to safeguard your interests:
- conduct thorough due diligence;
- read all provided documentation;
- communicate with other franchisees within the network;
- ask the franchisor critical questions before signing the agreement;
- negotiate for more favourable or balanced terms with the franchisor; and
- seek independent legal, financial and business advice before signing the franchise agreement.
Entering a franchise agreement is a significant commitment and should not be taken lightly. For assistance in reviewing your franchise documents and conducting due diligence on the franchisor, consider consulting experienced franchise lawyers.
If you need assistance reviewing your franchise documents and conducting due diligence on the franchisor, 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
Due diligence helps you understand the franchise’s history, financial stability, and market reputation. It ensures you are making an informed decision and are aware of any risks or obligations.
Yes, while standard franchise agreements are common, franchisors may agree to reasonable adjustments if you present a sound rationale. Negotiating ensures the agreement aligns with your business interests.
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