If you’re looking to start a business, buying into a franchise can be a good alternative to starting a business from scratch. Franchising essentially permits one business to operate under the trading name of another business’ established brand and sell its products and/or services for a specified period.
Like any business decision, franchising must be considered carefully and the right processes should be followed. It is also important to note that franchising and the relationship between franchisors and franchisees is regulated by the Franchising Code of Conduct (the Code).
Issues for a prospective franchisee to consider
When you are considering buying a franchise you should consider the same issues as when purchasing or starting any other business, along with issues specific to franchising such as what happens if the franchised business fails or if the franchisor goes broke.
Once you have entered into a franchise agreement you are legally committed to run the business according to the requirements set out in the franchise agreement and the franchise operating manuals. You’ll also be required to pay the franchise payments to the franchisor for the life of the agreement.
Therefore, before signing the franchise agreement, it’s essential that you obtain as much information about the franchise as possible.
The Code requires that all Franchisors provide the prospective franchisee with:
- a copy of the Code;
- a disclosure document;
- a copy of the proposed franchise agreement in its final form; and
- a short information sheet outlining the risks and rewards of franchising.
(collectively, the disclosure documents).
The disclosure documents need to be provided to a prospective franchisee at least 14 days before a franchise is commenced, renewed or extended.
Rights and Obligations under the Franchise Agreement
As a prospective franchisee, it’s important to understand what is being offered and your rights and obligations under the Franchising Code.
You should also be aware that:
- a franchise agreement only gives you the right to operate that business for the life of the franchise agreement; and
- there is no guarantee that the agreement will be renewed, unless specifically negotiated under the agreement.
Checklist before signing a Franchise Agreement
The following are a list of issues to consider before you sign a franchise agreement:
What is the franchised business about? For example:
- Do you have all of the relevant background information?
- What is the franchisor’s record of financial performance and management?
- Does the franchisor have a strategic plan for business development and marketing?
- Will the franchise grow in the future?
- Have other franchisees in Australia and in your state, territory or region had success?
- Will you have an exclusive territory or marketing area?
What will you get when you buy into the franchise? In this regard you should consider:
- Will you be permitted to use a business name for the franchise?
- What are the products you will be selling?
- Does the franchise have a good reputation?
- What is the site of your proposed business?
- Is there marketing support offered by the franchisor?
- What are your rights and obligations with respect to the intellectual property (such as trademarks) of the franchise?
- Are you required to purchase goods from a nominated supplier?
- Will there be any unforeseen capital expenditure throughout the life of the franchise agreement?
What are your rights and obligations under the franchise agreement? Consider issues such as:
- On what grounds can you terminate the franchise agreement?
- Are there any industry specific occupational health and safety obligations you must comply with?
- Are you able to sell the franchise? If so, what are the terms of the sale and any associated transfer fees?
- Is there an operating manual?
- Will you be bound by reporting procedures?
- Are employee standards set out by the franchisor?
- Can the franchisor unilaterally change the operating manual without consulting you?
- Will you require a retail lease? Will the lease be in your name or the franchisor’s name? What happens if the lease terminates and you do not have a premises to operate your franchised business from?
What are the fees you will need to pay? Consider the following:
- Is there an initial franchise purchase fee?
- Is there an ongoing franchise fee/ royalty fee? What is the frequency of this fee?
- Is there a marketing contribution/ fee? How often is this payable?
- Are there training fees (both initial training and ongoing training?
- Will you be required to attend an annual conference?
- What is the fee if you wish to transfer the franchise?
- Will you be required to make regular payments to third parties (such as suppliers nominated by the franchisor)?
- Will there be hidden fees, such as mystery shopper fees?
- How are dispute resolution costs apportioned in the event of a dispute?
- What will be the fit out (if any) of franchised premises?
- If it is a mobile franchise, you might require a vehicle?
Whilst many franchisees find the world of franchising very rewarding, as you can see, franchising can be a minefield.
Let us help you navigate these issues by reviewing your franchise disclosure documents before you sign a franchise agreement. We offer a fixed-fee review which touches on the issues set out above.
Call our Client Care team today on 1300 544 755 and they will put you in touch with one of our franchise lawyers.