Why you must get legal advice before entering into a franchise agreement

Buying a franchise is a big deal. Fees to buy into a franchise can run to a lot of money and you are signing up to a whole range of legal obligations that have lasting consequences.

Franchises offer an opportunity for everyday business people to enter into and operate under a well-known brand and image (known as the Franchise System).

However, in order to let a franchisee use the Franchise System, a franchise owner (Franchisor) will require that a Franchisee (the person entering into the agreement) sign up to a franchise agreement and possibly other documents such as licence and supply agreements.

The Franchise Agreement

Under a franchise agreement, the franchisor grants the franchisee the right to sell, supply or distribute goods or services in a manner which is determined by the Franchisor. For example, if the franchisee operates a café the franchisor can require that they stock certain core menu items and offer those items under an established system or marketing plan – prices, products and even recipes and the finished look of the food is controlled by the franchisor.

This means that while a franchise affords a franchisee the opportunity to operate their own business, that business will be within the confines of the restrictions placed on them by the franchisor so that the Franchise System is not compromised. The aim of a franchise is generally national uniformity, meaning anyone who visits a franchised store receives the same experience regardless of the store or business visited. This can be a rewarding business structure but a franchisee should always enter into a franchise with their eyes open to the requirements of the franchisor.

The Franchising Code of Conduct

Each individual franchise relationship between franchisor and franchisee is generally regulated by a written franchise agreement entered into between the Franchisor and the Franchisee.

However, all franchises in Australia are also regulated by the Franchising Code of Conduct (Code). The Code, amongst other things:

• is a schedule to Competitions and Consumer Act 2010 (Cth);
• specifies the franchisor’s rights and responsibilities;
• specifies the franchisee’s rights and responsibilities; and
• regulates the franchise relationship.

Importantly the Code was updated in January 2015 and any franchise agreement must comply with these updates to the code, which include (but are not limited to) an obligation to act in good faith and more stringent disclosure requirements.

So you want to buy a franchise? Get legal advice

If you are considering becoming a franchisee, before entering into any franchise agreement it is crucial that you seek independent legal advice before you sign the agreement. After all, a term of a franchise agreement can be between 5 and 15 years.

The benefits of obtaining legal advice before entering into an agreement include:

• ensuring the Franchisor has complied with the Code;
• ensuring the Franchisor has provided you with all documents required under the Code, including the Disclosure Document within the required time frames;
• making yourself aware of all costs that you will face with the setting up and the day-to-day running of the franchise, noting there can be many hidden costs;
• making yourself aware of the marketing obligations and advertising costs;
• looking at the level of involvement and support the Franchisor will offer the business throughout the term of the agreement;
• considering the experience of existing franchisees in their businesses;
• whether there will be any restrictions on assignment or transfer if you wish to sell your franchised business during the term of the agreement;
• a thorough review of the agreement will highlight any hidden clauses that may be difficult for you to comply with during the term of the franchise agreement;
• the level of security you will need to provide the franchisor (for example, are you required to provide a bank guarantee or personal guarantee?);
• training requirements;
• whether there are unforeseen costs, such as whether you are to attend an annual conference;
• consideration of whether you need to enter into a commercial lease or licence agreement to operate the franchise and the legal and financial obligations of these ancillary agreements; and
• finally determining whether the terms of the franchise agreement are fair and reasonable.

It is prudent for the franchisee to obtain financial advice from their accountant and consult a business adviser to finalise their due diligence before entering into any franchise agreement.

Conclusion

If you are looking at a franchised business, call LegalVision before you do anything else on 1300 544 755. One of our experienced senior franchise lawyers can review the proposed agreement and disclosure document and discuss any issues of concern with you.