Franchise
9. Before Purchasing a Franchise
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 27 Jul 2015
- Before entering into a franchise agreement it is essential to satisfy yourself that the franchise is suitable for you and that the business is viable. This is sometimes described as a due diligence process.
- Some of the most important things to consider include:
- what capital investment is required to set up and commence operations and how will this be financed?
- how many hours of your personal time are required to set up and manage the ongoing operations of the business?
- do you have the necessary skills, expertise and industry know-how to run the specific business you are interested in?
- what kind of work forms part of the daily operations of the business?
- how comprehensive are the established procedures and operating manual?
- is there enough scope for you to make your own business decisions?
- are there other franchisees operating this particular business and what has been their experience?
- There is a range of documentation that can help you make these preliminary investigations.
- Under the Franchising Code of Conduct the franchisor is required to give you a disclosure document. This document sets out all of the information that allows a franchisee to make an informed decision about whether to enter the franchise agreement.
- This document may be in a short or long form depending on the expected annual turnover of the franchise and include such things as:
- details of the operational system and history of the business;
- intellectual property;
- initial and ongoing payments;
- information about earnings;
- solvency statement;
- contact details;
- list of existing franchisees;
- details of trademarks;
- financing conditions;
- variation of agreements;
- any current proceedings against the franchisor; and
- details of confidentiality obligations.
- The franchisor is also required to provide a franchise agreement. Once signed this agreement will bind you into a contractual relationship with the franchisor. It should be carefully reviewed by you and your legal representative before being signed.
- Once you have these documents you shouldn't stop there. It is advisable to double check the accuracy of all key information contained in these documents. Providing a copy of the documents to your lawyer so they can do some additional checking is advisable.
- The franchisee often bears a great deal of responsibility for the success of the franchise as well as most of the liability for its failure. When things go wrong despite your best efforts to fix the potential business failures it is important to know your rights.
- Many standard rights and obligations are in the Franchise Code of Conduct and more specific rights and obligations relating to your particular franchise will be in the terms of the franchise agreement. You will need to look at both of these documents to fully understand and evaluate your rights.
- You must be given documentation that allows you to evaluate the franchise opportunity. The franchisor must give a franchisee the following documents at least 14 days before entering into any franchise agreement:
- the disclosure document;
- a copy of the final franchise agreement;
- a short information sheet outlining the rewards and risks of franchising; and
- a copy of the Franchising Code of Conduct.
- If you do not receive these documents the franchisor will be unable to enter into any franchise agreement with you. This is to ensure that franchisees undertake thorough investigations and consult a legal advisor before committing themselves to the significant financial risk of entering into a binding franchise agreement.
- The Franchising Code of Conduct requires that a prospective franchisee must be given a cooling-off period of 7 days after entering into a franchise agreement.
- If a franchisee choses not to go ahead with the franchise agreement within those 7 days then all payments must be refunded to the franchisee within 14 days minus any reasonable expenses.
- This protects the position of franchisees who become hesitant about their decision after they have entered into an agreement to obtain a franchise.
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