AN AGREE­MENT THAT SHOULD BE AGREE­ABLE

Inside Franchise Business - - Contents - ES­THER GUTNICK

A legally bind­ing con­tract be­tween a fran­chisee and fran­chisor.

One doc­u­ment will shape your fran­chise ex­pe­ri­ence and set the bound­aries for the busi­ness. It pays to re­ally un­der­stand what the fran­chise agree­ment is all about and how to use it to your ben­e­fit.

When buy­ing a fran­chise, you will be pre­sented with a bun­dle of doc­u­ments to read and/or sign. One of the most im­por­tant of these doc­u­ments is your fran­chise agree­ment.

As the legally bind­ing con­tract be­tween you as fran­chisee and your fran­chisor, the fran­chise agree­ment de­tails the obli­ga­tions you will be bound to ob­serve dur­ing the term of the fran­chise. Once you sign it, you can with­draw from the fran­chise agree­ment only in very lim­ited cir­cum­stances, which should be set out in the agree­ment.

Also, if the fran­chisor ter­mi­nates the fran­chise agree­ment - for in­stance, if you breach it in some way - you may find you are not nec­es­sar­ily re­leased from your le­gal obli­ga­tions un­der the fran­chise agree­ment. For ex­am­ple, you may still be li­able to com­pen­sate the fran­chisor up un­til the time the agree­ment would have oth­er­wise ex­pired.

That is why it is crit­i­cal you thor­oughly read your fran­chise agree­ment and seek le­gal ad­vice to en­sure you prop­erly un­der­stand all its terms and con­di­tions.

WHEN WILL I RE­CEIVE IT?

You should ask to see a copy of the fran­chisor’s current fran­chise agree­ment as early as pos­si­ble af­ter you have started con­sid­er­ing join­ing a par­tic­u­lar fran­chise sys­tem. This will give you plenty of time to read it and ask the fran­chisor any pre­lim­i­nary ques­tions it may raise for you.

At the very lat­est, the fran­chisor is legally obliged to give you a copy of the fran­chise agree­ment, in the fi­nal form you will be asked to sign, at least 14 days be­fore you en­ter into the fran­chise or make any non-re­fund­able pay­ments.

WHAT SHOULD I DO WITH IT?

On re­ceiv­ing your fran­chise agree­ment, care­fully re­view it and note any ques­tions or is­sues that come to mind. You should read through the doc­u­ment sev­eral times to en­sure you don't miss any­thing and that you fully un­der­stand it.

You should also read it in con­junc­tion with the dis­clo­sure doc­u­ment, the op­er­a­tions man­ual (if the fran­chisor al­lows you to see a copy) and any other doc­u­ments pro­vided to you. At this stage you may start ne­go­ti­at­ing with the fran­chisor if there are spe­cific changes you need for the agree­ment to meet your par­tic­u­lar cir­cum­stances.

It is a good idea to en­gage a fran­chise lawyer as early as pos­si­ble to re­view the agree­ment and give you ad­vice. The Aus­tralian Fran­chis­ing Code of Con­duct, the law that gov­erns fran­chis­ing in Aus­tralia, con­tains rules about what a fran­chise agree­ment can and can­not con­tain. A fran­chise lawyer will be able to ad­vise you if any of the clauses in your fran­chise agree­ment are il­le­gal or in­ap­pro­pri­ate.

WHAT WILL IT LOOK LIKE?

There is no such thing as a stan­dard fran­chise agree­ment. Each fran­chise sys­tem has its own doc­u­ments, and they can vary greatly de­pend­ing on a range of fac­tors. Your agree­ment may range in length from 20 to more than 100 pages. It may be writ­ten in sim­ple lan­guage with an easy-to-read style, or it may con­tain com­plex and con­fus­ing le­gal jar­gon.

Don't be put off just be­cause your fran­chise agree­ment looks dif­fer­ent from the type of agree­ment used by an­other fran­chise sys­tem, or be­cause it looks long and in­tim­i­dat­ing. Of­ten, a com­pre­hen­sive and lengthy fran­chise agree­ment is a sign of a well-de­vel­oped and ex­pe­ri­enced fran­chise sys­tem.

WHAT KEY AR­EAS SHOULD I FO­CUS ON?

You should read the en­tire fran­chise agree­ment thor­oughly, be­cause im­por­tant in­for­ma­tion and “red flags” may be any­where in the doc­u­ment. How­ever, here is a gen­eral guide to some of the most im­por­tant clauses you may find in a fran­chise agree­ment...

TERM AND RE­NEWALS

A fran­chise is al­most al­ways granted for a lim­ited time only. You should en­sure the term spec­i­fied will be ad­e­quate for you to suc­cess­fully run the busi­ness, de­rive a re­turn on your in­vest­ment and re­pay any loan com­mit­ments.

If the fran­chise agree­ment gives you the op­tion to re­new the fran­chise, you should en­sure you are likely to sat­isfy any con­di­tions for re­newal. Re­newal is usu­ally not a guar­an­teed right – it is gen­er­ally tied to your “good be­hav­iour” and the pay­ment of a re­newal fee.

TER­RI­TORY

Some fran­chise agree­ments al­low you to run your busi­ness only in a spe­cific area. If this is the case, en­sure ter­ri­to­ries are clearly de­fined, and that your ter­ri­tory is large enough or has the right de­mo­graph­ics for you to sus­tain and grow your busi­ness.

You should also check whether you have been granted exclusive rights within your ter­ri­tory. You need to know whether or not the fran­chisor can ap­point other fran­chisees in your ter­ri­tory, or even if the fran­chisor can work in your ter­ri­tory, in­clud­ing tem­po­rary or mo­bile fran­chises, in­ter­net sales, whole­sale or re­tail sales from non-fran­chise branded out­lets such as su­per­mar­kets, and spe­cial events such as sport­ing events.

It is also im­por­tant to clar­ify whether the fran­chisor can change your ter­ri­tory bound­aries with­out your con­sent, and whether you can lose exclusive rights to your ter­ri­tory, and if so, in what cir­cum­stances.

THE PREMISES

For fran­chises that run from a shop or per­ma­nent busi­ness premises, the fran­chise agree­ment should have pro­vi­sions re­lat­ing to all as­pects of the premises.

These con­sid­er­a­tions are im­por­tant: • Who chooses the premises, and what hap­pens if you are not happy with the lo­ca­tion?

• What ar­range­ments ap­ply if you need to re­lo­cate to dif­fer­ent premises dur­ing the term of the fran­chise?

• Will you be re­quired to lease the premises di­rectly from the land­lord, or will the fran­chisor lease the premises and give you a sub­lease or li­cence to oc­cupy? If it is the sec­ond op­tion, you need copies of all rel­e­vant doc­u­ments. You should en­sure you are aware of all the terms and con­di­tions that gov­ern your occupancy rights and obli­ga­tions.

• Who ne­go­ti­ates the terms of the lease? • What hap­pens if the lease ends be­fore the

fran­chise agree­ment, or vice versa? • What are your obli­ga­tions re­gard­ing

up­grad­ing or re­fur­bish­ing the premises?

The Aus­tralian Fran­chis­ing Code of Con­duct re­quires the fran­chisor to pro­vide you with a copy of the lease and any doc­u­ments that give you rights to oc­cupy premises, or at least a sum­mary of the con­di­tions of your occupancy. Leases and occupancy doc­u­ments such as sub­leases and occupancy li­cence agree­ments are usu­ally com­plex doc­u­ments that may need the help of a lawyer to be fully un­der­stood.

FEES AND PAY­MENTS

Fran­chise agree­ments gen­er­ally con­tain a range of fees you will be obliged to pay. These may be set out in dif­fer­ent sec­tions of the agree­ment, or may not be drafted clearly, but it is im­per­a­tive you do not over­look any of your fi­nan­cial com­mit­ments.

Fees may in­clude:

• one-off pay­ments at the start of the fran­chise agree­ment, such as an ini­tial fran­chise fee, train­ing fee, the cost of fit­ting out the premises, or fees to cover the fran­chisor’s costs of is­su­ing you the fran­chise doc­u­ments

• one-off pay­ments at cer­tain stages, such as fees for re­newal of the fran­chise, trans­fer to an­other fran­chisee or the end

of the fran­chise agree­ment

• on­go­ing or re­cur­ring pay­ments, such as pe­ri­odic roy­alty fees, con­tri­bu­tions to the fran­chisor’s mar­ket­ing fund, tech­nol­ogy li­cence fees or fees for cer­tain ser­vices pro­vided by the fran­chisor.

The fran­chise agree­ment may con­tain ex­tra “hid­den” fees such as an obli­ga­tion to pay the fran­chisor’s costs if you re­new or sell the busi­ness, or breach the fran­chise agree­ment. There can also be an obli­ga­tion to pay third-party costs, such as the land­lord’s costs of con­sent­ing to you oc­cu­py­ing the premises. Of­ten, the quan­tum of these costs will not be known at the out­set.

So you can prop­erly as­sess the fran­chise and en­sure your busi­ness will be fi­nan­cially vi­able, be sure your bud­gets in­clude all the fi­nan­cial obli­ga­tions set out in the fran­chise agree­ment, in­clud­ing es­ti­mated amounts for items not yet quan­tifi­able, as well as the ex­tra costs you are likely to in­cur in set­ting up your busi­ness.

Your ad­di­tional costs may in­clude the fees of your le­gal and/or fi­nan­cial ad­vi­sors, reg­is­tra­tion fees for the busi­ness, costs of set­ting up your com­pany, trust or other struc­ture, and the costs of any per­mits or li­cences you must ob­tain in or­der to run the busi­ness.

SUP­PLY AND PUR­CHAS­ING

AR­RANGE­MENTS

In many fran­chise sys­tems, the fran­chisor dic­tates which prod­ucts and ser­vices you can buy, use and sell in the busi­ness, and which sup­pli­ers you may use. These rules are in­tended to en­sure qual­ity and con­sis­tency across the fran­chise net­work, but you should care­fully check whether the sup­ply ar­range­ments im­posed un­der the fran­chise agree­ment are clear, rea­son­able, sus­tain­able for your par­tic­u­lar busi­ness, and law­ful.

In par­tic­u­lar, if a fran­chisor sim­ply in­structs you to use a spec­i­fied third-party sup­plier, you should aware that this may be il­le­gal con­duct known as third-line forc­ing. You should seek spe­cific ad­vice and make fur­ther in­quiries be­fore sign­ing a fran­chise agree­ment that con­tains such pro­vi­sions.

SALE OR TRANS­FER

A fran­chise agree­ment or­di­nar­ily sets out a spe­cific process you must fol­low if you wish to sell the busi­ness. This process may in­clude a method and time­frame for seek­ing the fran­chisor’s con­sent to the sale, obli­ga­tions for you to give the fran­chisor the first right to buy your busi­ness, and con­di­tions

you must sat­isfy be­fore the sale can pro­ceed. You should read these clauses care­fully be­cause they may se­verely re­strict your abil­ity to prof­itably exit the busi­ness.

BREACH AND TER­MI­NA­TION

The Aus­tralian Fran­chis­ing Code of Con­duct stip­u­lates cer­tain cir­cum­stances that give a fran­chisor the right to im­me­di­ately ter­mi­nate the fran­chise agree­ment with­out giv­ing you prior warn­ing or an op­por­tu­nity to re­solve the is­sue. You should en­sure that any “im­me­di­ate ter­mi­na­tion” clauses in the fran­chise agree­ment are lim­ited to those con­sis­tent with the code, and ob­ject to any fur­ther cir­cum­stances de­tailed in the fran­chise agree­ment.

The code also stip­u­lates that if you breach a term of the fran­chise agree­ment and the fran­chisor wishes to ter­mi­nate the agree­ment as a re­sult, the fran­chisor must give you for­mal writ­ten no­tice and a rea­son­able pe­riod, up to 30 days, to re­solve the is­sue and avoid ter­mi­na­tion. Again, you should en­sure that any breach and ter­mi­na­tion clauses in the fran­chise agree­ment are con­sis­tent with the code’s re­quire­ments. Fa­mil­iarise your­self with these pro­vi­sions and en­sure you are able to com­ply with all key obli­ga­tions un­der the agree­ment, be­cause a breach of any obli­ga­tion may re­sult in you los­ing your en­tire busi­ness with­out com­pen­sa­tion.

You should also care­fully re­view the pro­vi­sions of the fran­chise agree­ment that de­scribe your obli­ga­tions on ter­mi­na­tion of the fran­chise agree­ment, as these can be oner­ous.

RE­STRAINTS OF TRADE

One of the most com­mon clauses that ap­ply on ter­mi­na­tion of a fran­chise agree­ment is a re­straint of trade pro­vi­sion. These clauses ef­fec­tively re­strict you from own­ing or be­ing in­volved in a sim­i­lar busi­ness to the fran­chise for a cer­tain pe­riod of time af­ter the fran­chise agree­ment ends, or in a cer­tain area, or a com­bi­na­tion of both. Pay close at­ten­tion to these clauses be­cause they can se­verely limit your abil­ity to ob­tain an­other job or de­rive in­come af­ter the fran­chise agree­ment ends.

If the clauses seem very broad or op­pres­sive, seek spe­cific le­gal ad­vice as they may not be en­force­able.

WHAT IF I AM UN­HAPPY WITH ANY OF THE CON­TENTS?

A fran­chise agree­ment, like any con­tract, is an agree­ment be­tween two (or more) par­ties and there­fore both sides have a right to ne­go­ti­ate the terms of the agree­ment. Fran­chisors are of­ten re­luc­tant to make changes be­cause it is im­por­tant for them to have con­sis­tent agree­ments for all fran­chisees in the net­work. How­ever, if there is any­thing in the agree­ment you can­not com­ply with or agree to, you should ne­go­ti­ate with the fran­chisor to change or re­move the rel­e­vant clauses. A fran­chise lawyer can help you with such ne­go­ti­a­tions, and also ad­vise if any clauses breach the code or other ap­pli­ca­ble laws.

Ul­ti­mately, to max­imise your chances of suc­cess and sat­is­fac­tion in the fran­chised busi­ness, it is im­per­a­tive you en­ter into the fran­chise agree­ment with a com­plete un­der­stand­ing of its terms, what will be ex­pected of you and what you can ex­pect from the fran­chisor and the sys­tem. To ob­tain a com­pre­hen­sive un­der­stand­ing, there is no sub­sti­tute for read­ing the doc­u­ments thor­oughly mul­ti­ple times, ob­tain­ing ex­pert ad­vice from rel­e­vant pro­fes­sion­als, and un­der­tak­ing ex­ten­sive due dili­gence.

Se­nior as­so­ciate, cor­po­rate ad­vi­sory and fran­chis­ing team, MST Lawyers

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