AN AGREEMENT THAT SHOULD BE AGREEABLE
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.