MYTH BUSTERS

Why legal costs are necessary.

When you’re buying a franchise, you’ll no doubt be looking at a long list of expenses and will be striving to save every dollar where you can. As a result, some franchisees choose to forgo getting legal advice to save on costs. But is it essential to get legal advice before entering into a franchise?

To answer that question, let’s have a look at some of the potential consequences of not getting advice (based on real-life examples):

• A franchisee signs a “prior representations deed” before signing the franchise agreement. A year later, certain promises made by the franchisor don’t eventuate. Unfortunately, the franchisee didn’t realise the importance of the prior representations deed and the franchisor relies on this as evidence that the promises were never made.

• An individual buys a business which is not treated as a “franchise”. However, as it turns out, the arrangement falls under the definition of a franchise agreement and the franchisee should have received a disclosure document as well as certain other rights. The parties engage in a lengthy and expensive dispute about a whole host of issues, many of which could have been avoided had the arrangement been properly treated as a franchise.

• A franchisee enters into a franchise agreement which contains a number of unfair contract terms, including that a particular fee can be unilaterally increased by the franchisor at any time. The franchisee ends up spending thousands of dollars in legal fees arguing that the clause is void. While it was successfully challenged, a good lawyer would have had this clause struck out at the negotiation stage, thereby avoiding the need to incur further costs in disputing the clause.

• A franchisee with a long history in hospitality buys into a cafe franchise. The franchisee doesn’t realise when signing the franchise documents that the franchise agreement contains strict restraint provisions. After the end of the franchise agreement, the franchisee can’t operate a similar business for two years after expiry, thus destroying his livelihood.

There are plenty of other potential consequences of failing to obtain legal advice. At the very least, franchisees should understand their obligations under the franchise agreement before signing. Not only that, but many disputes can be avoided if franchisees seek advice on the franchise arrangement and therefore avoid any “surprises” down the track.

On a more positive note, getting legal advice will also help you to understand your rights under the franchise agreement. Franchisees are afforded a number of rights under the Franchising Code of Conduct which it is useful to be aware of. For example, if there is a marketing fund, franchisees are entitled to the marketing fund’s financial statements each year.

When you consider the overall cost of buying a franchise, getting legal advice is a very small portion of this. And while it may sting at first, it can not only save you thousands of dollars in the future, but also considerable heartache and emotional energy. So in answer to the question – you simply can’t afford not to get legal advice.

Marianne Marchesi is the award-winning founder and principal of law firm Legalite.