FOR YOUR EYES
The documents you have to review as a potential franchisee
The documents you must read before you buy.
The Franchising Code of Conduct requires franchisors to provide a disclosure document setting out prescribed information to all potential franchisees. This document includes the proposed franchise agreement that you will need to sign which contains the terms of your franchise.
There may be other documents that you will need to consider, depending on the nature of your franchise.
What information can you expect to find in the various documents?
DISCLOSURE DOCUMENT
This document contains information regarding the franchisor and the franchise system including:
• the franchisor’s financial details for the
immediate past two financial years; • contact details of existing franchisees; • changes in the number of franchisees in
the last three years;
• franchisor’s conditions for the supply of
goods and services to the franchisee; • restrictions imposed on the sale of goods and services by the franchisee (including online sales);
• site restrictions;
• the various payments that the franchisee will need to make to the franchisor; • initial estimated set up costs and other ongoing costs;
• whether a marketing fund is operated by
the franchisor;
• what happens at the end of the franchise
term.
FRANCHISE AGREEMENT
This is the agreement that is specific to your franchised business and salient clauses will include:
• the term of the franchise;
• your rights as a franchisee to use the franchisor’s intellectual property to carry on the business;
• start up and fit out requirements; • continuing obligations regarding the
operation of the franchised business; • training requirements;
• fees payable to the franchisor; • assignment procedures;
• franchisor’s rights;
• termination rights of both parties and
procedures on termination.
PREMISES LEASE
Where the franchised business is operated from a fixed location, you will need to be satisfied with the lease terms as you will be the responsible party either directly under the lease or as sublessee or licensee of the franchisor.
As franchisee, you are either required to take up a lease in your/your company’s name or enter into a sublease or licence with the franchisor. The latter is an arrangement where the franchisor is the lessee on the lease who, with the consent of the landlord, subleases/licenses the premises to you.
FRANCHISE AGREEMENT
The important terms to focus on are:
• the term (this needs to mirror the
franchise term)
• whether there are options to renew (to mirror renewal terms in the franchise agreement)
• procedures to be followed for lease
renewal
• maintenance and refurbishment
requirements
• relocation requirements – especially when you are negotiating the lease directly with the landlord as these may impact on your obligations under the franchise agreement
• commercial terms - rent and outgoings • other responsibilities as lessee; • assignment procedures and rights (these need to be read in conjunction with the franchise agreement to ascertain the complete assignment process);
• default provisions and termination rights
of both parties
Where the premises are retail premises, a disclosure document detailing outgoings payable by the lessee, the commercial terms of the lease, alteration/redevelopment works planned or known to the landlord and other representations made by the landlord are also provided by the landlord.
Other important issues regarding the premises:
• consult the local planning scheme and council to check the premises are within a zoning which allows the operation of the proposed franchise
• check for proposed amendments to the planning scheme in the pipeline which may affect the continued operation of the franchised business.
OTHER DOCUMENTS REQUIRED BY THE
FRANCHISOR
These are generally documents that the franchisor requires you to complete to give effect to your obligations under the franchise agreement. For instance, you are required to keep all confidential information of the franchisor and the franchise system confidential. You will need to sign a Deed of Confidentiality.
Similarly with the personal guarantees franchisors require directors of franchisees to provide, a Deed of Guarantee and Indemnity will need to be signed by the directors of your company (if you are using a corporate entity to operate the franchised business).
MAJOR TAKEAWAY
It is important that the plethora of documentation that you need to review and sign does not have conflicting terms and there are provisions that cater for your future intentions with regards to your franchised business. Christine Lau is a commercial, corporate and property lawyer with more than 26 years’ experience. She provides practical and strategic advice to business clients to help them address immediate issues while also factoring in the long term goals and vision for their business.