HOW TO SPOT FAKE FACTS
Warning signs to look for before signing a franchise agreement.
Warning signs in a franchise agreement.
Before you sign a franchise agreement, chances are you will be involved in a whirlwind of paperwork, meetings, preparations and the general excitement of starting a new business. It is important to pause amidst the chaos and reflect on what you are about to commit to.
So, what are some of the “warning signs” to be wary of and relevant matters to consider before entering a franchise?
COMPLIANT DOCUMENTS AND
PROCEDURES
Here are six things to consider about processes and compliance:
Does the franchisor comply with the Australian Franchising Code of Conduct and other applicable laws?
Check whether the disclosure document provided to you is in the same format as set out in the code and has been updated after the last financial year.
Did the franchisor provide you with the correct form of information statement at the earliest relevant opportunity as required by the code?
Has the franchisor given you all the necessary documents at least 14 days before asking you to sign the franchise agreement or make any non-refundable payment?
Has the franchisor acted in accordance with the code’s good faith obligations? Are there any terms in the franchise agreement which may be considered unlawful under Unfair Contract Terms laws?
If you don’t want to do this yourself, a franchise lawyer can review the documents provided and advise you as to whether the franchisor appears to be compliant with the code and other relevant legal requirements.
If the franchisor’s conduct, and/or the documents you have been asked to sign, are not code compliant, that is a red flag and you should immediately stop and reconsider signing up to a franchise.
STRUCTURED PROCESS
You will want to be part of a professional and well-organised franchise system. A good sign of this is a comprehensive, formal and structured process from your initial expression of interest in the franchise and throughout your application submission, the completion of all assessments and training and all other steps right up to signing documents.
If the franchisor seems disorganised and does not have a thorough, systematic procedure for appointing new franchisees, this is another sign that the franchise may not be all that has been promised.
REPRESENTATIONS OR INDUCEMENTS
Frequently, when a franchisee becomes disgruntled, the cause of their
discontentment is the franchisor’s failure, real or perceived, to fulfil certain promises or assurances which the franchisee believes were made to them during the course of the application and sale process.
Such assurances by the franchisor, or a representative of the franchisor, are termed representations or inducements. These are often made (or claimed to have been made) in relation to matters such as: the projected costs to establish the franchised business and/or ongoing operating expenses a specified number of leads or sales to be provided to the franchisee income guarantees or estimated profits that the franchised business can expect to generate exclusive rights or territories to be granted technology or products that the franchisor will develop and/or provide to franchisees the training, support and assistance to be provided by the franchisor discounted or special fees to be offered for the benefit of the particular franchisee.
However, representations can be made regarding any matter relevant to the franchise.
Take detailed and accurate notes of any discussions you have with the franchisor and its representatives, and, where the content of such discussions is important to you, confirm them in writing. If you believe the franchisor has made any specific promises or offered you any particular incentives to enter into the franchise, be sure to document these fully and advise the franchisor, in writing, of the relevant details.
Franchisors often request that franchisees complete and sign a document commonly known as a “prior representations” statement or certificate. This allows the franchisee to set out the terms of any promises or incentives made to them. If you sign such a document, ensure that you complete details of all relevant promises. If you don’t, it may be hard to claim at a later date that you relied on these promises when deciding to buy the franchise.
CONTENTMENT AMONG EXISTING
NETWORK
Despite what the franchisor may tell, show or promise you, its franchisees are the best resource to help you ascertain how successful and functional the franchise system really is. You should speak with as many current and former franchisees of the network as possible. The franchisor’s disclosure document should, if it is compliant with the code, provide contact details of franchisees who have left within the past three financial years.
If you cannot contact other franchisees or if they do not provide valuable insights, you may be able to glean some information from statistics alone. At item 6.4 of the disclosure document, the franchisor must provide details of franchised businesses which, in the last three financial years, have been sold, terminated, not renewed/ extended on expiry, bought back by the franchisor or otherwise ceased to operate.
Movement of franchisees within the franchise network can be a telling sign.
If a significant proportion of the franchisees have recently left the network, this may indicate a lack of contentment among the franchisees or a franchisor engaging in “churning and burning” behaviour. At the very least it might indicate a level of disharmony between the franchisor and its franchisees.
KEY ELEMENTS OF FRANCHISE
DOCUMENTS
It is one thing for the key terms of the deal to be negotiated and agreed upon, but quite another to ensure that the paperwork accurately reflects your agreed terms. Carefully review the franchise agreement and associated documents to ensure that all the critical aspects, such as fees, territory and the duration of the agreement (including any renewal options) are correct and as promised to you by the franchisor.
Some franchise agreements contain the franchisor’s “standard” terms, with any agreed modifications recorded by way of special conditions, either within the franchise agreement itself or in a separate letter or deed. It is therefore crucial to review all relevant documents contemporaneously to form an understanding of the contractual arrangement in its entirety.
If any terms or conditions in the franchise documents depart from your understanding of what was agreed between you and the franchisor, do not sign until you have sought professional advice, clarified any areas of uncertainty in writing with the franchisor and/or you have received an amended agreement.
All too often I am approached by franchisees who are shocked to discover certain terms and conditions in their agreement of which they were not previously aware; franchisees who are desperately looking to exit an agreement or vary their contractual obligations after they have signed and it is too late.
In summary, there is a plethora of matters to consider before buying a franchise. Whether you are experienced in franchising or it is your first business venture, you should always engage a lawyer and accountant with franchising expertise to review the relevant documents and advise you before you sign on the dotted line and bind yourself to the terms of the agreement.