01 Jan 10 Important things a franchisee should know before buying a Franchise.
1. A Franchise Agreement is defined in the Franchising Code of Conduct. The definition is very broad. Be cautious of anyone who tells you that they issue Licence Agreements and not Franchise Agreements. Some Franchisors believe that by calling an Agreement a Licence rather than a Franchise they can avoid compliance with the Franchising Code of Conduct. This is incorrect. See section 4 of the Franchise Code of Conduct.
2. At least 14 days before you enter into a franchise agreement the franchisor must give you:
• A copy of the code;
• A Disclosure Document; and
• The Franchise Agreement.
3. A franchisor must not enter into a franchise agreement with you unless you have provided a written statement that you have read and had a reasonable opportunity to understand the disclosure document and the code.
4. After you sign you are allowed a cooling off period. You can terminate the Franchise Agreement for 7 days after:
• entering into the agreement; or
• making a payment.
5. If you lease premises from a franchisor then the franchisor must provide you with a copy of the lease within one month after the lease is signed. Any failure to do so is a serious breach of the Code. See section 14.
6. A franchisor is not obliged to give you any further term after the Franchise Agreement expires. Courts have said that it is not unconscionable, nor unfair for the Franchisor to refuse to renew your franchise agreement. If your franchise agreement ends and is not renewed you will lose your business. You must make sure that your franchise agreement contains an option. If an option to renew is not given in the franchise agreement then you should make sure that you can pay off the purchase cost of the franchise and make a sufficient profit in the time allowed i.e. the term of the franchise agreement.
7. Many Franchise Agreements contain a sale fee. This means that the franchisor requires you to pay a fee, sometimes in the amount of tens of thousands of dollars, before you will receive consent to sell the franchise. Make sure you know what the sale fee is before you sign the Franchise Agreement.
8. A franchisor is not entitled to include a clause in a franchise agreement that says no matter what they do they are released from any liability or responsibility to you the franchisee.
9. If a franchise agreement requires you to pay money to a marketing fund then the franchisor must provide you with a copy of a statement, showing all receipts and expenses with 5 months of the end of the last financial year. Be careful however to read the franchise agreement or obtain a promise from the franchisor about the use of the funds. Courts have ruled that franchisors do not have to use the funds to help you in your business unless the franchise agreement requires this. Often the franchise agreement does not have this requirement.
10. A franchisor is not entitled to unreasonably refuse a request for the assignment of a franchise agreement. In fact if the franchisor has not given reasons why consent is refused within 42 days after a request, then the Franchisor is taken to have given consent.
Contact us if you have any questions about franchising.