Navigating the Franchise Documents
Buying a franchise is an exciting venture, usually the result of much thought and consideration.
However, sometimes sifting through the franchise documents can feel a bit like climbing a mountain and any buzz of excitement quickly disappears. Although it is always wise to obtain legal advice, this guide is designed to help you navigate your way around the key documents.
The Disclosure Document
The Disclosure Document is provided to potential franchisees at least 14 days before the franchisee enters into the Franchise Agreement. Franchisors are required to update their Disclosure Document annually.
The purpose of the Disclosure Document is to give you information about the franchisor and the franchise opportunity to enable you to make an informed decision. It will also contain a copy of the Franchising Code of Conduct (‘the Code’), the law which regulates the franchising sector in Australia.
Typically, you should ask yourself the following questions when reading the Disclosure Document:
• Does the Disclosure Document follow the format required by the Code and is it up to date?
• Is the franchisor currently involved in any litigation of the types described in the Code? For example, proceedings relating to a breach of a Franchise Agreement.
The following past proceedings must also be disclosed:
- a conviction of a serious offence within the last ten years;
- final judgments in relation to civil proceedings within the last five years;
- bankruptcy or insolvency within the last ten years.
• Have any franchised businesses been terminated or ceased to operate within the last three financial years? If so, why?
Note that the Disclosure Document must set out details of previous franchisees (unless such franchisees have requested their details not be disclosed). You should use these details and contact as many franchisees as possible to get a franchiseeperspective on the franchisor and the business, and confirm the reasons for the termination or closure of the franchise, particularly if the franchised business was in the territory or at the site in which you will be operating.
• Will you have an exclusive territory in which to operate your franchise?
• What payments will you be required to make, both upfront and ongoing, to the franchisor and to third parties?
• What are your obligations under the Franchise Agreement in relation to key areas - such as training, complying with standards, or marketing?
It is also a good idea to consider the franchisor’s current financial position. Franchisors are required to include in the Disclosure Document either financial reports for the last two financial years or an auditor’s report. You should review these reports in the course of obtaining financial/accounting advice in relation to the franchise opportunity.
You are entitled to a minimum period of 14 days to review the franchisor’s Disclosure Document and Franchise Agreement before you enter into the Franchise Agreement. This provides you with an opportunity to read the franchise documents and obtain advice.
The Franchise Agreement
Put simply, the Franchise Agreement is what gives you the right to operate the franchise under the franchisor’s system or marketing plan. Like any agreement, this sets out both parties’ rights and obligations. Many of the standard terms in the Franchise Agreement are replicated in the Disclosure Document, so you should ensure these are consistent.
The Franchise Agreement will also set out whether the franchise being granted is within a non-exclusive or exclusive territory. If you are granted an exclusive territory, you should carefully read these provisions to understand your rights in relation to the territory. For example, can other franchisees in the system operate their business within your territory? Is the franchisor able to operate a business that is substantially the same as yours within the territory? And can the territory be changed by the franchisor? You should also check that your territory is clearly defined in the Franchise Agreement, whether by way of a description or a map with the territory clearly marked.
Franchise Agreements commonly contain minimum standards with which you must comply. For example, how you are to contribute to marketing both the franchise system and your own franchised business. It will also set out important rights and obligations relating to branding, payments, policies and procedures surrounding transfers of the franchised business, termination and dispute resolution mechanisms.
The Schedule to the Franchise Agreement will contain basic terms relating to your franchise. These include the term (i.e. duration) of your Franchise Agreement, whether there are any options to renew and fees payable. In relation to the term of the Franchise Agreement, a key issue is whether it is long enough to ensure that you receive an adequate return on your investment.
Further, you must consider whether the term of your Franchise Agreement and the term of the lease (where the franchise operates from a fixed site) coincide. Some Franchise Agreements provide that the Franchise Agreement will end if the lease ends. You should also take note of the amount and frequency of any recurring payments such as royalties and marketing contributions. Also double check that other basic details are correct, such as the franchisee entity or site address (if relevant). If you have negotiated any special conditions with the franchisor (that is, terms specific to your agreement), you should ensure that these find their way and are accurately represented in the Franchise Agreement.
Lastly, in what circumstances might your Franchise Agreement be terminated? The Code details special circumstances in which it is permissible for a franchisor to terminate a Franchise Agreement immediately by notice in writing. In all other circumstances, the franchisor must provide the franchisee with written notice of an alleged breach of the Franchise Agreement, and specify how the franchisee may remedy the breach and the timeframe within which the breach must be remedied (which must be reasonable). It is uncommon for franchisees to be provided with reciprocal termination rights.
You should be aware of any restraints that will apply at the end of a Franchise Agreement. Most Franchise Agreements provide for a period after the end of the Franchise Agreement during which the franchisee is restrained from being in any way involved in a competing business within a specified area from the territory and/or site.
Property Licence Deed
If the franchise operates from a fixed site and the franchisor holds the head-lease for the site, you may be required to enter into a Property Licence Deed with the franchisor which grants you occupancy rights. The Property Licence Deed will often require you to make payments (such as rent and outgoings) to the Landlord as if you were the tenant.
You should ensure you recieve a copy of the Lease and read it carefully to ensure you understand your obligations under it and are able to comply with its terms. There is no substitute for obtaining quality advice before you enter into a franchise, however, this guide should at least get you on your way. Full due diligence prior to making a long, and often costly, commitment, is in both the franchisee’s and franchisor’s best interests. Getting it right at these initial stages should pave the way for a lasting and healthy franchise relationship.
Marianne is a Lawyer at Mason Sier Turnbull, a law firm renowned for its franchising expertise.
Located in Melbourne’s industry heartland, Mason Sier Turnbull has strong commercial law skills and provides clients with sensible solutions.
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