You Get What You Pay For
This article appears in the Mar/Apr 2015 issue of Business Franchise Australia & New Zealand
Picture this: you’ve spent months looking at various franchise opportunities, have spoken to your accountant, completed your due diligence, filled in the application form and are finally ready to become a franchisee. All that’s left is to sign the franchise agreement. Simple right? Not exactly.
The franchise agreement and disclosure document are often hundreds of pages long. Under the Franchising Code of Conduct, franchise documents must contain certain information to help you make an informed decision about a franchise. Such information includes the history of the business, number of franchisees, initial and ongoing costs, intellectual property details and any litigation as well as outlining the obligations of the franchisee and franchisor.
The volume of the franchise agreement and disclosure document can be overwhelming. This is exactly why the Franchising Code of Conduct prohibits a franchisee from signing a franchise agreement or paying a non-refundable deposit until 14 days have passed from the date they received the documents.
Make sure you don’t leave the review til the last minute. You should begin reviewing the documents as soon as you receive them to ensure you take advantage of the time available to you. It is understood and expected that reviewing the franchise documents is a lengthy and time consuming process that needs to be done with care. Unfortunately, franchisees still enter into franchise agreements without obtaining legal advice or have the documents reviewed by a lawyer who specialises in franchising.
Using a lawyer who is not familiar with franchising may waste time and money. Franchise lawyers know what to look for and are familiar with the terms and concepts of a franchise network. We know what is standard, what is of concern and what can be negotiated. Don’t pay your local lawyer to learn franchising.
Under the Franchising Code of Conduct you must either obtain legal advice or confirm that you have chosen not to. This is to protect you by making sure the franchisees are aware of the importance of having the documents reviewed by a lawyer given their length and content and the fact that you will have no comeback with the franchisor if you sign the agreement without legal advice. Buying a franchise is a big decision and may cost hundreds of thousands of dollars. You should not be making such a substantial financial investment without first having a skilled franchise lawyer review the franchise documents to ensure there are no onerous obligations that you will not be able to meet. You wouldn’t make a substantial investment such as buying a house without taking specialist legal advice and likewise, you shouldn’t enter into this franchise investment without first having a franchise lawyer review the documents.
Ignorance is no defence. It is important to remember that even if you don’t understand the franchise agreement, you will still be bound by it.
Written vs Oral advice
Beware of law firms that offer to review your franchise documents within a few hours over the phone or via Skype. This is not sufficient time to comprehensively review the documents and may mean you will only receive advice on the terms specific to your franchise and not the terms and conditions relating to the entire franchise network. You should always obtain legal advice in writing to protect you should anything go wrong. Having written legal advice also allows you to go over the advice as often as you like to ensure you are making the right decision.
Things to consider
A skilled franchise lawyer should not only give you detailed written advice about the franchise documents, they can also provide added value by asking questions to ensure you are entering into a commercially suitable deal.
Such questions include:
• Are you happy with the level of experience and knowledge of the franchisor and its directors as their expertise is essentially what you are paying for?
• Does the franchisor own the intellectual property?
• Has the franchisor been involved in any litigation? If so, what was the nature and outcome?
• Have you spoken to any franchisees in relation to training, support and costs?
• How many franchisees have left the system and why?
• Has your accountant looked at the figures in the disclosure document and other financial information which indicates the business is viable?
Negotiating your Franchise Agreement
A comprehensive franchise review should not only highlight the obligations of both the franchisee and franchisor, but also provide insight and advice in relation to the commercial terms of the franchise agreement. For instance, a specialised franchise lawyer will be able to tell you whether the royalty, franchise fee or marketing levy is appropriate for that particular franchise.
Unlike general commercial lawyers, a specialised franchise lawyer will have the skills to recommend and draft any special conditions within the franchise agreement to get you a better commercial deal. Due to their exposure to franchise agreements on a daily basis, a specialised franchise lawyer can easily draft any required special conditions to ensure your best interests are met. A poorly drafted franchise agreement may not express your interests clearly and cause an entirely different result from what you had intended.
The new Franchising Code of Conduct
The revised Franchising Code of Conduct came into effect on 1 January 2015. Some of the amendments to the Code include greater disclosure requirements by franchisors, a duty to act in good faith and stronger enforcement provisions.
Franchisors can no longer require franchisees to undertake significant capital expenditure unless certain conditions are met and they cannot bring a dispute outside of the state the franchisee operates nor can they request that the franchisee pay their dispute costs.
A specialised franchise lawyer should be across all the changes to the Code and can advise whether the documents you have been given are compliant with the new Code.
The importance of execution
It may seem obvious to sign on the dotted line however in a significant number of cases, franchise agreements are not executed correctly. Too often a franchisee will not have a witness execute the document or only one director signs the franchise agreement on behalf of a company although section 127 of the Corporations Act 2001 requires either two directors or one director and a company secretary to execute the agreement.
The proper execution of a franchise agreement is crucial to create a legally binding document. There is a risk that the franchise agreement may not be binding or enforceable if it has not been executed correctly in accordance with section 127.
Buying a business to obtain Permanent Residency
You may be able to obtain permanent residency in Australia if you buy a business under the Business Innovation and Investment scheme. In order to obtain a visa, you will need to run and maintain the business successfully.
As attractive as this can be to foreigners looking to settle in Australia, the need to have a competent lawyer review the franchise documents is crucial as they may be unfamiliar with Australia’s legal landscape.
Remember, purchasing a business does not automatically grant you permanent residency. You must also successfully run the business. To do so, you will need to ensure the franchise you have invested in is profitable and that you will have enough capital to continue paying your royalty and other franchise fees, employ staff, purchase supplies and continue operating the business in accordance with the franchise agreement. You have a lot riding on this business investment and it is imperative that you receive specialist franchise legal advice.
In addition to reviewing your franchise documents, a skilled franchise lawyer can also advise you on effective ownership structures of your franchise entity; leases, subleases or occupancy licences; employment issues and eventually assist with the sale of your business.
DC Strategy recommends that all prospective franchisees seek legal advice from a specialised franchise law firm.
Christina Andrews is a lawyer in the law firm at DC Strategy who specialises in franchise documentation and franchisee reviews. She is also an experienced intellectual property lawyer.
For over 30 years DC Strategy has been the region’s leading end-to-end franchise consulting, legal, recruitment and branding firm. Our multi-disciplinary team is committed to providing professional, practical advice and ongoing support to clients.
Contact Christina on:
P: 02 8220 8704