Jim’s Tips... On Contracts, Lawyers, & What to Expect from your Franchisor
This article appeared in Issue 3#5 (July/August 2009) of Business Franchise Australia & New Zealand
Finding a lawyer
The Franchising Code advises franchisees to get their contracts checked out by a lawyer. Although I agree, I would recommend franchisees be very selective when choosing their franchise lawyer.
Solicitors’ fees start from around $200 an hour, and it can take several hours to read and write a report on a complex document such as a Franchise Agreement.
Many non-specialist suburban solicitors I have encountered do not have adequate experience in franchising. I’ve had several hundred of such solicitors miss a gross mistake in the Jim’s Franchise Contract, such as referring to a non-existent clause!
In other cases their advice can be pretty meaningless. I had one solicitor flatly recommend against our agreement on the basis that it was a ‘bad contract’. I telephoned him and asked if he had ever seen a contract as fair to the franchisee as ours. He agreed he hadn’t, but said he always advised against Franchise Agreements as a matter of course. In which case, why charge several hundred dollars for advice he could have given over the phone?
When choosing a solicitor, select someone with franchising experience, such as those in Business Franchise Magazine or legal firms listed on the Franchise Council of Australia’s website.
Ask your lawyer how many contracts they’re familiar with, especially of the same generic type (service or retail). These specialist franchise solicitors may cost a great deal more but their advice will be of much better value. They will be familiar with many franchise agreements and may also know which franchisors have a poor reputation or could be involved in current litigation
Check it out yourself
Regardless of this, take the time to read the contract and Disclosure Document yourself. Most clever comments regarding our contracts have come from prospective franchisees rather than their lawyers. In a number of cases, even one this year, we actually changed our standard contract as a result! The Disclosure Document, in particular, should not be hard to read and understand.
Pay special attention to any earnings claims. Verbal statements are very hard to prove, but anything in writing can be given more weight. A false claim, or one that cannot be verified, could give you grounds for legal action at a later date, so most franchisors will be cautious in this area.
Find out what protection you have against unfair termination and whether there is an automatic right of renewal when the contract term expires. Some contracts allow your business to be simply taken off you at the end of the term, even if you are fully compliant.
Watch out for other clauses that give franchisors extraordinary power. Some contracts allow franchisors to remove your customers at whim, in the case of service franchises, or to raise franchise fees at any time and to any extent. Do not be soothed by statements such as ‘we never do that in practice’. If they don’t do it, why is it in the contract?
Lastly, pay careful attention to any current litigation revealed in the Disclosure Document, bearing in mind that this is written by the franchisor so may not necessarily represent a balanced picture. Since most franchising disputes never make it to litigation, even 2-3% of franchisees in litigation could represent a major problem.
What to expect from your franchisor
This is also the time to find out exactly what to expect from your franchisor. Will he or she advertise to find you work, or is that your responsibility? How often are meetings held and where? Meeting with your franchisor and other franchisees is one of the key advantages of a franchise system, not only for training but for moral support and advice. At Jim’s, we find that franchisees without access to regular meetings are far more likely to fail.
Who will support you and answer your questions? Depending on the system, it may not be the person who sold you the business. What is their level of experience and how easy will they be to get on to? These are the sorts of questions that should come up in discussions with current franchisees, but should also be laid out in the Contract, Disclosure, and Operations Manual (copies of which you should get before signing any agreement).
Induction training is also a key consideration. In the early days of Jim’s we actually gave no formal training – just a couple of days on the road with an experienced franchisee. Within a few years we began formal induction courses, which have tended to become longer and more thorough with time. This may put franchisors at odds with new franchisees, who tend to be eager to get out and start earning. However, proper induction training can have a major impact on the success of the franchise. In one recent case at Jim’s, we found that a better induction course dropped our first year attrition by almost one third.
Next issue: Working effectively as a franchisee.
Jim Penman founded the Australian iconic brand Jim’s Mowing in 1982. It has evolved into the Jim’s Group with some 26 individual Divisions and 2750 franchisees. The second largest franchise group in Australia (after Australia Post), also operates in New Zealand, Canada and the United Kingdom.