7 best legal tips to help you prepare for owning your first franchise
Updated: 6 December 2019
If you're thinking about buying a franchise, read on for our 7 best legal tips to help prepare for owning a franchise.
In a hurry? You can jump ahead below.
1. Franchising code of conduct
Your franchisor needs to comply with the Franchising Code of Conduct (franchising code).
So what is it?
It's a legally binding industry code. It applies to all the parties to a franchise agreement. Here's a link to it.
2. Information statement
The franchisor should give you an information statement.
An information statement outlines the risks and rewards of franchising.
You get one when you enter into a franchise agreement for the first time (i.e. not for the renewal of your franchise agreement).
3. Disclosure document
A disclosure document describes the franchise system and running a franchise.
The franchisor needs to give you a disclosure document if you are proposing to enter into, renew or extend a franchise agreement.
- any legal proceedings against the franchisor it's directors;
- contact details of current and former franchisees (unless the franchisee has requested that their details not be disclosed); and
- arrangements for when the franchise agreement ends (including renewal and extensions).
The disclosure document needs to be in the format set out in the franchising code.
Also, it needs to be signed by the franchisor, or a director, officer or authorised agent of the franchisor.
We strongly suggest that you have an accountant review the financials.
Cooling off period
If you change your mind, you have a 7 day cooling off period after entering into the agreement or making any payment (whichever happens earlier).
The franchisor must refund all payments within 14 days but they may withhold their reasonable expenses.
4. When to see a lawyer
If you have chosen to get legal advice, it's a good idea to get legal advice once you receive the information statement.
Some clients think they cannot negotiate much so there's not much point seeing a lawyer.
This is not always the case.
Typical legal and accounting work
So how can a lawyer help you?
Risk advice: first, your lawyer may do some legal research on the franchisor and any existing legal cases against them.
Then your lawyer will be able to give you advice so you are aware of the risks.
Review work: your lawyer will also check your disclosure document to make sure that key terms have been included in the agreement.
Franchise agreement negotiation: your lawyer can help you negotiate some of the terms.
Lease review & negotiation: finally, your lawyer can review your lease, advise you of any negative terms and help you negotiate better ones.
How about an accountant?
An accountant can help you review the franchisor's financials to give you comfort that finances are in order.
5. Items to prepare before executing the franchise agreement
Insurance: the franchisor usually requires you to have public liability, content, professional indemnity and workers compensation insurance.
It's a good idea to shop around. Brokers are a good place to start because you can compare a number of providers.
Bank guarantee: the franchisor may require you to provide a bank guarantee.
Why? In case you don't pay any of your service fees, the franchisor can then deduct money owed to them from your bank guarantee.
Leased premises: usually you will need to get permission from the franchisor for any premises that you choose. Also, watch out for size restrictions.
The franchisor will want to see certificates of currency for your insurance before the settlement date of your agreement.
Tip: don't leave these items until the last minute, it can be stressful for you and anyone helping you.
6. Terms to watch out for in your franchise agreement
Be sure to look out for these terms in your franchise agreement:
Legal fees: usually each party pays their own legal fees.
Some franchisor's require you to pay their legal fees as well as yours.
You may be able to negotiate this point so that each party pays their own legal fees.
Interest: watch out for high penalty interest on late payments, this is an item you can usually negotiate.
Franchisor competition: also, be aware of clauses in your franchise agreement that allow a franchisor to compete extensively with your franchise.
Territory: make sure that any territory boundaries are clearly defined.
Ideally, you will have exclusive access to operate your franchise in a particular area.
Unpaid training - finally, watch out for clauses that require you to provide unpaid training because this will take time away from your franchise.
7. Dispute resolution
Dispute resolution: resolving disputes is a huge deal, so it gets its own heading.
Here's what needs to happen in the event of a dispute:
Step one: Inform the other party of the dispute
Inform the other party in writing of the dispute, this is usually called the dispute notice.
You must include the nature of the dispute, the outcome you want and action you think will settle the dispute.
Step 2: Resolving the dispute
The parties should agree about how to resolve the dispute.
Step 3: Mediate
If you cannot does resolve the dispute within a certain time frame, either party may refer the matter to a mediator.
Costs: each party should pay for their own cost of attending mediation, unless otherwise agreed.
Importantly, the franchising code allows either party to start legal action despite dispute resolution processes.
If you get a dispute notice, your focus should be to look at ways of resolving the dispute quickly.
Here are the key ways a lawyer can help you:
- a lawyer can give you advice about your rights; and
- a lawyer can send a letter to the franchisor
- follow a dispute resolution process set out in the code.
The Australian Competition & Consumer Commission (ACCC) has some really good information for both franchisees and franchises.
You can read more in the franchisor compliance manual.
So if you are thinking of entering a franchise, keep these key points in mind:
- the franchising code of conduct applies to your franchise agreement.
- the franchisor must give you an information and a disclosure document before you enter the agreement.
- you should see a lawyer once you receive the information statement.
- start shopping for insurance and a bank guarantee early and make sure your lease complies with the the agreement and that you are meeting any franchisor requirements for these items as well.
- terms to watch out for in your agreement include: legal fees, interest, competition, territory, unpaid training and dispute resolution.
You may have other terms that need to be checked and for this reason, the above points are a guide and not legal advice.
Finally, negotiation early on usually works best before you sign anything!
Do you have questions or comments about a franchise? Be sure to leave them below.
I wish you success in your ventures!