Franchise Agreement Review
Starting at $990.00 plus GST
Having your franchise agreement reviewed by a franchise lawyer is a must before you enter into a franchise agreement.
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Franchise businesses have higher rates of success than startup businesses.
Generally you will be buying an established brand with a successful business model and a developed marketing plan.
Before buying a franchise, you will need to consider many factors including:
Buying a franchise is different to starting your own business. When you start your own business you have complete control over your decision making. When you buy a franchise you have to operate the franchise in accordance with the procedures and processes of the franchisor.
We have worked with hundreds of people who have been interested in buying a franchise or starting a business. In our experience, owning a franchise is not right for everyone.
While buying a franchise may decrease the risks involved in owning a business, you are required to operate the business in line with the policies and procedures developed by the franchisor. In addition, when the term of your franchise agreement ends, you lose the right to continue to operate the business. If you do not sell the franchise before the end of the term of the franchise agreement, you may not receive any payment for the goodwill you have generated in the business.
Further, while the established brand recognition and support from the franchisor can be an advantage, the ongoing costs of running a franchise include ongoing royalties, advertising fees and other costs that are payable to the franchisor. These types of costs are not payable if you start your own business.
Our article Starting Your Own Business vs Buying a Franchise considers the pros and cons of either option.
The ACCC's free online course Is franchising right for me? will also help inform your decision.
If you have considered the pros and cons of buying a franchise and feel that buying a franchise is right for you, you then need to review the opportunities that are available. While there are many franchising opportunities, not all of them will be suitable to your circumstances.
Consider your own strengths and your interests.
You'll want to know whether operating a franchise will provide you with an adequate financial return and offer a lifestyle that suits you.
For some people financial return is the most important of these factors. For others, lifestyle may be more significant.
A client once told us that they bought the franchise because of the cheesecake (unfortunately the franchisor changed supplier).
Consider the length (or term) of the franchise and if the franchise is operated from premises, the length (or term) of the lease. If the term of the lease and the term of the franchise agreement do not align, you may find yourself in a situation where the franchise agreement ends much sooner than you expect due to the expiry of the lease.
This situation was considered in the case of Lanhai Pty Ltd and Ors v 7-Eleven Stores Pty Ltd [2022] VSC132, where the lease ended during the "term" of the franchise agreement and the franchisor made the decision not to renew the lease.
While the term of the franchise agreement may end early for reasons such as the lease not being renewed, generally, you are unable to cease operating a franchise until the end of the term of the franchise or until you sell the franchise business.
Even if you plan to sell the franchise business before the end of the term, make sure that you are in a position to operate the franchise for the full term of the franchise agreement.
Also, consider whether the franchise agreement and the lease contain options for renewal. But remember, if the franchisor is the lessee under the lease, the franchisor is not obligated to renew the lease.
Before you enter into any franchise agreement obtain detailed financial advice, both about your personal circumstances and about the franchise business that you are considering.
It is also essential to seek professional financial advice regarding any financial information provided by a potential franchisor.
We have assisted numerous franchisees who received financial information about a franchise business, only to discover that the franchise did not meet their expectations. While there may be valid reasons for a franchise business failing to perform to expectations, in a number of cases, the figures provided were found to be misleading. [What is misleading or deceptive conduct?]
While there may be advantages to "getting in early" with an unknown franchise brand, generally it is less risky to buy a franchise business in a proven brand.
Even if a product or brand initially experiences high demand, there is no guarantee that this demand will continue.
The life cycles of products and services may be shortened by technological advances, consumer preferences may change, and new competitors may enter the market.
You should consider the sustainability of the market for the product or service, underlying the franchise.
Investigate the offer and the franchise system and obtain advice from an accountant, a franchise lawyer, and a business adviser.
The disclosure document will set out the contact details of franchisees in the franchise system. [What is a disclosure document?]
Contact both current and past franchisees and ask them about their experiences. The ACCC recommends that you contact 5 current and 5 former franchisees. In our experience the more franchisees that you speak to the better.
The ACCC has set out a number of questions to ask both current and former franchisees.
Prepare business plans and budgets with a detailed understanding of the proposed territory or site.
Be aware of the franchisor's future plans for expansion, sale or possible rebranding. Expansion could lead to market saturation, affecting your ability to do business effectively, while rebranding might necessitate additional investments from you, such as updating signage or undertaking a complete shop fit.
Ensure to have your franchise agreement reviewed.
Consider the impact of any restraint of trade clauses. These clauses can significantly impact your ability to compete in the market if you decide to leave the franchise. Understanding these restrictions is crucial for planning your long-term business strategy and ensuring that you are making a sustainable investment. [What is a restraint of trade?]
Remember, franchise agreements can include rights of termination that favour the franchisor, and like any business your franchised business or the franchisor's business may fail. [What happens if the franchisor becomes insolvent?]
If your franchise agreement is terminated or the franchisor's business fails, you may lose your whole investment.
If you have decided that buying a franchise is right for you, there are a number of steps that are typically taken to purchase the franchise business.
You can narrow your search by considering your own strengths and interests and whether any franchises are available in these areas.
Other factors which may help you to narrow your search include:
Franchises differ in upfront costs and ongoing fees. Generally upfront costs include:
Most franchisors charge an ongoing royalty. An ongoing advertising levy is also common to enable a franchisor to undertake large advertising campaigns. In addition, there may be other ongoing fees such as ongoing software or IT fees.
The franchise disclosure document will contain all of the relevant costs and fees payable during the term of the franchise agreement [Your Guide to Franchise Disclosure Documents in Australia].
Generally, franchises with higher brand value also have higher upfront and ongoing costs and fees.
If you would like to compare the costs and fees of different franchise systems, the Franchise Disclosure Register may be of assistance.
Some franchises require you to have certain qualifications.
Some franchisors allow you to choose a location, while other franchisors require you to operate from an existing location.
Make sure that any location fits with your lifestyle.
Carefully read through the information pack provided to you.
If you have any meetings with the franchisor or its representatives make clear notes of those meetings and what is represented to you about the franchise system.
During this stage you can expect to sign a confidentiality agreement and pay a fully refundable deposit.
A franchisor can only take a non-refundable payment or deposit when:
You should receive from the franchisor:
The Information Statement must be provided before the other documents.
Before you enter into any agreement you should thoroughly investigate the offer and the franchise system and obtain advice from an accountant, a franchise lawyer and a business adviser.
The disclosure document will set out the contact details of franchisees in the franchise system. You should contact both current and past franchisees and ask them about their experiences. When speaking with other franchisees, it's important to delve into specific aspects of their operation to gather substantive insights. Ask them critical questions such as: Are they making a profit? Are there any hidden and unexpected costs? Have they recovered their investment? What is the culture like, and what kind of support do they receive from the franchisor? These questions will help you understand the financial and operational realities of the franchise, providing a clearer picture of what to expect.
Additionally, you should also prepare business plans and budgets based on the information gathered to ensure that your financial projections and expectations are realistic and grounded in actual franchisee experiences.
As a result of the advice that you obtain or the information that you gather when investigating the franchise system, you may want to negotiate either the offer being made by the franchisor or the documents that the franchisor proposes that you sign. [Are franchise agreements negotiable?]
You can only sign the franchise agreement after
Once you have signed the franchise agreement you have fourteen days during which you can cool off and terminate the Franchise Agreement (there are generally costs involved in terminating the Franchise Agreement at this stage).
Once you have signed the franchise agreement and any other relevant documents and the cooling off period has expired, you can commence operation of the franchise business.
Well established franchisors provide you with an identity and a system which has proven to be effective and has a market impact:
You may gain the advantage of national advertising campaigns that are included in an upfront franchise fee or an ongoing monthly fee payable to the franchisor.
National advertising campaigns would be out of reach for a small business.
Well established franchisors will train you in everything from technology, to accounting, to standing behind the counter and taking money.
Training makes the franchise model a much less riskier venture than buying a stand alone business or starting a business from scratch:
A franchisor is more likely to be in touch with the market trends that trigger changes necessary to keep up with changing times:
You have better negotiating power as a member of a recognised and proven brand.
You may also have the ability to tap into the bulk purchasing power and negotiating capacity made available by the franchisor.
Buying a franchise is not cheap, there is usually an up front franchise fee on top of the cost of the premises, equipment and inventory.
You need to be aware of the ongoing fees. In addition to the initial franchise fees, ongoing fees are payable by you to the franchisor.
You also need to be aware that some franchisors will require you to refurbish franchisee stores to keep up with a changing image or theme. These possible refurbishments can cost in excess of $150,000.00.
The controls and limitations imposed by the franchisor can include limitations on products, pricing, employees, policies, territory, marketing, working hours and other areas deemed critically important to the success of the franchisor and the franchised business as a whole.
There is little freedom of scope for you to be creative; almost every aspect of operating the business will be regulated.
Your ability to sell or transfer the franchise business is likely to be limited. Most franchised systems have some restrictions or obligations regarding the sale or transfer of a franchised business.
If a franchisor or other franchisees are receiving bad press or suffering from poor public perception then you will ultimately suffer.
While there are many excellent franchisors in Australia, not all franchise systems are soundly based or well run.
You should conduct comprehensive research on the franchisor and only enter into franchise systems which have a time tested and solid reputation within the industry.
Unlike in stand alone businesses the growth potential of a franchised venture is limited.
Franchisors will almost always impose territorial limits on you which dictate where you can operate. There are often harsh penalties if you step over this mark.
Franchise agreements tend to be to the advantage of the franchisor.
Franchise agreements can contain heavy penalties if you breach certain clauses, including the ability for the franchisor to terminate the franchisee and to seek monetary compensation from you.
In addition, franchise agreements generally contain clauses that operate after the franchise agreement has ended. These clauses include intellectual property clauses, confidentiality clauses and restraint of trade clauses.
It is important that you get legal advice about restraint of trade clauses before you enter into the franchise agreement, so that you are aware of the restrictions that apply after the franchise agreement has ended. Not all restraint of trade clauses will be enforceable and it is important that any restraint of trade clauses contained in a franchise agreement are reasonable.
You should always seek your own legal advice before you enter into a franchise agreement no matter how reputable the franchisor is.
Resources
Starting at $990.00 plus GST
Having your franchise agreement reviewed by a franchise lawyer is a must before you enter into a franchise agreement.
Starting at $1,000.00 plus GST.
It's often not just the franchise that you're committing to, but also the premises.
Starting at $1,000.00 plus GST.
Advising on non-compete clauses is one of our specialties.
We'll let you know what is and isn't enforceable and what you can and can't do.
It is advisable to consult with franchise lawyers and accountants, as these professionals are specialised in the specific legalities and financial aspects of franchising.
Franchises have complex agreements and financial structures that differ significantly from other types of businesses, necessitating specialised advice to navigate these complexities safely and effectively.
It’s crucial because franchises come with numerous rules and restrictions that one must adhere to, and understanding these can help in making an informed decision about whether this business model suits one's goals and capabilities.
Practical questions that you can ask other franchisees include:
These questions directly address key aspects of the business operation and the franchise system, offering insights into profitability, cost management, return on investment, organisational culture and the level of support provided by the franchisor.
The franchisor will normally provide initial training before you commence operation of the franchise business. Established franchisors will generally have detailed training programs.
In addition established franchisors will normally provide ongoing operational guidance.
Exit strategies include:
If you operate the franchise for the term of the franchise agreement, it is unlikely that you will be paid for the goodwill component in the franchise business on the expiry of the franchise business.
In order to recoup your initial investment the sale of the franchise business is the best option to exit the franchise.
Buying a franchise typically requires a significant upfront investment. There is a risk of financial loss if the business doesn't generate sufficient revenue to cover ongoing expenses and any borrowing costs.
Just because the franchise brand is successful, doesn't automatically mean that your franchise business will be successful. The success of your franchise business can depend on various factors, including market conditions, competition and location. There is a risk that your franchise may not perform as well as other franchises in the network.
Buying a franchise is not the same as starting or buying a business. When you buy a franchise you buy the right to use the franchisor's name, intellectual property and systems for a certain period of time. Generally, a franchise agreement will contain a 5 year term, with a right or rights of renewal. Renewing the franchise is not normally automatic and you may be required to pay further upfront fees to renew (you may also be required to undertake further capital works on renewal).
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