Understanding Franchise Agreement Reviews

The Importance of Reviewing a Franchise Agreement

Buying or renewing a franchise is a significant commitment that can shape your future for years to come. It is important that you understand the terms and conditions set out in your franchise agreement before making any decisions. 

A thorough review of the franchise agreement will help you identify the potential risks associated with the franchise. This process assists you to understand unfavourable terms that could impact your business negatively. By understanding the franchise agreement, you can make an informed decision about whether to enter into the franchise.

Moreover, the review process can highlight any ambiguities or gaps in the agreement that need to be addressed. This can lead to negotiations with the franchisor to amend these terms, so that the final agreement is more fair and balanced.

Without a comprehensive review, you may find yourself bound by terms that are not in your favour, which could be detrimental to your business's success.

Key Terms in a Franchise Agreement

Some of the key terms in a franchise agreement include:

1. Intellectual Property Provisions: Intellectual property provisions are one of the key provisions in a franchise agreement. Under the terms of the franchise agreement you will be licensed to use the franchisor's name, the franchisor's logo, the franchisor's style of shop front (if the franchise is site based) and the franchisor's systems. This is what enables you to operate a business that is the same as the franchisor or other franchisees. 

2. Franchise Fees: Another of the key provisions in a franchise agreement are the fee provisions that set out the fees that are payable by you as the franchisee. The franchisor will generally charge an ongoing royalty for you to operate the franchise business. In addition, the franchisor may charge marketing fees or other specific purpose fees.

3. Territorial Rights: Franchise agreements may contain territorial rights, particularly if the franchise is a mobile business. It is important that you understand how any territory rights work. This includes understanding whether other franchisees can operate within your territory and whether you are able to market your franchise business outside of your territory. 

4. Term and Renewal: Franchise agreements only give you the right to operate the business for the term of the franchise agreement. Once the franchise agreement expires, you no longer have the right to operate the business. Generally, you are able to "renew" the franchise agreement, subject to conditions, such as notification of renewal, the payment of a renewal fee and the entry into a new franchise agreement. 
5. Training and Support: The franchise agreement will normally specify the training and ongoing support you will receive from the franchisor. You should consider the length of training that you will receive, where the training will be held and what costs you will be required to pay to attend any required training.
6. Termination Clauses: Termination clauses outline the circumstances under which the franchise agreement can be terminated. Generally, termination clauses operate in favour of the franchisor. The circumstances under which the franchisor can terminate the franchise agreement is regulated by the Franchising Code and the unfair contracts regime.
7. Post Termination Clauses: These clauses regulate what you can do after the franchise agreement has ended. While you will no longer be able to use the intellectual property of the franchisor, restraint of trade and confidentiality clauses may further prohibit you from operating a similar business at all. 
8. Charges: Some franchise agreements contain charges over the assets of the franchise business (and sometimes your personal assets). If the franchise agreement contains a charge, it is important that you know and understand how the charge works and what assets the charge applies to.
   
   
   

Common Pitfalls to Watch Out For

While franchise agreements are governed by the Franchising Code, there are several common pitfalls that prospective franchisees should be aware of:

1. Hidden Fees: Franchise agreements can contain fees that are not explicitly stated in the main sections of the agreement, or in the schedule. It's important that you are aware of any additional fees or charges.

2. Prohibited Fees: Some franchise agreements may contain fees that are prohibited under the Franchising Code, or are likely to be unfair contract terms. For example, the Franchising Code prohibits the charging of legal fees in certain circumstances. In addition, fees such as "breach fees" or "proposed termination fees", may be unfair contract terms depending on their operation. 

3. One-Sided Terms: Generally, franchise agreements are drafted to favour the franchisor. However, the operation of the unfair contract terms regime means that if a franchise agreement is a standard form contract, then it must not contain any terms that are unfair (under section 23 of the Australian Consumer Law).

4. Restrictive Territorial Clauses: Territorial clauses can limit where you can operate your business, but in addition can also limit where you can market your business. For example, you may not be able to sponsor your child's soccer team, because they play outside of your marketing territory.

   While it's important that you understand your territorial obligations, it's also important that you can maintain and grow your business within the defined territory limits.

   
   
   

How Professional Review Services Can Help

Engaging a franchise lawyer can help you to navigate and understand the complexities of a franchise agreement. Review services offer several benefits:

1. Expert Analysis: Lawyers specialising in franchise law can provide a detailed analysis of the agreement, highlighting areas of concern (including clauses that are outside of industry norms), and suggesting necessary amendments.

2. Clarity and Understanding: Professionals can explain the terms of a franchise agreement in plain language, so that you can better understand what you are agreeing to. This can help to prevent any misunderstandings down the line.

   In addition, professionals can point out which clauses may be prohibited or unfair, so that if the franchisor attempts to enforce these clauses later (such as fixed breach fees), you are aware that you are not necessarily required to comply with the terms. 

3. Negotiation Support: If the agreement contains unfair or unfavourable terms, a franchise lawyer can assist you in negotiating better terms with the franchisor.

4. Compliance: A professional can also verify that the franchise agreement complies with the relevant franchising laws and regulations. 

5. Peace of Mind: Knowing that your franchise agreement has been thoroughly reviewed by experts provides some peace of mind, allowing you to focus on running your business.

   
   
   

The Role of Restraint Clauses in Franchise Agreements

Restraint clauses are generally included in franchise agreements and can have significant implications for franchisees. Restraint clauses typically restrict the franchisee from engaging in similar business activities within a certain area and timeframe both during the term of the franchise agreement, and after the agreement ends.

However, not all restraint clauses are enforceable. Restraint clauses need to be very carefully drafted to ensure that they reasonably protect the legitimate business interests of the franchisor, but that they do not do any more than that. This means, that a restraint clause must be reasonable in the activity it prohibits, the area that it covers, and the time frame that it operates for.

If a restraint clause is too broad, and is unlikely to be enforceable, it is sensible to negotiate an amendment of the clause with the franchisor. This provides certainty to both the franchisor and franchisee and can save unnecessary costs after the franchise agreement ends. 

Ensuring Compliance with the Franchising Code of Conduct

In Australia, franchise agreements are governed by the Franchising Code . The Franchising Code requires that certain terms be included in franchise agreements (for example dispute resolution clauses), and also mandates that certain terms be excluded from franchise agreements (for example, general releases).

In addition, the Franchising Code requires that all franchisors provide a disclosure document to prospective franchisees. A disclosure document contains specific information to help franchisees make informed decisions when entering into a franchise agreement.

Franchise agreement review services carried out by a franchise lawyer, typically include some sort of review of the disclosure document, to ensure that it includes all of the required information, and complies with the Franchising Code. 

In addition, a franchise lawyer can point you to helpful information contained in the disclosure document, such as rebate information, specific purpose fund (or marketing fund) expenditure, fees and charges, and general franchisee information.

Takeaways

Franchise agreements are complex agreements, and can be difficult to fully understand. 

In addition, franchising is governed by the Franchising Code and the Australian Consumer Law. Consequently, a franchise agreement may contain clauses that are not enforceable, or that are prohibited by legislation.

Even if the franchisor has made it clear that it will not agree to any amendments of the franchise agreement, it is a good idea for you to have the franchise agreement reviewed, so that you can better understand how the franchise agreement operates, and so that you can better understand (and assess) your risk.

If the franchisor is open to negotiation, it is important that you take the opportunity to amend any clauses that are unfair, that are onerous, or that do not reflect your agreement with the franchisor.  

If you need assistance with the review of a franchise agreement, we offer fixed fee franchise agreement review services.