Legal Challenges to Restraint of Trade Clauses in Franchising: What Franchisees Need to Know
Restraint of trade clauses are common in franchise agreements and are designed to protect the...
Specialties
Services
Once you have protected your intellectual property, documented your systems and prepared your franchise documents, you are ready to start the process of recruiting franchisees and granting franchises.
A prospective franchisee will express an interest in finding out more about the franchise system, either by filling out an online form or by contacting the franchisor directly.
After the initial contact is made the franchisor will generally meet with the prospective franchisee for a preliminary discussion.
At this initial meeting the prospective franchisee will be provided with information about the franchise system together with sales material.
The prospective franchisee may ask detailed questions at this meeting such as How much income can I earn? and Are there any financial incentives?
Franchisors must ensure that any information provided to a prospective franchisee is accurate (either during the discussion or in any written material given). In addition, any written information provided to a franchisee should include a disclaimer which sets out the basis upon which the information is being provided.
If the franchisor is expecting to release detailed information about the franchise system, the prospective franchisee may also be provided with an NDA (Non disclosure agreement or confidentiality agreement) at this stage.
If a franchisee thinks that the franchise system is a "good fit" he or she will complete an application form.
An application form is far more detailed than an expression of interest form.
Typically the information contained in the application form will be used by the franchisor to assess the suitability of the prospective franchisee.
Consequently, an application form will include details such as:
In preparing an application form a franchisor should consider what information is needed to make an assessment of whether the prospective franchisee is likely to be successful in the franchise system.
Success indicators will vary between franchise systems. Some franchises are operated under management so the franchisee will need to have good management skills. Other franchises are owner/operated and may require the franchisee to have excellent interpersonal skills to build rapport with their customers.
All franchisees will be required to follow the systems created by the franchisor as consistency is key to a successful franchise system.
What you need to know about the difference between licensing and franchising.
If a prospective franchisee is accepted as an applicant he or she will then be provided with either a draft franchise agreement for review or a disclosure document with a franchise agreement in the form in which it is to be executed (together with supporting documentation).
The prospective franchisee is likely to seek independent advice at this stage.
A franchisor may also require a franchisee to pay a deposit, which is regulated by the Franchising Code of Conduct (the Franchising Code).
It is important that the application document and the disclosure document are consistent in relation to the information provided about the deposit.
Under the terms of the Franchising Code a franchisor is unable to receive a non-refundable payment unless the franchisor has received from the prospective franchisee a written statement that the prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Franchising Code.
In its disclosure document a franchisor must state why a deposit is required, how the deposit is to be applied and who will hold the deposit.
A prospective franchisee is unable to enter into or sign a franchise agreement until he or she has had the franchise agreement in the form in which it is to be executed for 14 days.
During the 14 day period the franchisor may amend the franchise agreement:
If the franchise agreement needs to be amended for any other reason, the prospective franchisee must be provided with a new disclosure document and franchise agreement (and supporting documents) and the 14 day period is required to start again.
The prospective franchisee is unable to waive this obligation.
Further, before the franchisee enters into or signs the franchise agreement and any other supporting documents, the franchisor must have received from the franchisee signed statements required under clause 10 of the Franchising Code.
After the franchisee has entered into or signed the franchise agreement, the franchisee has a further seven days to cool off.
If a franchisee cools off or terminates the franchise agreement, the franchisor must within 14 days repay to the franchisee all payments made under the franchise agreement less the franchisor's reasonable expenses (provided that the expenses or their method of calculation have been set out in the franchise agreement).
The information in this page is subject to our Terms and Conditions.
Restraint of trade clauses are common in franchise agreements and are designed to protect the...
Copyright © 2021 Haarsma Lawyers