I’m considering a franchise agreement. Anything I need to know?

By 7 March 2017General

Yes! There’s a lot you need to know!

What is a franchise agreement?
Franchise agreements set out the rights and obligations of the franchisee and the franchisor. Franchising is the selling of a successful “business formula” which has been developed and previously tested by the franchisor.

Don’t expect to be able to negotiate the terms of a franchise agreement
You will be required to sign the same agreement that every other franchisee has been required to sign. Franchisors want all franchisees to be working to the same requirements. If you have managed to negotiate something outside the ordinary terms with the franchisor then this is likely to be reflected in “special conditions” to the franchise agreement or will be recorded in a “side letter”.

Before entering into a franchise agreement
Whilst you are investigating the franchise opportunity the franchisor must give you:

  • An information statement – a short document which sets out some of the risks and rewards of franchising; and
  • A disclosure document, the franchise agreement, and a copy of the Franchising Code at least 14 days before you sign a franchise agreement or make a non-refundable payment.

You should carefully read each of these documents.

Franchising Code of Conduct
Your franchise agreement is regulated by the Franchising Code of Conduct which is administered through the Australian Competition and Consumer Commission. The Code provides for the following protections:

  • Mandatory disclosure of information from the franchisor, including financial details, directors’ interests, franchisee list, and litigation information;
  • A 7 day cooling-off right after signing the franchise agreement; and
  • The right to mediate disputes;

How long does a franchise last?
The length of a franchise agreement may be as short as 1 year, but generally are for 3 or 5 year terms. Options to renew may also be available.

The territory
Some agreements will specify a territory outside which the franchised business may not operate.  The territory can be defined in a number of ways including Council areas, a postcode or a particular shopping district. Make sure that the territory is defined accurately. You will need to check:

  • Have you been granted exclusivity for the territory or can the franchisor grant other franchises to other franchisees or run similar businesses within your territory?
  • Whether the territory can be changed by the franchisor without your consent.

What can you expect to pay for a franchise?
Prices vary greatly. Service franchises, which mostly operate without need for shopfront premises, may cost from $5,000 to $50,000. Those franchises which require shopfront premises, shop fittings, stock, etc, may cost from $50,000 to $250,000 or more. Existing franchise businesses for sale may not be at the same price as new franchises for sale – a variety of factors such as goodwill, depreciation of equipment and fittings, stock levels, and lease terms will have an affect upon price.

Setting prices
Franchisees can set their own prices. Franchisors can provide a recommended price list, but they cannot set prices or a minimum price, although they may set a maximum price.

Sourcing stock and services
A franchisor that requires franchisees to purchase goods or services only from a particular supplier or a list of nominated suppliers may be engaging in ‘third line forcing’. This is a form of “exclusive dealing” and is prohibited by the Competition and Consumer Act 2010, however, a franchisor can seek to be exempted from legal action by lodging a notification with the Australian Consumer and Competition Commission.

A franchisor may require franchisees to purchase goods or services from the franchisor or a related company. These arrangements will not be subject to challenge, so long as they do not have the purpose or likely effect of substantially lessening competition.

One-off and recurring fees
One-off fees payable under a franchise agreement can include the following:

  • Franchise fee – for the initial grant of the franchise;
  • Training fee – for the training provided by the franchisor before trading commences;
  • Renewal fee – payable upon the renewal of the franchise agreement if there is a renewal option;  and
  • Transfer or assignment fee – payable by the franchisee upon the sale of the franchised business to a purchaser.

Recurring fees may be either fixed as a percentage of the franchisee’s turnover or be a “flat fee”.  Recurring fees are most often paid monthly. Franchisees may also be required to pay into a central advertising or marketing fund. It is important that you are aware of your financial obligations under the franchise agreement.

How do I know I am dealing with a reputable franchisor?
Potential franchisees should always ask for proof of membership of the Franchise Council of Australia. The Franchise Council of Australia is committed to best practice in franchising, and encourages all franchisors to aspire to the highest possible standards of franchising conduct.

Should I talk to other franchisees?
Absolutely. A list of franchisees should be included as part of the disclosure information franchisors must provide by law. Contact several franchisees, especially those who are in locations near the one you are considering. Also consider contacting franchisees who have left the franchise system – they may be prepared to speak very candidly! Beware of a franchise system where there is a high turnover of franchisees.

Where can I find out more information?
The Franchise Council of Australia publishes and sells several books on franchising which are recommended reading for anyone looking to buy a franchise.

Where do I go for advice?
In the course of buying a franchise, you will need specialised legal, financial and accounting advice.

Article By: David Koschitzke