I’m looking to buy a franchise and have been presented with a lengthy contract. Are there any particular clauses I should watch out for and query with my franchisor?
The highest priority when considering any franchise and the contractual documentation associated therewith is to engage the services of a solicitor who specialises in business law, or even more specifically, franchise law.
These specialist practitioners can be sourced via the respective state Law Societies, or by searching for them on the Franchise Council of Australia website.
In essence, there are two main documents you need to closely and carefully consider, both of which are compulsory for franchisors to provide to all prospective franchisees.
These are the disclosure document which, in essence, details the ownership, managerial and operating history of the franchisor, and the actual franchise agreement.
There may also be other documents such as a confidentiality agreement, which might also accompany the disclosure document and franchise agreement.
Counsel also needs to be sought on these documents too, prior to execution.
In regard to the key areas of the disclosure document which need to be addressed, careful consideration should to be given not only to the entity who actually owns the franchise business – its directors, shareholders and financial position – but also to the operating history of the franchise.
Franchisors are required to detail in the disclosure document any of their franchise outlets which have closed. If any such outlets are listed in this document, detailed questions should be asked of the franchisor as to why these businesses closed, and the reasons and explanations applied to your overall due diligence process.
The disclosure document should also detail the current management structure of the franchise organisation.
Careful consideration needs also to be given to the experience and skills of the management team, in order for you to make an assessment on their capability to maintain and grow the franchise group as a whole.
In regard to the key areas of the franchise agreement, careful consideration needs to be given to such areas as the term, non-compete, franchise renewal and supply provisions.
In regards to term, and in the case of retail franchises, you essentially want to ensure your franchise agreement runs concurrently with the term of your premises.
In regards to the non-compete provision, you need to clearly understand what restrictions, if any, exist which might preclude you from operating a “similar” style of business while you own and operate your franchise.
For example, if you were to buy a cafe franchise, could your husband or wife then go and set-up an independent cafe?
In regards to the franchise renewal, you need to be clear on what will happen at the end of the franchise agreement, whether you have any option in your favour to renew, and what the likely costs will be.
In regards to supply, you need to have a very clear understanding of which suppliers, if any, you are obligated to purchase from under the franchise agreement.
Many franchise business models are established on the basis of the franchisor being the major supplier, so you need to be completely comfortable with that being the case, and ensure that this relationship is clearly explained to you prior to formalising any agreements.
Please note, the opinions given here are based on my business experience. They should not be taken in any way as being legal advice.
As stated at the outset, all prospective franchisees, and independent business owners for that matter, should take counsel from an experienced and reputable business and/or franchise solicitor prior to entering into any formal agreement.