What happens if I go into a franchise and it bombs? Will I have to go to court?
Thursday, August 9, 2012/
Having read about the problems faced by Billy Baxter’s franchisees, how can I be certain that I won’t suffer losses if I buy a franchise? And is the only recourse to drag the franchisor to court, as in this case?
Answer co-written by Leanne Scott of Carter Lawyers
It is always important when entering into a business venture, whether it is a franchise or otherwise, to obtain your own legal and accounting advice. Don’t just take the franchisor’s word for it, do your homework. If you are not clear, ask for clarification from the franchisor.
Consider in advance the requirements for the business, for example permits, licences, registrations; employees needed to support the business; customer and supplier relationships; lease duration, franchise terms and other relevant agreements.
In particular, look carefully at the profitability of the business – revenue and expenses, as well as security of profitability and growth opportunities.
Research the viability of the business model. If possible, talk to other franchisees within the same franchise, or other business owners in the same field, taking into account the location and other varying factors. Get your accountant to review the accounts, if it is an established business.
The franchisor is required by law to provide, at least 14 days before signing the franchise agreement, a disclosure statement containing much of the information you should know about the business. If the franchisor makes any representations which deviate from the disclosure statement, get it in writing.
Before you sign the franchise agreement, have a lawyer experienced in franchise agreements advise you as to the important terms you need to be aware of.
Know your rights and minimise risks.
All too often I have had clients come to me when it is too late. They have breached the franchise agreement, and complain afterwards that the business was not profitable.
As seen in the Billy Baxter’s Glenelg franchise case, the Pollards had to go to great expense and stress of bringing court proceedings, including an appeal, to obtain a judgment.
In the end it seems the judgment was a hollow one, as the franchisor is unable to pay the damages awarded to the Pollards. This can all be prevented by doing your homework and obtaining legal and accounting advice before you enter into the franchise.
This answer was co-written by Leanne Scott of Carter Lawyers
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