Top 10 tips for first time franchisees

Franchising has enjoyed considerable growth in the past few decades. Since 1998, the franchising sector has been regulated by the Franchising Code of Conduct (the Code).

The Australian Competition and Consumer Commission (ACCC) has been monitoring compliance with the Code since its introduction, and has not shied away from instituting court actions against non-compliant or recalcitrant franchisors. This regulatory environment has certainly lifted the profile of the franchising sector and has served to filter out, and keep out, many franchisors who are not serious about franchising and who are not prepared to comply with the Code.

The following are ten tips that a prospective franchisee should consider before buying a franchised business:

1. Business structure

There are a number of different business structures that a franchisee can adopt. A decision as to the business structure to be adopted by the franchisee needs to be made early on and certainly before signing any of the franchise agreement. Some of the reasons for adopting the correct structure right from the outset include: minimising personal risk, protecting personal assets, and making the purchase and the subsequent sale of the franchised business more tax effective.

2. Due diligence

All prospective franchisees should do their homework and undertake extensive research before investing in a franchised business.

3. The location could be the key to success

If a prospective franchisee is contemplating buying a franchised business that operates from a fixed location, there needs to be additional due diligence performed in respect of the location.

Careful consideration needs to be given to the particular area where the franchised business will be based, the demand for the goods and/or services offered by the franchised business within that area, and any direct and/or indirect competition to the franchised business in that area – both immediate and in the future.

4. Preliminary meetings with the franchisor

A prospective franchisee should take comprehensive notes in each meeting or discussion with the franchisor or its representatives – both prior to and post entering into a franchise agreement with the franchisor. Any representations or promises made by the franchisor before the prospective franchisee enters into the franchise agreement should be reflected in the franchise agreement. This may become crucial in the event of a dispute with the franchisor years later, after the franchise agreement has been signed, and after the franchised business has been operating for some time.

5. Other franchisees

Other franchisees can be an invaluable source of information about the franchisor, its business and its system. Prospective franchisees should endeavour to make contact with as many franchisees as possible. Their details should be in the franchisor’s disclosure document.

6. The disclosure document

Pursuant to the Code, the franchisor must – at least 14 days before the franchise agreement is signed or before accepting non-refundable money – provide to every prospective franchisee the following:

• A disclosure document in the form prescribed by the Code; and

• A copy of the Code.

Among the suite of documents a prospective franchisee may be asked to sign, there could be the following additional documents:

• A confidentiality agreement. This is usually required to be signed before the franchisee can receive any information about the franchise system and/or any of the franchise documents;

• Where the franchised business operates from a fixed location, which is leased by the franchisor, the franchisee may be asked to sign either a license agreement (pursuant to which the franchisee is granted a license to occupy the location) or a sublease (pursuant to which the franchisee is granted a sublease of the location);

• Where the franchised business operates from a fixed location that is to be leased by the franchisee, the franchisee will need to sign a lease in respect of the location;

• Where the franchised business operates from a fixed location that is used for retail purposes, a disclosure statement in respect of the lease may be required to be provided, pursuant to various retail legislation that applies to retail premises around the country. Unlike the Code, which applies nationally, each state and territory has different legislation governing retail leases.

• Where a prospective franchisee is buying an existing franchised business from another franchisee, there will be additional documents, including a contract of sale of business and possibly a trading statement for franchised businesses in Victoria and South Australia.

7. The franchise agreement

At the same time as receiving the documents detailed above, a prospective franchisee will no doubt receive a copy of the franchisor’s standard franchise agreement. The franchise agreement is the most important document in the suite of documents as it will govern the legal relationship between the franchisor and the prospective franchisee for the duration of the term of the franchise.

8. Cooling off right

One important matter that is often overlooked is the fact that, once a franchise agreement has been signed or money has been paid pursuant to a franchise agreement, a prospective franchisee has a seven-day ‘cooling off period’.

9. Employment issues

A prospective franchisee should give careful consideration to all potential employment issues, which may arise when entering into a franchise arrangement. This includes, but is not limited to, statutory entitlements, terms and conditions of employment, applicable industrial instruments, termination of employment, equal opportunity and occupational health and safety obligations. These issues should be discussed in detail with a legal advisor prior to signing any franchise agreement.

10. Costs

Among the types of costs a prospective franchisee can expect to pay are the following:

• The franchisor's legal and/or administrative costs, associated with the drawing of the franchise documents, including the franchise agreement and any license agreement or sublease;

• If there is a lease of the location, and subject to retail legislation providing otherwise, the landlord's legal costs associated with the lease documents; and

• The franchisee's own legal and accounting costs associated with obtaining advice in respect of the franchise documents, the lease documents (if any) and any of the ancillary documents mentioned above.

The Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.