The Franchising Code of Conduct provides for a seven day cooling off period with a franchise agreement.
What is it?
When a franchise buyer signs a franchise agreement or pays a fee (whichever comes first), there is a seven day cooling off period that takes immediate effect.
Under the Franchising Code of Conduct, the franchisee is entitled to be refunded the money paid (minus reasonable expenses) if they decide within that week to exit the franchise.
What are the expenses?
Costs incurred through any training undertaken by the franchisee are unlikely to be returned.
There will most likely be additional expenses too:
- Costs in store fit-out
- Equipment hire or purchase
- Cost of stock, uniforms
- Marketing material
- Bank, lawyer and accounting fees
- Any charges for business registration
It is quite likely that a franchisee who chooses the cooling-off period to exit the franchise will be financially worse off than if they had never signed a franchise agreement.
What are the legal issues?
Even though the franchise agreement is ended when the cooling-off period is actioned, there will remain legal obligations in place. For instance, the now former-franchisee will be bound by any restraint of trade clauses or trademark use restrictions.
Why use it?
It’s a safety net for franchisees who realise they have made a serious error in their purchase. However, it shouldn’t be relied on as a get-out clause.
When a franchisee signs up to a franchise agreement, they will have been given the appropriate documentation to review. That is the best time to decide whether or not the franchise is right for them.
It is wise for anyone purchasing a franchise to seek legal and accounting advice before signing an agreement.