The very nature of a franchise relationship means that a franchisor will invariably have the greater level of control and bargaining power, leaving a franchisee sometimes feeling they have little, if any, bargaining power.

Usually the time when a franchisee has the greatest bargaining power is when they are negotiating to acquire the franchise. Although the failure rate of franchises is reportedly relatively low, you should not enter into a franchise relationship on the assumption that the franchisor you have chosen is successful or even solvent.  

There are many things that you can do before you enter into a franchise agreement to protect your rights.  It is recommended that you have your lawyers review the prospective franchise agreement and disclosure document.

Do your due diligence

The importance of conducting a legal, accounting and financial due diligence on the franchisor before you enter into a franchise agreement is paramount. Under the Franchising Code of Conduct a franchisor is required to provide to a prospective franchisee a copy of the Code, the disclosure document, a copy of the franchise agreement in the form in which it is to be signed and an information sheet on the risks and rewards of entering into a franchise. The disclosure document must be provided to you 14 days before you can enter into a franchise agreement with a franchisor.

It is important that you take the time to read and understand these documents and the impact they will have on you. You will be asked to sign an acknowledgement that you have had a reasonable opportunity to read and understand them and seek advice on them. You should investigate the franchisor’s reputation, history, financial position and experience. Details of the franchisor and its associates must be provided in the disclosure document. 

You can also conduct searches such as company and bankruptcy searches on both the franchisor and its associates as well as trade mark searches. You should also see if the system has been pre approved and accredited by your financier.

The Code also requires a franchisor to provide in its disclosure documents a list of contact details for current and former franchisees who have left the system in the previous three financial years. It is also a good idea to contact these ex-franchisees to discuss their experiences with the franchisor and whether their departure from the system was amicable.

10 key questions to consider

Pay close attention to the details of the proposed business and the terms and conditions of the franchise agreement, you should be asking yourself the following questions (amongst many other things):

1.            Has proper disclosure been provided?

2.            Does the franchisor have a good compliance culture in their organisation?

3.            Do you get the right to an exclusive territory or can the franchisor grant other franchises or operate (or allow its associates to operate) the same or similar businesses in competition with you?

4.            Has the territory previously been occupied by another franchisee and what were the circumstances of their exit?

5.            How long is the term and renewal term (if any); do you get a right to renew or extend the franchise?

6.            What are the fees and expenses required in establishing and operating the franchised business?

7.            Who holds the lease of the premises? If you don’t, do you get a sublease or licence?

8.            Does the lease allow you to operate a franchised business for the full term of the franchise agreement?

9.            Have you factored in the nature and extent of refurbishment required by the franchisor and landlord and other significant capital expenditure you may have to incur during the term?

10.          What are your rights in the event that the franchisor sells the franchise system? For example, must the franchisor obtain a deed of covenant in your favour from the incoming franchisor to observe the terms of your agreement as if it was named in your agreement in the event that this occurs?

Negotiate

Often, and particularly with larger franchise networks, franchisor’s will only use one standard form franchise agreement. They typically are reluctant to negotiate its terms with prospective franchisees although in many cases a willingness to negotiate the terms may demonstrate how reasonable and commercial they are. 

Typically franchisors argue they do not want to amend them to ensure consistency throughout the network. Because of this, many prospective franchisees will not initiate negotiations regarding the terms and conditions of their franchise agreement, thus increasing the bargaining position of the franchisor. 

It is often the case that a franchisor will accommodate reasonable requests for amendments, or special conditions to their standard form franchise agreement, particularly in smaller networks that are seeking to increase their numbers. 

Remember that often franchise agreements have few if any obligations imposed on a franchisor while having significant obligations imposed upon a franchisee.

Seek advice

Before entering into a franchise agreement, it is important that you seek advice from your lawyer, accountant and business advisor. You should also get advice on insurance requirements from your broker as well as taxation advice on the most appropriate structure to use to acquire and operate the franchise.