Buying a franchise, like any major business decision is no certainty for success. Three things you can be certain of prior to signing a franchise agreement, however, are stress, anxiety and the often-dreaded paperwork.
It’s perfectly normal to feel anxious or stressed about a new venture, it is one of the accepted aspects of entrepreneurship. Where you must be diligent though, is in your understanding of the franchise agreement.
The franchise agreement can be a lengthy document, full of legal jargon and industry-specific knowledge. Regardless of how complex it may seem, it is imperative that you are fully across all elements of the document prior to signing.
So, how can prospective franchisees ensure they are making an informed decision? Here’s three warning signs to watch out for in your franchise agreement.
1. Compliance standards
All franchisors, and franchisees for that matter, are bound by a strict set of regulations outlined in the Franchising Code of Conduct.
There are a few ways you can measure your prospective franchisor’s compliance, starting with the disclosure document.
Check whether the disclosure document provided to you is the same format set out in the Code and has been updated after the last financial year. Additionally, has the franchisor acted in accordance with the Code’s good faith obligations?
Esther Gutnick from MST Lawyers said while this might be a confusing process to undertake, determining your franchisor’s commitment to compliance could save you grief in the long-run.
“If you don’t want to do this yourself, a franchise lawyer can review the documents provided and advise you as to whether the franchisor appears to be compliant with the Code and other relevant legal requirements,” she said.
2. Representations
Frequently, when a franchisee becomes disgruntled, the cause of their discontentment is the franchisor’s failure, real or perceived, to fulfil certain promises or assurances which the franchisee believes were made to them during the course of the application and sale process.
These promises are often referred to as representations of inducements and can cause a rift in the franchise network.
Gutnick suggests note-taking can help you to keep an accurate record of conversations between you and the franchisor.
“If you believe the franchisor has made any specific promises or offered you any particular incentives to enter into the franchise, be sure to document these fully and advise the franchisor, in writing, of the relevant details,” she said.
The experience franchise lawyer said that in some cases franchisor will require insurance with regard to representations, something all new franchisees should be aware of.
“Franchisors often request that franchisees complete and sign a document commonly known as a “prior representations” statement or certificate,” Gutnick said,
“This allows the franchisee to set out the terms of any promises or incentives made to them. If you sign such a document, ensure that you complete details of all relevant promises. If you don’t, it may be hard to claim at a later date that you relied on these promises when deciding to buy the franchise.”
3. Contentment in existing network
Regardless of how the franchisor sells you on the prospective business, it is critical that you speak to the existing network of franchisees. These are resources that can provide an in-depth and accurate representation of the day-to-day running of the business.
If you consult the existing network and uncover a series of rifts between the two parties, it may reveal a larger issue at hand. You can find existing franchisees’ details in your disclosure document.
“Movement of franchisees within the franchise network can be a telling sign,” Gutnick said.
“If a significant proportion of the franchisees have recently left the network, this may indicate a lack of contentment among the franchisees or a franchisor engaging in “churning and burning” behaviour. At the very least it might indicate a level of disharmony between the franchisor and its franchisees.
Getting to know your franchise agreement
It is one thing for the key terms of the deal to be negotiated and agreed upon, but quite another to ensure that the paperwork accurately reflects your agreed terms.
Remember, understanding your franchise agreement is your responsibility. It is critical that you are across all aspects of the document; it may save you a wealth of time and grief later on.