3 must-avoid franchisee legal mistakes

By Nick Hall | 06 Mar 2019 View comments

Want to avoid costly franchisee legal mistakes? When you are assessing a franchise venture, you may find yourself looking at your potential expenses, searching for any opportunity to reduce costs.

In some cases, a new franchisee may opt to forgo legal advice, which may delay the initial outlay of expenses but will ultimately cost them more in the long run.

In business, mistakes can be costly, particularly when it comes to legal disputes. Here, Inside Franchise Business takes a look at the top three franchisee legal mistakes and how you can avoid them.

1. Not reading the fine print

When launching a franchise opportunity, you may feel overwhelmed at the amount of paperwork involved. While this is yet another reason to consult a franchise lawyer, it also calls into question your comprehension of the information.

To avoid making franchisee legal mistakes, you must have a firm understanding of your franchisee responsibilities and the role of your franchisor.

Marianne Marchesi, founder and principal of law firm Legalite has seen instances where a lack of understanding has cost the franchisee deeply.

She explain a real-life situation where a franchisee signed a ‘prior representations deed’ before signing the franchise agreement. A year later, certain promises made by the franchisor didn’t eventuate.

“Unfortunately, the franchisee didn’t realise the importance of the prior representations deed and the franchisor relied on this as evidence that promises were never made,” Marchesi said.

Reading the fine print is more than a common phrase, it is an absolute must for avoiding franchisee legal mistakes.

2. Franchise or not?

While a rare occurrence, some franchisees may not even realise they are franchisees at all.

In some cases, a prospective business venture may not be presented as a franchise opportunity, when in actual fact the terms of the arrangement falls under the description of a franchise agreement.

In 2018, Husqvarna Australia admitted it had misled franchisees by suggesting the Franchising Code of Conduct did not apply to their contracts.

An investigation by the ACCC found that Husqvarna’s “dealership agreements” were consistent with a franchise agreement, thus entitling dealers to additional protections and support.

“If an agreement meets the definition of a franchise agreement it will be covered by the Code regardless of whether it’s referred to as a ‘franchise agreement’ or not,” ACCC deputy chair Mick Keogh said at the time.

“By claiming that the dealership agreements were not franchising agreements, Husqvarna likely gave dealers the impression that they were not entitled to protections under the Franchising Code.”

Once again, consultation with a franchise law professional should uncover any discrepancies in the agreement, alerting you to any issues that may cost you in the long-run and reducing the risk of making costly franchisee legal mistakes.

3. Engaging in legal disputes

Any sort of legal dispute or challenge will be a costly exercise, regardless of whether it is successful or not.

Should the franchisee enter into an agreement that has unfair terms, such as the unilateral raising of a particular fee by the franchisor at any time, they may be inclined to pursue legal action.

While this is obvious and correct course of action, Marianna Marchesi suggested that a good franchise lawyer would have been able to identify the unfair contract terms before the costly battle ensued.

“Even if it was successfully challenged, a good lawyer would have had this clause struct out at the negotiation stage, thereby avoiding the need to incur further costs in disputing the clause” Marchesi said.

The cost of franchisee legal mistakes

While there are a number of potential legal issues that may arise in any franchise business, Marchesi said the most important take-away is for prospective franchisees to consult a legal professional.

“At the very least, franchisees should understand their obligations under the franchise agreement before signing,” she said.

“Not only that, but many disputes can be avoided if franchisees seek advice on the franchise arrangement and therefore avoid any surprises down the track”.

For anyone considering a franchise opportunity, the reality is that legal advice is the number one investment you can make to ensure your operation is compliant, protected and free from costly franchisee legal mistakes,

When you consider the overall cost of buying a franchise, getting legal advice is a very small portion of this,” Marchesi said.

“While it may sting you at first, it can not only save you thousands of dollars in the future, but also considerable heartache and emotional energy.”