4 franchise documents every franchisee needs to review
Franchising is governed by a strict set of rules and regulations, many of which revolve around documentation. But with so many lengthy agreements and franchise documents to review, how can new franchisees get a grip on the facts?
The Franchising Code of Conduct requires franchisors to provide a disclosure document setting out prescribed information to all potential franchisees. This document includes the proposed franchise agreement that you will need to sign which contains the terms of your franchise.
There may be other franchise documents that you will need to consider, depending on the nature of your franchise.
What information can you expect to find in the various franchise documents?
This document contains information regarding the franchisor and the franchise system including:
- the franchisor’s financial details for the past two financial years;
- contact details of existing franchisees;
- changes in the number of franchisees in the last three years;
- franchisor’s conditions for the supply of goods and services to the franchisee;
- restrictions imposed on the sale of goods and services by the franchisee (including online sales);
- site restrictions;
- the various payments that the franchisee will need to make to the franchisor;
- initial estimated set up costs and other ongoing costs;
- whether a marketing fund is operated by the franchisor;
- what happens at the end of the franchise term.
This is the agreement that is specific to your franchised business and salient clauses will include:
- the term of the franchise;
- your rights as franchisee to use the franchisor’s intellectual property to carry on the business;
- start up and fit out requirements;
- continuing obligations regarding the operation of the franchised business;
- training requirements;
- fees payable to the franchisor;
- assignment procedures;
- franchisor’s rights;
- termination rights of both parties and procedures on termination.
Where the franchised business is operated from a fixed location, you will need to be satisfied with the lease terms as you will be the responsible party either directly under the lease or as sublessee or licensee of the franchisor.
As franchisee, you are either required to take up a lease in your/your company’s name or enter into a sublease or licence with the franchisor. The latter is an arrangement where the franchisor is the lessee on the lease who, with the consent of the landlord, subleases/licenses the premises to you.
What to look for in premises leases?
The important terms to focus on are:
- the term (this needs to mirror the franchise term)
- whether there are options to renew (to mirror renewal terms in the franchise agreement)
- procedures to be followed for lease renewal
- maintenance and refurbishment requirements
- relocation requirements – especially when you are negotiating the lease directly with the landlord as these may impact on your obligations under the franchise agreement
- commercial terms – rent and outgoings
- other responsibilities as lessee;
- assignment procedures and rights (these need to be read in conjunction with the franchise agreement to ascertain the complete assignment process);
- default provisions and termination rights of both parties
Where the premises are retail premises, a disclosure document detailing outgoings payable by the lessee, the commercial terms of the lease, alteration/redevelopment works planned or known to the landlord and other representations made by the landlord are also provided by the landlord.
Other important issues regarding the premises:
- consult the local planning scheme and council to check the premises are within a zoning which allows the operation of the proposed franchise
- check for proposed amendments to the planning scheme in the pipeline which may affect the continued operation of the franchised business.
Other documents required by the franchisor
These are generally franchise documents that the franchisor requires you to complete to give effect to your obligations under the franchise agreement. For instance, you are required to keep all confidential information of the franchisor and the franchise system confidential. You will need to sign a Deed of Confidentiality.
Similarly with the personal guarantees franchisors require directors of franchisees to provide, a Deed of Guarantee and Indemnity will need to be signed by the directors of your company (if you are using a corporate entity to operate the franchised business).
It is important that the plethora of documentation that you need to review and sign does not have conflicting terms and there are provisions that cater for your future intentions with regards to your franchised business.