Timing is everything when you buy a franchise: what to do and when
Planning to buy a franchise? Between undertaking your due diligence on the brand, speaking to other franchisees, inspecting possible site locations and perhaps securing finance, it is important not to forget the legal side of the process.
To make things easier, we have compiled this breakdown of the seven steps in the usual legal process of entering into a franchise agreement.
1. Make general enquiries before receiving anything
Before you receive any documents, or even ask for documents, you should make as many general enquiries with the franchisor as possible. Asking questions will give you a good idea about whether you want to, or should, proceed any further. These queries may relate to:
- the operation of the franchise system;
- how a business site will be selected;
- the initial costs;
- the system’s recent performance; and
- anything else you are concerned about.
Additionally, an internet search of the franchisor and each individual director is standard practice.
Franchisors often require a non-refundable (or at least partially non-refundable) deposit or another amount before providing you with any documents, so investigating a little before proceeding to any formal step could save you funds long term.
2. Sign a confidentiality agreement
If you have indicated that you are satisfied with the initial information the franchisor has provided and you are ready to take the next step, the franchisor will probably require you to sign a confidentiality agreement. This will occur before you receive the franchise documents or other confidential information.
The confidentiality agreement is generally short and straightforward, requiring you to agree not to use, share or disclose any of the franchisor’s confidential information you receive.
You may also wish to seek an assurance that any personal information you provide as part of the application process will also be treated as confidential.
3. Receive the franchise documents
Once you have signed a confidentiality agreement (and perhaps provided the deposit), you will receive the franchise documents, which importantly include the:
- franchise agreement
- disclosure document
These are the two key and essential documents in any franchise purchase. Generally, the franchise agreement will contain the information specific to you, for example, your company name and the specific territory you are acquiring.
However, it is also somewhat common for the franchisor to simply give you a copy of their standard agreement at first instance, which has not been tailored.
You will also receive a copy of the Franchising Code of Conduct and an Information Statement, which the franchisor must provide before you enter the agreement. You will be asked to acknowledge receipt of these documents.
4. Seek legal, business and accounting advice
Once you have received the franchise documents, it is time to seek professional advice. Look for a lawyer, accountant and advisor who specialise in franchising to ensure you receive the best advice.
A franchise lawyer will be able to:
review the franchise documents and identify key issues or risks contained in them;
explain how the documents will be interpreted in light of the Franchising Code of Conduct; and
help you negotiate changes to the franchise agreement if necessary
They will also be able to explain some of the important aspects of franchising law. This will help you to understand and monitor the franchisor’s obligations.
Importantly, even if you are completely happy with the terms of the proposed agreement, you cannot sign anything until you have had the document for at least 14 days.
Now that you are aware of any key issues with the franchise agreement, you should negotiate them with the franchisor. Your lawyer can manage this process for you and liaise directly with the franchisor or their lawyers.
Often, franchisors are willing to engage in the negotiation process and consider any reasonable requests, particularly in newer or more up-and-coming franchise systems.
The agreement must be a complete record of the deal struck. So if the franchisor makes some additional promise or assurance, you should request its inclusion in the written agreement. This is often in the form of a special condition or warranty.
As most franchise agreements contain ‘entire agreement’ and ‘no warranty’ clauses, it will be difficult to enforce the promise or assurance if it is not in the document.
6. Sign the agreement
As stated above, the Franchising Code requires you to wait at least 14 days from receiving the franchise documents before signing the franchise agreement. During this time, you can seek advice legal, business and accounting advice and negotiate.
Once the previous steps occur, you can sign. You should always sign two copies of the franchise agreement and disclosure document so both you and the franchisor have an original copy for your records.
You must execute the document correctly and make sure you also sign any receipts or acknowledgements. If you make any minor amendments by hand, all parties should initial them to indicate their agreement.
7. Note the cooling off period
Under the Franchising Code, you have the right to terminate the franchise agreement within seven days of signing the agreement or making a payment under the agreement (whichever is earlier).
Take careful note of the date you signed the agreement and mark the day which is seven days later to ensure you do not miss the window to terminate if you have reason to do so. If you exercise this right, the franchisor must, within 14 days, repay all payments you have made under the agreement, minus any reasonable expenses the franchisor has incurred.
Timing is everything in the process to buy a franchise. Mapping out the process means you will avoid snags or delays along the way, putting you one (or seven) steps closer to opening the doors of your new business.