Useful advice for prospective franchisees

By Sarah Stowe | 29 Oct 2015 View comments

One of the most serious mistakes a prospective franchisee can make… is to fail to conduct proper investigations and obtain as much relevant information as possible before making a final decision whether or not to purchase the franchise.

IMPORTANCE OF LEGAL, ACCOUNTING AND BUSINESS ADVICE

The Franchising Code of Conduct recognises the importance of obtaining legal, accounting and business advice.

It requires that franchisors receive a statement from franchisors outlining that they have obtained, read and understood such advice, or at least, a statement that the franchisee has been informed that they should obtain this advice but has decided that he or she does not wish to obtain the advice.

The legal advice that a prospective franchisee should obtain before making a decision to purchase a franchise needs to be of genuine value to a prospective franchisee and assist him or her to make the decision in a real and significant respect.

Legal advice about Franchise Agreements is of value to a prospective franchisee and assists him or her in the decision-making process, if it not only provides an explanation to the prospective franchisee about the key legal terms of the Franchise Agreement, and the obligations that these terms impose on franchisees.

It also brings to the attention of the prospective franchisee:

  • The relevant enquiries the prospective franchisee should make;
  • Matters of uncertainty arising from the Franchise Agreement or the Disclosure Document provided to the prospective franchisee by the franchisor which should be clarified;
  • Identifiable commercial risks arising from the legal obligations imposed by the Franchise Agreement.

FRANCHISE LEGAL MATTERS

When seeking legal advice on Franchise Agreements, it is important franchisees ensure their lawyer considers a range of matters, all or some of which may be relevant to a particular Franchise Agreement.  

Just some of these matters include the following:

  • Whether or not the Franchise Agreement incorporates other documents such as an operations manual which expand the range of obligations with which a prospective franchisee must comply;
  • Whether the Franchise Agreement requires the franchisee to acquire approved products or products from approved suppliers, and the possible risks or benefits of this to the prospective franchisee;
  • Whether the franchisor provides leads to the prospective franchisee and whether the franchisee must pay a fee for these leads, whether or not the leads lead to income earning clients or income earning work for the franchisee;
  • Whether the Franchise Agreement requires directors of corporate franchisees to provide guarantees and whether the guarantors’ obligations under these guarantees are secured by mortgages, charges or other securities over the guarantors’ personal property;
  • Whether the Franchise Agreement allows the franchisor to unilaterally change the terms of the Franchise Agreement so that the franchisor can unilaterally impose on the franchisee different or additional obligations;
  • Whether the Franchise Agreement and Disclosure Document fully disclose the costs of establishing a new franchise business;
  • Whether the Franchise Agreement and Disclosure Document fully disclose one-off and recurring charges or expenses so that the franchisee can factor these into projections on the costs of acquiring and running the franchise business. 

These are just some of the many factors that a prospective franchisee should consider and in respect of which he or she should obtain legal advice.

 Bill Morgan is a franchise law specialist at Morgan Mac Lawyers.