Don’t get swamped by paperwork as a franchise buyer. Here’s our easy cheat-sheet for the documents you will come across when you buy a franchise.
Investing in a franchise may not be the most tree-friendly venture. You may be a little overwhelmed by the volume of paperwork presented for signing. However, be assured, each document has its purpose.
Franchise application
This is usually the first document to be signed and is used by the franchisor to assess a prospective franchisee. It may incorporate or accompany a confidentiality agreement to ensure you keep all information regarding the negotiations or anything you may happen to learn about the system, confidential. In response, the franchisor should send you an Information Statement for Prospective Franchisee.
Contract of business sale
If you are purchasing an existing business from a current franchisee, or corporate-run store from the franchisor, then a formal business sale contract must be signed with the seller. This does not apply to the grant of a new franchise by the franchisor or a greenfield site. The conditions in any business sale contract are very important and should be discussed with and negotiated by your lawyer to suit the particular business and circumstances.
Receipt for disclosure document
If the franchisor approves your franchise application, you will be given a disclosure document. You must sign the receipt on the final page and return it to the franchisor. This is merely a receipt and does not bind you to anything. This must be received at least 14 days before the franchise agreement is signed and must include a copy of the franchise agreement in the form in which it is to be signed as well as a copy of the Franchising Code of Conduct.
Franchise agreement
The franchise agreement embodies the agreed terms for the grant of the franchise and the obligations of you and franchisor throughout the term. The franchisor will require this document to be signed before settlement/start of operations and may want it signed before training starts.
Section 10 statements
Section 10 of the Code requires you to sign a statement stating:
- that you received, read and had a reasonable opportunity to understand the disclosure document and the Code; and
- whether or not you received independent legal, accounting or business advice before entering into the franchise.
Some franchise systems will require you to have a further certificate completed by your advisor if you obtained such advice.
Prior representations deed
Many franchise systems require franchisees to sign a prior representations ‘deed’ or ‘statement’. Sometimes this is included within the franchise agreement. It essentially prompts you to answer a series of questions about promises or statements made by the franchisor which you have relied on to enter into the franchise. This is very important because if a statement is not included then it will be difficult to raise and rely on it at a later time.
Ancillary documents
There are sometimes side or ancillary agreements covering matters not set out in the franchise agreement. That ancillary agreement may sometimes be between you and a third party. For example, if the franchisor requires you to use a specific software system, there may be a software licence agreement between you and the owner of the software.
Lease
If you operate from a fixed location, then unless you own the land, you will need to sign a document to give you the right to occupy the premises.
Sometimes the franchisor will hold the lease in its own name or in the name of a related entity and licence occupation of the premises to you. You will in this case need to sign a licence to occupy.
Otherwise, the following documents will generally apply:
a. Lease application: Similar to a franchise application, this is the form given by you to the landlord.
b. Offer to lease: The offer to lease will usually be issued after the landlord approves your application and will set out the key terms that will form the foundation of the lease.
c. Disclosure statements: If it is a retail lease, then each state and territory has certain statements you must sign, which generally include disclosure about you and the landlord, and confirming you received legal and accounting advice. These are mandatory forms in the format prescribed by the applicable retail leases act.
d. Agreement for lease: If the premises are still under construction, or the landlord is contributing to your fitout costs, then an agreement for lease might be signed concurrently with the lease.
e. Lease: A lease or sublease embodies the agreed terms for the grant of the lease and the obligations of you and the landlord throughout the term.
f. Incentive deed: If the landlord is providing a fitout contribution, rent-free period or other incentive which isn’t set out in the lease or agreement for lease, then it may be documented by an incentive deed.
g. Step-in deed: The franchisor may require you and landlord to sign a step-in deed. This entitles the franchisor to step in and take over the lease in certain circumstances, such as you breaching the lease or franchise agreement, or when the franchise agreement ends.
Licences
Depending on the type of business, you will need to apply for certain government or council licences. For example, a mobile franchise will need vehicle registration and a food service business will need a food licence.
Get legal advice
Always remember to read any document before you sign it, and if in doubt, obtain legal advice. Never rush. These documents are legally binding, so you should always take the time to fully understand the purpose and consequences of signing each document.