Franchised businesses differ from other businesses in a number of ways.  They essentially offer the ability to run your business utilizing the franchisor’s “system” in a way that allows you to gain benefit from the name, marks, brand, image, and general “know-how” of a much bigger and more expansive organization.

Whilst operating a franchised business provides you with a great number of benefits, there are nonetheless a number of pitfalls that prospective franchisees need to look out for when entering into their franchise agreements.

Franchising in Australia is governed by the Franchising Code of Conduct which operates to regulate the conduct of both franchisors and franchisees.  As an offshoot of the Australian Competition and Consumer Regulations, it also provides for sanctions against non-complying entities.

At its most fundamental level, the Code dictates that before you enter into a franchise agreement, the Franchisor must provide you with a copy of the following documents:

1. A copy of the Code;
2. A copy of the franchisor’s “Disclosure Document”; and
3. A copy of the Franchise Agreement in the form in which is to be executed by you, at least 14 days before you enter into the Franchise Agreement or make a non-refundable payment to the franchisor.

Disclosure Document

The Disclosure Document  is designed to provide you with as much  information as possible so you can make an informed decision when considering entering into a Franchise Agreement with the franchisor.  Although it is important that you consider all of the information contained within this document, I generally advise my clients to pay particular consideration to the following:

1. The experience of the Franchisor, including its management and directors;
2. Whether the Franchisor has been involved in previous litigation or other Court proceedings;
3. Details of other current franchisees and their locations;
4. The number of franchisees that have exited the system;
5. Details of costs and expenses that may be passed on by the Franchisor to you; and
6. The Franchisor’s financial reports and accounts.

Franchise Agreement

Your franchise agreement is just like any other contract and as such it is imperative that you read it and fully understand it before signing it.  Considerations that you should pay particular attention to in this document include:

1. Whether or not your site and/or territory are exclusive to you and whether or not the Franchisor can grant additional franchises within your area or even operate their own business in competition with you.
2. The extent of the fees, levies, and/or other expenses that you are required to pay under the franchise system.
3. The exact nature of the rights that you are granted under the franchise system and the restrictions on your use of the franchisor’s brand.
4. Whether or not the lease of your business premises is to be held in your name or in the name of the franchisor.
5. Whether or not you are required to undertake a fit-out or refurbishment of the business premises during the franchise term.
6. The extent of the training/assistance that will be provided to you by the franchisor at the beginning of, and throughout, the franchise term.
7. The process that is involved should you wish to sell your franchised business at some stage in the future.

Whilst franchised businesses can be easier to operate than other businesses in many circumstances, they are accompanied by very specific restrictions in the way in which you are able to operate your business to ensure that the Franchisor’s interests are protected.  For this reason it is essential that anyone considering entering into a franchise agreement seeks legal advice before doing so.