In its simplest form, franchising is the right granted to the Franchisee to operate or use the business model and intellectual property of the Franchisor for a fee and on certain terms and conditions.
Franchising can result in the successful operation of a business using the experience and security of the Franchisor’s system. However there is no guarantee of success when purchasing a franchise.
There are advantages and disadvantages of operating a franchise.
The advantages include:
The disadvantages include:
We can assist you with:
Business is evolving. The systems and methods you develop now will probably be obsolete in 5 years. Franchisors need the flexibility to move forward with their new ideas and marketing concepts.
We prefer to journey into your business to better appreciate not only your current requirements, but to anticipate as best we can what they may be in the future. Our Agreements are designed with the future in mind.
A Franchisor will want to ensure:
Franchising can be a marvellous business opportunity for the right people. It can also be a disaster for others irrespective of the amount of effort put into the undertaking. Like all businesses there is an element of risk.
A Franchisee will want to ensure:
Central to the relationship between the Franchisee and the Franchisor is the Franchise Agreement which could endure for many years once executed.
Franchisors are reluctant to make any changes to their standard agreements.
Franchise agreements are known as “adhesion contracts”. Adhesion contracts favour the Franchisor because it is more efficient to deal with multiple franchisees without the individual tailoring of changes. A Franchisee may consider some of the terms unfair and one-sided but it is a point of view depending upon which side of the fence you sit on.
Generally however the clauses should not be unconscionable. Determining whether a clause is unconscionable involves complex principles of law.
It may be difficult to get a Franchisor to move from what might perceived to be an unconscionable term in the Franchise Agreement.
Many Franchisor’s will adopt a “take it or leave it” approach and not compromise on its position whatsoever.
The Franchisee will then need to make a commercial decision as to whether it wishes to pursue the undertaking knowing the risks or walk away.
There is no such thing as a standard franchise agreement. Unlike the common REIQ contract for the purchase of house and land, it is not a document that has been settled upon by a regulatory body. Consequently the Franchisor is in a position of power to craft terms that favour it to the detriment of the Franchisee.
Generally in our experience provided the changes don’t affect the “system” that the Franchisor requires each of its Franchisees to work within and comply with, there should always be room for negotiation of terms.
If a Franchisor is unwilling to negotiate on any terms then it may be better to withdraw from the deal then be bound by a document riddled with unknown risks and unconscionable terms. Franchise agreements are easy to get into but hard to get out of.
Franchisees may have a greater chance of success in negotiating terms if the franchisee brings something to the deal for example:
We would certainly recommend that negotiations on the following issues be undertaken by any prospective Franchise:
There will be numerous documents that a prospective Franchisee will be expected to sign which together are called the “Franchise Documents”. At all stages during the process we recommend legal advice be sought on all documents before signing.
The document bundle may include:
In response to the Franchise Application the Franchisor will send a Disclosure Folder which should contain:
The Disclosure Document which contains some (but not all of) that information a Franchisee may need in order to make an informed decision about whether to enter into the Franchise Agreement.
The Disclosure Document must contain the required information as required by the Franchising Code of Conduct set out in Annexure 1 prescribed under section 51AE of the Competition and Consumer Act 2010 (Code).
The required information in a Disclosure Document should include (amongst other things):
The Disclosure Document can run into hundreds of pages and requires careful scrutiny.
The Franchise Agreement is contained within the Disclosure Document.
Cooling Off - If it is a new Franchise Agreement (not a renewal, extension, extension of the scope or transfer of an agreement) the Franchisee is entitled to a seven day “cooling off” period after signing the agreement, during which the agreement may be terminated. "If the agreement is terminated during that period, the Franchisor must within 14 days return all payments made by the Franchisee to the Franchisor under the Agreement." However the Franchisor may deduct from that amount the Franchisor’s reasonable expenses, if the expenses for the method of calculation have been set out in the agreement.
It is absolutely essential that independent legal, accounting and business advice be sought before signing the franchise agreement. Franchises are easy to get into but hard to get out of.