Buying a franchise?

06 May 2009 Topics: Franchising

Buying a franchised business can be overwhelming, particularly given the amount of documents you will be provided with and asked to sign at the outset of your operations.

Given that these documents will regulate much of your dealings with the franchisor over the, sometimes very long term of the franchise, it is important that you read the documents in detail before you become bound by their terms.

Common documents provided to Franchisees

  1. Franchising Code of Conduct
    This document forms part of the Trade Practices Act 1974 (Cth) and sets out the minimum legal requirements for a franchise.
    The Franchisor should give you a copy of the Code as part of the Disclosure Statement.
  2. Disclosure Statement
    The Franchisor is required to give you a Disclosure Statement at least 14 days before you enter into the Franchise Agreement.he Disclosure Statement should contain various information including:

    1. the intellectual property you will be able to use e.g. trade marks;
    2. details of any costs e.g. establishment or up-front costs, ongoing contributions, marketing costs;
    3. details of the geographic area you can operate in;
    4. a list of existing and previous franchisees including location and contact details.
      You should view the list of franchisees in the disclosure statement as a source of information. You can ask the franchisees about their earnings and profitability, support provided and operations they receive from the franchisor.
  3. Franchise Agreement
    Check the terms of Franchise Agreement are consistent with the Disclosure Statement.
    Review the Franchise Agreement thoroughly. You have the right to seek independent legal, business and accounting advice on the terms of the document.
    In particular, make sure you understand the terms of the franchise, the payments you will need to make under the Franchise Agreement and exit strategies available if your expectations are not met.
  4. Lease
    If you will be operating your franchise business from leased premises, carefully review the terms of the Lease particularly:

    1. length of time (Term) and use;
    2. rent and rent reviews;
    3. security deposit/bank guarantees;
    4. transfer provisions; and
    5. maintenance and insurance requirements.
      If the lease is regulated by the retail leases legislation, you should ensure you are able to comply with any disclosure periods required under those Acts.
  5. Business Contract
    If you are buying the franchise from an existing franchisee there are additional things you need to look at including:

    1. whether you are going to take on the franchisee’s employees and if you will receive a reduction in the purchase price for the accrued entitlements of the employees e.g. sick and annual leave;
    2. whether you will be liable for the past acts of the franchisee;
    3. whether there is any training you will need to do to take on the new franchise; and
    4. once you sign the Franchise Agreement if you are entitled to a seven day cooling off period.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.