INFORMATION STATEMENT FOR PROSPECTIVE FRANCHSEES
BEFORE YOU SIGN THE FRANCHISE AGREEMENT
Entering a franchise is a big decision. Before you sign a franchise agreement, have you checked these important things off the checklist?
Learn about franchising
Franchisees who participate in pre – entry training tend to have better relationships with their franchisor and be more successful in business. Free, online courses for prospective franchisees can be found at www.accc.gov.au/franchising-education-program.
Information about franchising in English and other languages can be found at www.accc.gov.au/buyingafranchise.
Conduct due diligence
The best way to get to know the franchise business is to thoroughly research the franchise system and study the disclosure document, the franchise agreement and any other documents provided by the franchisor. You can also talk to current and former franchisees to understand what they find rewarding and challenging about the business.
Get professional advice
It’s important to get legal, accounting and business advice from independent professionals with expertise in franchising. They will see risks you can’t and will help you in your decision making.
Consider other options
Looking at more than one franchise business is a good way to test if this is the right franchise for you.
WHAT IS FRANCHISING?
It is important that you understand what franchising is before you enter a franchise agreement
Franchising is a way of doing business based on a brand name and business system. Usually the franchisor controls the system closely. The franchisor grants you the right to operate a business in line with its system, normally for a set period of time. As a result, you may be limited in the changes you can make in the business without the agreement of the franchisor.
So in some ways your franchise is your business and in some ways it is not your business.
You will usually be bound by confidentiality obligations. This may include limits on your rights to discuss the franchise business with third parties or to use the franchisor’s intellectual property or business system outside the franchise.
As the franchise adjusts to meet changes in the market, the franchisor might make changes to the franchise system. A franchisor may be able to make these changes even if you don’t agree with them.
Some franchise systems offer benefits other types of businesses cannot
Even with a well – established brand, franchising is not risk free
Watch out for site turnover
Look for warning signs about a franchise system like the turnover of sites. If one site has had many owners (known as churning) it could mean it is not in a suitable location. A high turnover across a system might indicate the system has expanded too quickly or without a plan to make existing businesses successful (known as burning).
Think about potential unexpected expenses
Franchisors can impose significant capital expenditure on you if certain conditions are met. For example, if some conditions are met a franchisor can make you pay for new equipment or to refurbish your store – even if it costs you a lot of money.
If something is important, make sure it’s in the franchise agreement
Some franchise agreements contain ‘no agent’ and ‘entire agreement’ clauses. Franchisors usually include these clauses so the terms of the franchise agreement can override any previous information provided to you. This could include all verbal or written information from an agent, the franchisor or an associate of the franchisor. If there is something important that you’ve been promised verbally or in writing that is not in the franchise agreement, consider the risk you are taking.
You can choose not to sign the agreement.
These are not the only risks. Can you think of more?
BEFORE YOU SIGN THE FRANCHISE AGREEMENT
Take your time to do your research and seek professional advice. If the franchisor tries to rush you, remember you can walk away. There will always be other opportunities.
Here are some more questions to consider:
Franchisor experience and reputation
How long has the franchise system been operating? What success has it had and where? The economy has its ups and downs. Consumer demand for products or services its not the same in every geographical area.
What experience does the franchisor and its key staff have in managing a business?
How much working capital or extra funds will you need to get the business established?
How long will it take you to break even after paying the costs of settling up the business?
- Can you only get products from an approved supplier?
- Does the franchisor receive rebates from suppliers and how is that rebate used?
- Will you pay franchise fees even if you are not making a profit?
- Will you make enough money to pay yourself as well as any staff? Labour costs can be hard to estimate. It is up to you to know what employment laws apply and to comply with them. The Fair Work Ombudsman can help you understand workplace rights and obligations: www.fairwork.gov.au/franchises
- What happens when there is ‘wastage’ and ‘shrinkage’ with products? Some franchise agreements include clauses on wastage and shrinkage. Wastage usually refers to products that are no longer fit for sale. Shrinkage can include theft, another loss or accounting error.
Have any profit or earning promises been made to you? Ask current and format franchisees if profit or earning promises were kept. Their contact details will be in the Disclosure Document.
Will you have an exclusive territory in which to operate your business?
Does your franchisor have the ability to compete with you online?
What changes can be made without your approval and how will this impact your business?
Franchisor – franchisee relationships
What are the dispute resolution procedures? Will the franchise agreement include a commitment by the franchisor to binding arbitration? Arbitration can be a quicker and less expensive way to resolve disputes than going to court. It might be hard to imagine needing arbitration, but it could become important if things go wrong.
What happens at the end of a franchise agreement?
Will you be able to renew the agreement if you want to? Are there conditions on this?
What rules apply if you want to sell the business before the end of the term?
When the franchise term ends, what are you entitled to (such as paid market value for your equipment or for goodwill), and what happens if you are in debt? Goodwill usually refers to the market value added to the franchise business by the franchisee for example, by building a client – base. However, in franchising, franchisees often have limited rights once the franchise agreement ends. You may not get any value for goodwill at the end.
Are there any restrictions on you starting a similar business if the agreement is not renewed? It’s a good idea to obtain legal advice on the restraint of trade clauses.
If the franchise ends unexpectedly, how would this impact you? Are you aware of the types of events that may lead to non – renewal or termination of an agreement? For example, if the franchisor becomes insolvent, you may not be compensated for the loss of your business. Nor may you get back the money you contributed to a marketing fund.
Speak to former franchisees to find out what happened at the end of their agreement. Their contact details are in the Disclosure Document.
IF YOU CHANGE YOUR MIND
Take your time before you sign
The franchising Code of Conduct gives you at least 14 days to read all the information that a franchisor provides you, including the franchise agreement, disclosure document, key fact sheet and information about any lease arrangement.
You can take longer than 14 days to study this information and get advice. For most people this is a bigger investment decision than buying a house so it is okay to take your time before signing a franchise agreement.
Is there is cooling off period if I change my mind?
You are entitled to terminate a new franchise agreement within 14 days. If you choose to exercise this right, you are entitled to a refund of the payments you have made (though reasonable expenses may be retained).
What if I have doubts?
If you have any doubts, consider not signing the franchising agreement or exercising your right to back out of the agreement during the cooling off period.
Even if you have already invested time and money, it is worth considering how much more you could lose if the business is not successful.
AFTER YOU SIGN THE FRANCHISE AGREEMENT
Know your rights
A franchisee may have private rights of action under the Franchising Code of Conduct, the Australian Consumer Law and the law of contract. Your franchise agreement is a contract that contains many of your legal rights and obligations. You may have rights in contract law if the franchisor does not honour the agreement.
The franchising Code of Conduct requires franchisors to disclose certain information to both potential and existing franchisees. It also sets out minimum conditions relating to the rights of the parties under a franchise agreement. It can be found at www.legislation.gov.au
Franchisors must have an internal procedure for handling complaints. If you can’t agree on an outcome within three weeks, either party may refer the matter to mediation or conciliation facilitated by an independent third party. Arbitration is also an option when both parties agree to this process.
Dispute resolution services are provided by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). Visit the ASBFEO website, email ua.vo1702295003g.oef1702295003bsa@o1702295003fni1702295003 or call 1300 650 460
Enforcing your rights
The Australian Competition and Consumer Commission (ACCC) enforces the Australian Consumer Law and the Franchising Code of Conduct. The ACCC takes action for breaches of these laws where it serves the public interest. The ACCC does not take action on your behalf if something goes wrong for your franchise. You can make a report to the ACCC through its website at www.accc.gov.au/contact-us
Sign Up To The ACCC’s Franchise Information Network
Subscribers receive regular email bulletins about current franchising issues, including changes to the law, information for franchisors about compliance and updates about the ACCC’s franchising work. To subscribe, visit www.accc.gov.au/fin.
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