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Advice on Franchise Agreements

Franchise agreements. Mildwaters Lawyers Kadina South Australia. Image: Muffins by Allan Henderson via Flickr

If you’re looking to buy into a franchise we can help you go through franchise agreements and franchisor disclosure documents to make sure that you are aware of all of the issues that could make or break your new business.

Franchise agreements are often lengthy and use definitions throughout that leave the reader a bit confused.  We can take the confusion out and streamline the most important issues for you, so that you know exactly what you are getting for your money.

Tips for new Franchisees

Tip 1 – Costs

Read your franchise agreement carefully in relation to costs.  The cost of entering the franchise agreement is more than just the initial start up costs and the ongoing regular franchise fee.  There are numerous other costs such as marketing levies, insurance costs (which are generally over and above the usual insurances that a small business takes out) and training costs.

The franchise agreement can also require the Franchisee to spend funds on improvements to their business premises as and when required by the Franchisor.

Tip 2 – Beware of the first right of refusal

We have noticed that the Franchisor often slips this section into the franchise agreement without notice to their intended Franchisee.  Our advice is to require any such clause to be removed as it limits your ability to obtain the best price for your business when you choose to sell it.

Tip 3 – Exclusive use of your business premises

Many franchise agreements provide that you must stock your business premises with their stock only and run the franchise business and no other business from your business premises.

Sometimes this is not a problem, but in many cases, a Franchisee may wish to run more than one business from the same business premises.  If that is the case, you need to make the Franchisor aware of this and obtain their consent to use your business premises for more than one purpose.

Tip 4 – Try to secure territory rights

If you are going to the trouble of entering into a franchise agreement to secure the benefit of the local customers of the brand, to enjoy the marketing expertise and reach of the brand and to learn the methods of a successful business, then you should consider requesting a clause in the franchise agreement that gives you territory rights.

This clause gives you the exclusive right to operate a franchise for that brand within a certain area and helps ensure that you receive the maximum return that you can in the area in which you live and run your business.

Tip 5 – Do your due diligence

The most important tip of all is to do your due diligence.  In simple terms this means investigating the brand and the business as much as you can before entering into a franchise agreement with them.

The things that you can do to find out more about the Franchisor’s business is:

  • Go through the list of existing Franchisees that comes with the disclosure statement and arrange to meet with a number of them to discuss with them their experiences as a Franchisee
  • Ask existing Franchisees questions like what are the Franchisor’s like to deal with, how much has their business improved financially after taking on the franchise and after taking all the costs into account and would they enter the franchise if they had their time again
  • Request financial evidence of the financial improvement in the business of existing Franchisees if you can
  • Contact any previous Franchisees to find out why they are no longer a Franchisee
  • Obtain financial advice on the proposed agreement
  • Obtain legal advice on the proposed agreement
  • Investigate with your Accountant as to whether you have the financial flexibility to pay the initial costs and ongoing costs as set out in the franchise agreement
  • Consider whether the area in which you live will have enough demand for the goods or services to be offered by the franchise to make the franchise financially successful.

These aren’t the only things that you need to do, but they are a good start.

If you are considering entering a franchise, then contact us today to get the legal advice you need so that you can get started on your due diligence requirements.

 

Image: Muffins by Allan Henderson via Flickr. CC BY 2.0

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