What issues should a franchisee consider?
Franchise Agreements are regulated by the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (the Code). Before entering into a franchising agreement, franchisees should consider the following:
- Franchisors must give franchisees a disclosure statement together with a copy of the proposed franchise agreement before entering into a franchise agreement. It is essential that you read the franchise agreement and obtain legal advice before you sign the franchise agreement.
- A franchisee is entitled to a cooling off period of seven days after entering into a new franchise agreement, however, this right does not apply to the renewal, extension or transfer of an existing franchise agreement.
- Franchisees should consider whether their rights are limited to a particular territory. If so, is the territory adequately defined; has a territory plan been attached? Do reciprocal referrals apply? For example, is the franchisee required to refer customer contacts made from outside their territory to other franshisees and vice versa? Is a commission paid for the referral?
- Franchisees should understand and consider whether they have exclusive rights within the territory. Is the franchisor or other franchisees allowed to compete with the franchisee in the territory?
- The Code requires that both franchisors and franchisees act in good faith. That is, the parties must act reasonably in pre-contractual negotiations, during the performance of the franchise agreement, dispute resolution and in the ending of the franchise agreement.
- You should consider where you will conduct the business from (ie. from a site owned/controlled/leased by the franchisor or a site to be leased from a third party). Careful consideration should be given to the provisions of the lease. In particular, the term of the lease should coincide with the franchise agreement and you should ensure that there is an ability to terminate the lease in the event that the franchise agreement comes to an end. You should also consider if (and how often) a new fit-out will be required and whether the landlord will allow such modifications?
- You should consider where you will source stock/ingredients from. Is the franchisor required to provide the product or will you engage a third party supplier? Where a third party is engaged, any agreement with the third party should be on terms the same or similar to the franchise agreement. Ideally, the third party supply agreement would allow for termination in the event the franchise agreement comes to an end.
- Who owns the intellectual property the subject of the franchise? If it is not owned by the franchisor, then you should investigate their rights to use that intellectual property and you should revise the Head Licence to ensure that the franchisor’s right to use intellectual property rights will be available throughout the duration of the franchise? Is the intellectual property attached to the franchise unique or is the franchise offering easily replicated/duplicated by others? What are the benefits of the proposed franchise model?
- What royalties and other fees and charges will be payable during the term of the franchise agreement? Are they reasonable? Are they subject to variation? How will marketing fees be applied? To local or national campaigns?
- Is the franchise agreement transferable? If so, what steps or payments are required to transfer or assign the franchise?
- Is on-going training and support offered or expected? Are there fees attached to additional training? Will training be offered locally? Is there support for dealing with customer warranties and disputes/refunds?
- Will you be subject to a restraint of trade upon ceasing the franchise? Do the terms of the restraint comply with the Code?