Timing is everything when you buy a franchise. So what do you need to do, and when should you do it?
The legal side of buying a business is crucial, and franchising is governed by certain regulations.
To make things easier, here are seven steps in the usual process of signing a franchise agreement.
1. General enquiries
You will be getting plenty of documents when you start the buying process but don’t get ahead of yourself. Before you receive any documents you should question the franchisor about all elements of the business. Asking questions will give you a good idea about whether you want to, or should, proceed any further. These queries may relate to:
- how the business operates
- site selection
- territory exclusivity
- marketing contributions
- upfront and ongoing costs
- franchisee performance and benchmarking
- franchisor expectations
Franchisors may require a partially or fully non-refundable deposit before sharing any documentation with. Doing thorough research before proceeding to any formal step could save you some money in the long term.
2. Sign a confidentiality agreement
If you are satisfied with the initial information and are ready to take the next step, expect the franchisor to ask you to sign a confidentiality agreement.
This is usually brief and straightforward, simply requiring you to agree not to use, share or disclose any of the franchisor’s confidential information you receive.
This is an opportunity for you to ask for equal respect in terms of privacy and seek an assurance that any personal information you share in the application process is regarded as confidential.
3. Receive documents
The agreement and disclosure document are the two crucial documents in any franchise purchase.
The franchise agreement may be a standard document but the final version will be tailored to you. For example, it will cite your company name and the specific territory you are purchasing.
The disclosure document provides general information about the franchise you will buy.
You will also receive a copy of the Franchising Code of Conduct and will be asked to acknowledge receipt of these documents.
4. Seek expert advice
Once you have received the franchise documents, it is time to seek professional advice. Key advisors are lawyers, accountants and business advisors.
While franchise buyers can use their family or local lawyer or accountant for this, seeking out a franchising expert is a wise option.
A franchise lawyer will be able to:
- review the franchise documents and identify key issues or risks contained in them;
- explain how the documents will be interpreted in light of the Franchising Code of Conduct; and
- help you negotiate changes to the franchise agreement if necessary
They will also be able to explain some of the important aspects of franchising law. This will help you to understand yours, and the franchisor’s, obligations.
5. Negotiate with the franchisor
If you have become aware of any key issues with the franchise agreement, now is the time you or your lawyer should negotiate with the franchisor.
Franchisors are often happy to consider any reasonable requests, particularly those operating newer or more up-and-coming franchise systems.
The agreement must be a complete record of the deal struck. So if the franchisor makes some additional promise or assurance, it needs to be recorded in the written agreement. This is often in the form of a special condition or warranty.
As most franchise agreements contain ‘entire agreement’ and ‘no warranty’ clauses, it will be difficult to enforce the promise or assurance if it is not in the document.
6. Sign the agreement
The Franchising Code requires you to wait at least 14 days from receiving the franchise documents before signing the franchise agreement.
This is not a time to rush, and even at this stage you can walk away if you are uncomfortable with any pressure being put on you to sign, or you have doubts.
When you are ready to buy the franchise, sign two copies of the franchise agreement and disclosure document so both you and the franchisor have an original copy for your records.
You must execute the document correctly and make sure you also sign any receipts or acknowledgements. If you make any minor amendments by hand, all parties should initial them to indicate their agreement.
7. Cooling off period
Under the Franchising Code, you have the right to terminate the franchise agreement within 14 days of signing the agreement or making a payment under the agreement (whichever is earlier).
Take careful note of the date you signed the agreement and mark your 14-day deadline.
While you are free to rescind the agreement, don’t expect to get all your money back. Franchisors are permitted to keep funds to cover any reasonable expenses they have incurred.
Timing is everything in the process to buy a franchise. Mapping out the process helps you navigate the buying journey.