They say all good things must come to an end, even franchise agreements. So that you can make a fully informed decision on whether to start the franchise journey, you need to understand what can happen at the journeyÕs end, which may not always be at the time of your choosing.

This article explains the ways in which the relationship can end and what information the franchisor must give you on these issues before you enter the franchise.

Franchise agreement comes to a natural end

Many prospective franchisees donÕt realise that franchise agreements run for a set term, usually five or 10 years, and there is no guarantee that the franchisee will operate the business beyond that term.

Under the mandatory Franchising Code of Conduct, before you buy a franchise, the franchisor must give you a disclosure document. This document must tell you, among other things, what will happen at the end of your agreement, including:

• Whether you will have an option to renew the agreement or enter into a new one and

• Whether you have the right to sell the business if you donÕt wish to renew.

A franchisor must notify its franchisees at least six months before their contracts come to an end of its decision to renew or not renew their contracts or to enter into new ones.

If the agreement is for less than six months, the franchisor must notify the franchisee of its decision at least one month before the end of the agreement.

If your agreement is not renewed, you will lose the right to use the franchisorÕs brand and operating system. Most franchise agreements also contain a non-compete clause, which prevents you from setting up a similar business under your own name.

You will most likely be required to buy a range of assets before you get started, including stock and equipment. A franchisor is required to disclose what will happen to those assets at the end of the agreement, including whether it plans to buy them from you and, if so, how prices will be determined.

Franchisees are sometimes required to spend large sums of money on shop refurbishments or equipment upgrades. A franchisor must disclose whether it will take these into account when deciding what will happen at the end of the agreement. It must also disclose whether it has considered these types of payments when making similar decisions in the past.

Where the franchisee has a right to sell the business at the end of the agreement, the franchisor must also disclose whether it asserts a first right of refusal and how the price will be set if you sell to the franchisor.

Franchise agreement ends prematurely

Termination

A franchise agreement will almost invariably include provisions for termination of the agreement. People considering entering a franchise should understand the possibility of early termination before they sign up.

The Code provides that a franchisor can seek to terminate a franchise agreement due to a breach of the agreement by a franchisee. However, the franchisor must also give the franchisee a reasonable opportunity to remedy the alleged breach (not more than 30 days). If the breach is remedied in that time, the franchisor is not allowed to terminate the agreement as a result of that breach.

Some franchise agreements allow the franchisor to terminate the agreement even in the absence of a breach by the franchisee. In these circumstances, before terminating the franchise agreement, the franchisor must give the franchisee reasonable written notice of the proposed termination, and the reasons for it.

The Code also specifies special circumstances in which the franchisor can terminate the agreement immediately. These include where the franchisee becomes bankrupt, voluntarily abandons the franchise or operates the franchise in a way that endangers public health or safety.

Many franchise agreements donÕt provide for the termination of the agreement by the franchisee. If this is the case, the franchisee may only be able to exit the agreement early by transferring the agreement to another party.

So remember: before you jump on the train, make sure youÕve got a good idea of how to get off.

Franchise failure

Like any business, your franchise (or the franchisor) could fail. If the franchisor fails, this could seriously affect your business. For example:

• You could lose your right to trade under the franchisorÕs brand name

• You may be unable to obtain stock, if the franchisor provides this

• The franchisor may no longer be able to provide training or marketing support

• Customers may not want to deal with you because of uncertainty

• If the franchisor holds the lease on your premises and has sublet to you, you could lose your right to occupy the premises if the franchisor loses its rights

• Although the franchisor might have failed, you might have to meet continuing obligations to its administrators or the like and to other suppliers and landlords — and to your employees.

The disclosure document needs to include a signed directorÕs statement that the franchisor is able to meet its debts. This statement either needs to be supported by an audit by a registered auditor or accompanied by the franchisorÕs financial reports for the last two financial years. If the franchisor gives you its financial reports, look at them closely with an accountant and try to assess the franchisorÕs financial health.

Get help

Before you go any further, seek advice from an accountant, lawyer and business adviser who specialise in franchising. The network of Business Enterprise Centres throughout Australia (www.beca.org.au) can also give you some useful advice.

We also suggest that you enrol in a franchise education course. The Australian Competition and Consumer Commission (ACCC) has funded a free, online course for prospective franchisees which was released in July last year. The five-module course is administered by Griffith University and gives you a good overview of every aspect of franchising, including termination and end-of-term arrangements. More than 1300 people have now signed up to do the course, which can be accessed via www.franchise.edu.au/pre-entry-franchise-education.html

The ACCC promotes compliance with the Franchising Code and the Competition and Consumer Act by informing franchisees, franchisors and prospective franchisees of their rights and obligations under the Code and the Act, and enforcing them where necessary. The ACCC has a number of free publications designed to assist prospective franchisees, including a Franchisee Manual and a Franchisee Start-up Checklist. Both are available online at www.accc.gov.au/franchising or by calling the ACCC small business helpline on 1300 302 021.