There is a get-out clause for brand new franchisees who are legally entitled to a week-long cooling-off period: you may terminate a franchise agreement within seven days after either entering into the agreement or making a payment under it, whichever occurs earlier.

The governing law, the Franchising Code of Conduct, stipulates that if a franchisee exercises his or her cooling-off rights, the franchisor must refund all payments made by the franchisee under the agreement within 14 days.

However, before making thea refund, the franchisor is permitted to deduct and retain an amount to cover the reasonable expenses they have incurred, provided the expenses or their method of calculation are set out in the agreement.

This means that as a new franchisee you effectively have seven days within which to change your mind about the purchase of the franchise and withdraw from the franchise agreement. There is further comfort from knowing that if you choose to withdraw, you will be legally entitled to recover at least some, if not all, of the monies you have outlaid under the franchise agreement.

While it is reassuring to know you have this cooling-off right, it would be unwise to carelessly enter into franchise agreements with the attitude that you will simply back out under this seven day period if you subsequently choose not to proceed.

WILL YOU BE WORSE OFF?

It is important to note that the cooling-off right only applies in relation to the grant of a new franchise, and so an existing franchisee will not be entitled to the cooling-off period when the franchise is being renewed, extended or transferred.

Even in transactions where the cooling-off right applies, you should consider that after exercising this right you will not necessarily be in the same position you would have been in had you not entered into the franchise agreement in the first place. This is because, by entering into the franchise agreement, you are likely to have inherited some legal and financial obligations which cannot be reversed.

THE EXPENSES

Firstly, the reasonable expenses which can be deducted by the franchisor may be significant, especially if training was provided before the cooling-off right was exercised. This means that, despite some financial refund, you may lose more money than you would otherwise have been prepared to forego.

Secondly, in addition to money paid to the franchisor, by the time you enter into a franchise agreement, you are more than likely to have incurred other costs and expenses which may be substantial. Some examples of types of expenses commonly incurred include:

• advisor’s fees if you have sought prior legal and/or accounting advice in relation to the proposed franchise and relevant documents
• expenses incurred in setting up a purchasing structure such as a company, partnership or trust and making any asset protection arrangements
• registration costs for registering an ABN, business name or registering with any organisation or association relating to the franchised business or industry
• costs in relation to the building, fit-out, or refurbishment of premises from which the franchised business was to be conducted
• marketing expenses, such as the costs of installing signage at the business premises or in a vehicle, and costs of printing brochures, business cards and the like
• costs of purchasing or leasing equipment from third party suppliers
• bank fees and charges or other costs in connection with procuring finance to purchase the franchised business or any assets
• costs of purchasing initial stock and consumables
• costs of purchasing uniforms or industry-specific clothing and other merchandise

Many of these expenses will not be recoverable in full and will increase the ‘sunk costs’ you have invested in connection with the failed business venture.

LEGAL OBLIGATIONS

In addition to these financial considerations, you should also be aware that terminating the franchise agreement will not necessarily end all legal obligations imposed by the franchise agreement. Typical obligations that survive or specifically apply upon an agreement’s termination include restraints of trade, confidentiality commitments, and obligations relating to the franchisor’s intellectual property.

As a result, while it may be better to withdraw earlier rather than later if the franchise venture is not to succeed or not to your liking, you need to be aware that, after exercising the cooling-off right, you are likely to be in a less favourable position overall than if you had not entered into the franchise agreement.

Prospective franchisees should approach a franchise agreement cautiously and seriously, as if there was no cooling-off right, and certainly not with the intention of exercising it.

Having said that, if circumstances make it necessary or desirable for you to exit the arrangement within those seven days, then the cooling-off right is a very useful privilege to have, and in these situations you should not hesitate to take advantage of it.

Esther Gutnick is a senior associate at MST Lawyers