So youÕve found a franchise you like. You are keen to get in and start earning an income. So keen that you sign the pile of documents you have just been given, planning to read them properly later. Doing this is sowing the seeds of a potential franchising disaster. Stop. Take your time and make sure you fully understand the arrangement you are about to enter into.

What is a franchise agreement?

Under Australian law, the pile of documents that a franchisor will give you before you sign any agreement must contain a disclosure document, a copy of the Franchising Code of Conduct and a copy of your franchise agreement (in the form in which it is to be signed).

The franchise agreement is a binding contract that governs the relationship between you and your franchisor. Most franchise agreements run for five or 10 years with an option to renew if you meet certain conditions. If you breach any of your obligations under the agreement, the franchisor may have the right to terminate the agreement and you could be forced to hand over your keys.

Before you read the agreement — pre-entry training

Before you start reading your franchise agreement, itÕs a good idea to get an overall picture of how franchising works. One of the best ways to do this is to enrol in a pre-entry training course. The Australian Competition and Consumer Commission has funded a free online course, administered by Griffith University, which 1000 people have already registered for (to enrol in the program go to www.franchise.edu.au/pre-entry-franchise-education.html).

The course provides an overview of the Franchising Code, and includes a wide range of topics such as disclosure, leasing and dispute resolution. In particular, the second module covers the franchise agreement, taking you through some common provisions of franchise agreements and explaining in detail the consequences of breaching an agreement. Franchise fees and royalties are also discussed.

Reading the agreement

The franchise agreement is usually a long document (sometimes more than 50 pages) but you should read it through thoroughly a few times until you understand every aspect. There is no point reading a clause for the first time when you are encountering a problem with it.

While it is important to read the entire franchise agreement, the disclosure document will direct you to some of the critical clauses of the agreement. Item 15 of the disclosure document will refer you to the parts of the agreement that contain the franchisorÕs obligations and item 16 will point you to some of your obligations. Item 17 will tell you where in the agreement you can find certain other conditions, including the term of the agreement and termination provisions.

Common clauses

While every franchise system will have its own unique franchise agreement, certain types of clauses can be found in almost every agreement.

The franchise agreement should tell you whether you have an exclusive territory, or whether another franchisee or the franchisor is allowed to set up a business within your territory. The agreement will set out the up-front fee you will be required to pay, as well as any ongoing royalty payments and the contributions you will need to make to a marketing fund. The agreement may also specify the amounts you will need to spend on fitting out the premises, purchasing a vehicle and various other expenses. This information will often be contained in an annexure to the agreement.

You will likely be required to obtain supplies only from the franchisor, or from a supplier approved by the franchisor. The agreement will usually require you to insure the business, and there is likely to be an obligation to keep your books up-to-date. The franchisor will usually have the right to conduct inspections of your business to make sure you are complying with the agreement.

Most agreements contain a clause that prevents the franchisee opening up a similar business after they leave the franchise. There will probably also be a clause that prevents you from discussing certain aspects of the franchise with anyone, both during and after the term of the agreement. However, this shouldnÕt stop you discussing the wide range of other critical issues that you are free to debate with current and past franchisees.

The agreement should set out what will happen at the end of the franchise term (if the agreement is not renewed). At the end of the term, the franchisor may have the right to take possession of any equipment, fixtures and fittings or stock of the business. Under most franchise agreements, you will not be entitled to any goodwill after leaving the business.

Most agreements will give you the right to sell the franchise, but many provide the franchisor with a first right of refusal, which gives them the option to buy the business back from you instead of approving the sale to a third party.

The agreement should also set out what occurs if the agreement is terminated before the end of its term. It is important to know that under some agreements, the franchisor can terminate even if you havenÕt breached the agreement.

Every franchise agreement is required to contain a dispute resolution procedure that complies with the procedure set out in clause 29 of the Franchising Code.

Clauses to look out for

The Franchising Code prohibits a franchisor from including certain clauses in a franchise agreement, so make sure they have not been included in your agreement. For example, the agreement cannot require you to sign a general release of the franchisor from liability towards you (whether this is contained in the franchise agreement or in another document). The agreement also cannot require you to sign a waiver of any verbal or written representations that the franchisor has made to you. You also cannot be prevented from associating with other franchisees for a lawful purpose.

There may be other clauses in the agreement that you should be wary of. A good franchising lawyer should be able to bring these to your attention.

The operations manual

Most franchise agreements will require you to comply with an operations manual, and so not following the operations manual will be a breach of the agreement. Operations manuals set out the day-to-day business procedures of the franchise and things like trading hours and uniforms. Under most franchise agreements, the franchisor will have the right to make changes to the operations manual, and some franchisors exercise this right regularly.

After you read the agreement

Get advice

Once you have read the agreement a few times, you will probably have a number of questions. Write them down. This is the time when you should get independent advice from a lawyer with franchising expertise. You should also discuss the agreement with an accountant and a business adviser before you sign it.

Talk to other franchisees

Before you sign the agreement, you should talk to the other franchisees in the system and find out if any clauses in their agreements have caused them problems. The disclosure document must contain the contact details of all current franchisees and some past franchisees, and module five of the Griffith pre-entry course contains a list of questions to ask existing and ex-franchisees.

If you are unhappy with any part of your agreement, try to negotiate with the franchisor before you sign it. If the franchisor refuses to make any changes, remember that you can always walk away.

Michael Schaper, ACCC deputy chairman