Hello and welcome. My name is Amie Larter, and this is Buying a Franchise Podcast. Vital listening for anyone interested in buying or that’s in the process of buying a franchise. Today I’m joined by Sarah Stowe, editor of Franchise Business and Franchise Executives. Welcome, Sarah.

Sarah
Thank you, Amie.

Amie
Sarah, the end of a franchise term. It is not something most franchise buyers are thinking about when they sign, but probably should be, particularly given the number of high-profile examples we’ve seen lately. It’s clear that this is something that is so important. Why isn’t it getting the attention that it deserves?

Sarah
Amie, look, it matters first of all, let me say, because knowing what could happen when your three, five, or seven year agreement ends allows you to plan ahead and to have options. Franchisees who aren’t clear about what happens when their agreement ends may have surprises and may be disappointed, even angry about the situation that they find themselves in. So why doesn’t it get more attention? I think when franchise buyers are signing up to an agreement, it’s probably human nature and experience because the reality is that for many new franchisees, particularly those that are moving from employee to business owner for the first time and they don’t have any corporate experience, that commitment to buy is both exciting and daunting, and it’s often the significant financial commitment. So the franchise buyer wants to put their energies into choosing the right brand, believing that they can handle that new business and and getting all the documents together, and that can be overwhelming.

So thinking about three, five or seven years from now is just an extra pressure that they don’t need.

Amie
Yeah, okay. So I know that every agreement will be different and this is certainly where this is certainly not legal advice because as we’ve said in nearly every episode, Sarah, please speak to a franchise lawyer when signing any kind of franchise agreement. What should potential franchisees be considering and looking at when it comes to the franchise term? Holistically.

Sarah
I think it’s important to remember that a franchisee is signing up for a term. So it’s an agreement and it might be for five years and there might be one option to renew. However, the renewal process is not automatic and the franchise all can, with good reason, refuse to renew. Now, this is this is something I spoke about with the HC’s Deputy Chair McKeo recently and he says that there can be a misunderstanding about the nature of a franchise contract. So it’s often sold as an investment. We talk about investing in a brand, investing in a business. But in reality, most franchises are a license to operate for a certain period of time. That’s what he was reiterating. And there are no guarantees given beyond that initial term.

so he was but he says he believes that the key to proper understanding of the nature of the franchise really lies in the signing up process. Now the ACCC monitors and enforces the mandatory franchising code of conduct which governs that relationship between the franchise or and the franchisee. And there are some strict rules about the purchasing process, such as a requiredcooling off period. However, franchise buyers will sometimes sidestep those guardrails and they’ll forego the right for legal advice altogether or they might do it in a very cursory manner. And sometimes the franchisor’s sales tactics can lean into this rush to get the deal done. And Mick Keogh urges buyers not to be ambushed into signing before they’re ready and to use those guardrails that the franchising code of conduct provides to do the necessary homework.

before committing to a business. So I think the message is that a measured approach and thorough due diligence will pay dividends. You know, if you skip legal expert advice when you’re reviewing your franchise agreement or rev reviewing the whole process just to save time and money, can be a recipe for long term regret.

Amie
That makes sense. So what questions should a prospective franchisee ask their franchise or and their lawyer for that matter, specifically about the end of term?

Sarah
Well, is as you’ve said, every franchise agreement is different and it’s really important to reiterate that. But as a franchise buyer, you’re looking at the principles, you’ll want to know whether there is an opportunity, first of all, to renew your franchise term. And it would be interesting to find out what percentage of franchisees in that particular network do renew. Remember that they are these renewals are only ever optional and the franchise or does have the final say on whether or not it will renew an agreement.

So in the buying process, you’ll want to ask about selling the business on. How strict is the franchisor about resales? How many franchisees do sell their business to a new franchise buyer? The franchise or in these instances has the right to reject a seller, a buyer, if they feel that they’re not appropriate. So you need to find out perhaps why they might refuse a business sale.

And how common it is for this to happen. Crucially, the question you need to find out is what happens if you are unable to sell the business because you can’t find a buyer that suits both you and the franchisor. So, in these instances, what are your choices? Will the franchisor buy back your business? Will the franchisor simply take over the business at the end of your term? What does that mean? What does that look like?

It’s important that you look to find out what the franchise agreement says about this and that you get legal advice. So you’re very clear about what’s in the franchise agreement, because that will determine what happens. And of course, the better informed you are, the better placed you are to handle a situation when it arises.

Amie
That makes sense. So how far in advance should a franchisee realistically start thinking about their exit? I mean, you don’t normally go into these things with sort of the exit or the end in mind, but what should that planning actually involve?

Sarah
Yeah, I mean you don’t go in with that exit plan. But having having s you should and having said that, I do speak to some franchisees and I have to say that they’re usually quite successful franchisees who have gone in and said, This is what I want to do, I know where I want to get out. and it might be a time that they’ve given themselves or it might be a goal, but they have a kind of a clear path. And if you can think about that at the beginning, fantastic, that’s ideal.

Amie
But you should

Sarah
Because of course everyone’s looking for a return on investment and it’s important to understand how you can achieve that. So you can make money from the revenue as you go, and you can make money from your build from building an asset and selling it. but certainly franchisees who go into their business with a clear exit strategy can shape that business journey to reach their goal.

And I think it’s common though for franchisees to think about building their business first. and then they will look at possibly expanding, and then they might think about how they will get out of the business. And this often includes selling before a term expires. So I think it it’s probably unrealistic to to t to expect everyone to have a an end goal, but I think it’s important that they they’re aware of what would happen in this if it

in particular circumstances. They may not have to plan for it at the beginning, but if they know what’s what could happen, they’re better prepared.

Amie
Yeah.

Yeah, you need to understand the parameters of the agreement. So knowing knowing this, what’s the single most important thing a franchise buyer should understand about the end of term before they sign their first franchise agreement?

Sarah
Yeah.

I think just to reiterate the overarching thing to consider is that what can happen at the end of your term will be in your agreement and you need to read, to understand it, and to get legal advice on this. Not everybody will be thorough, but we would absolutely recommend that you’ll you really do take time to to look at these elements or read all the agreement, but be very sure about what happens at the end.

Amie
It’s so important. Well, thank you, Sarah. In the show notes below, we’ve got links and references if you want to follow this further and get more in-depth information before you continue your journey to buy a franchise. If you’re somehow into your franchise search, you might be ready to check out the franchise handbook that’s available on our website. Practical tips that can help you navigate the journey smoothly. Visit www.franchisebusiness.com.au for more for more information. And we hope you can join us on another episode of Buying a Franchise Podcast.

Thank you for listening.