If you’re considering entering into a franchise agreement, it is important that you understand the first rule of franchise law: read every document before signing – even the fine print.

What is a franchise agreement?

A franchise agreement constitutes a legally binding contract that oversees the terms of the relationship between you and your prospective franchisor. Usually lasting anywhere from five to 10 years with an optional renewal clause, franchises are lengthy investments. Following the breach of a franchise agreement, the non-breaching party will generally enjoy a right to require the breach be remedied and then a right to terminate. Understanding your contractual obligations is paramount to being able to continue operating.

By law, a franchisor is required to provide you with:

• A disclosure document
• A copy of the Franchising Code of Conduct
• A copy of your franchise agreement.

Before you sign anything, read through the agreement with a lawyer who can explain the more complex provisions. Most importantly, take the time to read the disclosure document, which should direct you to the most important provisions of the agreement and provide you with an insight into the financial position and experience of the franchisor.

What are the various clauses?

Although each franchise agreement is unique, many will share common clauses.

1. Territory: the agreement should explain the terms of your territory, and whether it is shared or exclusive.
2. Fees: the agreement also specifies any up-front fees you will have to pay, along with any ongoing royalties and marketing fund contributions.
3. Fit Out: it might also detail the necessary expenditure for fitting out the store, plus any additional expenses. The financial responsibilities are normally located in an annexure to the agreement.
4. Supplies: the franchisor or the nominated supplier will ordinarily provide supplies.
5. Insurance will be required for the business to operate, and accounts/books will need to be maintained. The franchisor’s right of inspection also, more often than not, forms part of the agreement.
6. Restraint: usually, franchisees are restrained from starting similar businesses once they’ve left the franchise. It is likely you will be prevented from sharing certain (not all) details about the franchise, both during operation and following departure.
7. Termination: if you (or the franchisor) choose not to renew, the agreement should explain the next steps. It might be the case that the franchisor has rights in the agreement to repossess equipment, fittings or stock of the franchised outlet, so be aware of this possibility. As a franchisee, you will seldom be entitled to any goodwill of the business following your departure. The right to sell is not uncommon to franchisees, although the ‘first right of refusal’ of franchisors features in the agreement just as frequently, giving franchisors the right to buy the business back from you rather than allowing it to be sold to a third party. The terms and conditions of termination should also be clearly explained, and certain dispute resolution provisions must be included in the agreement, according to the Franchising Code.

What are the important clauses?

The Franchising Code excludes certain clauses from any agreement, such as release of liability clauses that indemnify the franchisor against the franchisee. Waivers of any representations (verbal or otherwise) are also prohibited in franchise agreements. Also, franchisors cannot stop franchisees from associating with each other for any lawful purpose.

What is an operations manual?

In most franchises, an operations manual dictates the day-to-day running of the business (like trading hours) and must be complied with. Generally, franchisors retain the right to amend the operations manual when required, so be aware of this possibility.

Conclusion

Once you have read the agreement, you will most likely have several follow-up questions. Make a list and seek independent advice from a franchise lawyer, an accountant and perhaps even a business consultant.

On top of this, speak with other franchisees who are currently operating their own outlet and work out which clauses, if any, have caused them problems. You should always find the contact details of all current franchisees in the disclosure document, along with some of the previous franchisees.

Moving forward, raise any concerns you have regarding the agreement with the franchisor. Negotiation is always an option. Whatever you do, just make sure you’re prepared.