If you're poised to venture into the exciting world of franchising as a franchisees or franchisor you will need to understand the unique legal and operational requirements quickly. Our franchise lawyer explains the key documents that franchisors are required to give a franchisee.
Firstly, the overriding legislation that relates to franchising in Australia is the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) (the Franchising Code of Conduct), made under the Competition and Consumer Act 2010 (Cth) (CCA). The Franchising Code of Conduct outlines the documents that are required by franchisors to new or prospective franchisees. It is wise for potential franchisees and franchisor employees to familiarise themselves with these essential documents as well as other practical tips for buying a franchise.
What are the Franchise documents when buying a franchise?
Embarking on a franchise journey involves an array of paperwork and decisions. The Franchising Code of Conduct stipulates that franchisors must provide potential franchisees with the following documents:
Information Statement
This is a generic document that lays the foundation for your understanding of franchising. As an aspiring franchisee, you must receive this at the earliest opportunity – even before any other documents are handed over. It includes information on, amongst other things, the following:
- The risks associated in franchising;
- Information to help you understand franchising;
- How to conduct research and due diligence; and
- Questions a potential franchisee should ask.
Franchise Agreement
An integral part of your franchise relationship is the franchise agreement which outlines the mutual obligations and restrictions for both you and the franchisor.
It is a detailed agreement that is legally binding and as a franchisee, you should have a clear understanding of what you are committing to.
Disclosure Document
This serves as a comprehensive source of essential information about the franchisor and the franchised business. It is specific to the franchise you are buying and they are there to help you make a reasonably informed decision about the franchise.
It will contain information that is current and includes information on financial, territories, intellectual property and more. Understanding the disclosure information is important to the business' viability and operation. The disclosure document is required by law to be updated every year.
Key Facts Sheet
This resource is designed to help you better comprehend the disclosure document, and contains key information of the franchised business.
Franchising Code of Conduct
This is a part of the legislation that lays down the rules and regulations which governs franchising in Australia.
There are strict timeframes associated with how and when you receive these documents. You should receive these documents at least 14 days before you sign the franchise agreement or make a non-refundable payment.
Should an existing agreement be transferred to you from a current franchisee, it must be provided at least 14 days before the franchisor grants approval for the transfer.
There are also provisions which outlines a specific dispute resolution process which the franchisor and franchisee must follow in the event of any disputes arising.
Additional Documentation for Certain Prospective Franchisees
Depending on the franchise and your specific circumstances, the franchisor may have to provide you with further information such as:
Leasing Information: If you're leasing or occupying premises from the franchisor or an associate, you should be furnished with all relevant leasing details.
Existing Franchise Agreement: If an existing agreement is being transferred to you, you will need a copy of the existing franchise agreement along with other associated documents.
Earnings Information: You should receive both historical and projected earnings for the franchised business. If the franchisor doesn't provide earnings information, they must inform you of this at Item 20 of the disclosure document.
Additional Agreements: You may also need to sign additional agreements as a condition of the franchise agreement, such as a confidentiality agreement or a security agreement. As always get legal advice BEFORE you sign any documents.
Some practical tips for buying a franchise
Buying a franchise is a significant investment both in time and money, and it's important to be fully prepared. Here are some of our franchise lawyers top tips for potential franchisees:
Do your research: Understand the market and the franchise business thoroughly. Utilise as many of the online resources available, including the Franchising Code of Conduct and ACCC is a helpful resource for more information. If the business has specific licences or requirements such as Food and Alcohol, be sure to understand the relevant industry regulations.
Business management skills: As well as considering the hard costs and technical requirements consider the soft skills you will need to make the franchise business successful. Running a business requires a broad range of skills from managing staff to planning and customer service. All these go into running a business daily and whilst you will be getting support from the franchisor you will ultimately be responsible.
Seek professional advice: Engage the services of a franchise lawyer to review all documents and contracts before signing any document, including the initial offer. Franchising is a niche area and those that operate in the industry understand it well and can provide valuable insights.
Understand the costs involved: Go beyond the initial franchise fee and examine other costs, such as lease payments, ongoing royalties, advertising fees, and inventory costs. Having an accountant that understands franchising is key to considering whether it is financially viable to purchase the franchised business.
Consider your exit strategy: Understand the length of the franchise agreement, unlike other businesses it is not yours forever. You should also understand the process should you choose to exit. There is often mechanisms which give the franchisor the first right of refusal in the event you wish to sell of transfer the franchised business. In most cases, it is a fixed term contract and there is no means of terminating the franchised agreement early without penalties if it does not work for you.
Verify earnings information: Analyse earnings information carefully, cross-check with other franchisees if possible, and be cautious of unrealistic earnings projections or expectations.
Commercially minded advice
Armed with the right knowledge and advice, you will be prepared to confidently navigate any franchising system. Understanding how franchising works and what the essential documents are is foundational to a successful franchise venture. It will ensure that you are confident of your rights and obligations and limit the potential for a franchise dispute to arise.
Our franchise lawyers have extensive experience helping clients in the franchising industry. We assist both franchisors and franchisees with their agreements and to resolve any franchise disputes. If you are looking to start a franchise or buy a franchise, we can help you and provide clear and industry relevant legal advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
