Franchising and the law – what you need to know

While joining a franchise with proven systems can be a recipe for success, like any investment it also involves risk. To help you identify potential pitfalls, here’s some key legal issues you should consider before buying a franchise:

Franchise agreements and documents

Surprisingly, many people don’t take the time to carefully read the franchise agreement and disclosure document. It’s not uncommon to find errors in documentation, including obligations which may no longer be relevant to the franchise system. So it’s important you make time to read everything, and ask questions!

Is an exclusive territory being granted? Are there operation manuals, can I read them before signing a contract? How long is the agreement for? Can the contract be extended? Who owns the intellectual property, and is there any restraint of trade during the contract or after it ends? Can the franchisor or franchisee terminate the contract, and in what circumstances?

Under the Franchising Code of Conduct, new franchisees are entitled to a seven day ‘cooling off’ period, where the agreement can be terminated. However, conditions for termination are generally set out in the franchise agreement – so get familiar with it, and know what you’re getting into.

Structure

There are a number of different ways to structure the ownership of a business and it’s best to seek advice from a lawyer and accountant well before you purchase anything. A company can be formed to own a business and a trust structure created for tax and risk minimisation purposes. Sole trader or partnerships are also common and may even be required to own and operate particular franchises. Each structure has advantages and disadvantages, which you should investigate well before you buy.

Personal guarantees

Most franchise agreements include guarantee provisions, which make the guarantor(s) personally liable for the franchisee’s obligations under the agreement. Most franchisors won’t remove guarantee requirements, but some may agree to limit or cap liabilities, so it’s worth having a discussion before you sign anything.

Existing franchises

If you’re looking to purchase an existing franchised business the consent of the franchisor must be obtained. A franchisor may not agree to the proposed sale, may have first rights of refusal, may impose conditions or may not approve the prospective franchisee. So remember not to sign a sale of business agreement unless the franchisor has consented in writing.

When buying an existing or corporate franchise investigate to ensure all the assets of the business are free from any existing debts or burdens. Not doing this research could lead to a situation where an asset won’t be released to you. Use the Personal Property Security Register and search the vendors’ company name, ACN, ABN, and trust name (if the vendor is a trustee) to ensure everything is above the line.

Occupancy rights

Make sure you understand whether the franchisor, or you as the franchisee will hold the lease of any premises and who is accountable for the fit out. If you take the responsibility, you’ll need to organise the lease and if the franchisor controls it they’ll need to provide you with a licence to occupy. A lease and a licence to occupy have different legal rights and costs, so seek advice about the distinctions and associated risks.

Licence(s)

Some franchise agreements need you, or someone you nominate to obtain a special licence. This is common in building, real estate and when a liquor licence is essential. Make sure you find out what’s required and that you’ll be able to secure the necessary licences before signing any binding agreements.

Franchise lawyer

While there’s a lot you can check yourself, remember that franchise law is a specialisation. Much like you would engage a specialist doctor for certain medical conditions, when buying a franchise you should engage an experienced lawyer. Franchise lawyers will help you navigate the buying process, provide cost-effective advice, and identify obligations that don’t fit the norm.

Learn more about buying a franchise and discover the Top 10 reasons to buy a franchise.