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As a franchisee, buying a franchise is an exciting opportunity for those who’ve always wanted to start their own business.
However, running a business can be difficult to navigate – and it gets even more complicated when it comes to buying a franchise.
This is because there are certain rules that you must comply with.
These rules are also dependent on the franchising network you want to join.
The starting point for buying and selling your own franchise is drafting a Franchise Agreement.
Here are the key things you need to know as a franchisee about a Franchise Agreement.
What Is A Franchise And What Do I Need?
A franchise is a type of business structure whereby the owner of a business (the franchisor) licenses others (the franchisee) to use the business’s trade name and operating structure.
If you’re thinking of becoming a franchisee, you will need:
- A Franchise Agreement
- Operation Manual
- … and other legal documents!
A lawyer will be able to help with most of this, but the most important legal document you’ll need is a Franchise Agreement.
What Is A Franchise Agreement?
A Franchise Agreement is one of the 5 essential documents a franchisor (the person licensing the franchise) needs to give you, the franchisee (the person operating the franchised business).
The document outlines four main things:
- Key terms of the business
- The franchisee’s obligations
- The franchisor’s obligations
- Procedures that will be relevant to the purchaser / incoming franchisee
Along with these provisions, the Franchise Agreement will contain clauses that are distinct from a normal business sale agreement.
It’s important to know that no two franchises are the same.
This is because franchisors have the opportunity to structure their franchise differently to other existing franchises.
Therefore, these kinds of clauses are needed to specify the relationship between you and the franchisee in a way which is specific to the franchise business you are purchasing.
According to the Franchising Code of Conduct, every franchisor has to present a Franchise Agreement to any potential franchisee.
However, the code does not set out a specific structure for the Franchise Agreement.
This is why it’s crucial that you have a lawyer review any Franchise Agreement as there might be some specifications specific to you as the franchisee, that have been left out.
What’s The Difference Between A Franchise Agreement And A Licence?
You might easily get tripped up when it comes to the difference between a Franchise Agreement and a Franchise Licence.
Generally, a Franchise Licence will authorise you to sell branded products from the franchise.
On the other hand, a Franchise Agreement will allow you to actually set up a franchised business.
This means that, in a Franchise Agreement, you have access to all of the company’s intellectual property, assets, suppliers and know-hows.
But in a Franchise Licence, you’re only authorised to sell the products under their brand.
Franchise Agreements tend to be more comprehensive (and therefore more restrictive to franchisees) than licensing agreements.
If you are bound by a Franchise Agreement, you have to abide by all of the franchise rules and regulations as effectively, you are a representative of their entire company.
Knowing the difference between a Franchise Agreement and a Franchise Licence is important as depending on which agreement you enter into, your obligations will be quite different.
What Are The Main Franchise Agreement Provisions?
As a potential franchisee, there are certain things that you should look for in a Franchise Agreement.
Training and Support
The franchisor should provide you with training and ongoing support for your staff.
Depending on the franchise, the training might be different. For example, some might include administrative and tech support, while others won’t.
Geographical Location & Exclusivity
The Franchise Agreement will also include specifics on location and where you are going to operate the franchise.
Sometimes, a Franchise Agreement will include an exclusivity provision which will ensure that no other franchisee can open a franchise in your location.
Duration
Another important provision that must be included in any Franchise Agreement is its duration.
The length of your Franchise Agreement will help you decide whether you can sustain running the business for that time period or whether you need to adjust the period depending on your capacity.
Fees
Fees including the initial franchisee fee which covers the cost of using the franchisor’s logo and operating system as well as the royalties you pay to the franchisor must be included in the Franchise Agreement.
Renewal & Sale Rights
Renewal and sale rights should also be included in the Franchise Agreement.
These terms will outline your options to terminate the agreement or renew if you wish to continue running the franchise.
Some franchisors also allow you to sell the franchise.
If you decide that you no longer want to run the franchise for any reason, this option may be useful to have in your agreement.
What If I Want To End My Franchise Agreement?
If you don’t want to sell your franchise or want to end your Franchise Agreement before the agreed date, it is a good idea to have a termination clause.
A termination clause is effective if one of the parties to the contract breaches any of the terms within it.
Most Franchise Agreement termination clauses have two outcomes:
- Suspension – the agreement won’t be in operation until both parties solve the issue and agree on a date for it to resume
- Termination – the agreement will no longer be effective
Whether you’re a franchisor or franchisee, it is in the interest of both to have a termination clause included in the Franchise Agreement.
This is because it provides a way out if things were to turn sour between both parties.
Franchising Resources
Laws around franchising can be quite dense, and it is an area of law that requires expert legal help. We have a number of resources to guide you in various stages of the franchising process, such as:
- Selling A Franchise
- What To Do At The End Of A Franchise
- Legal Documents You Need For Franchising
- What Fees The Franchisee Has To Pay
- Terminating A Franchise Agreement
- What To Do With A Bad Franchisee
- Franchisees’ Legal Obligations
- What Are Franchising Royalties?
- Franchise Grant Process
What To Take Away…
As a franchisee, the process of buying and selling a franchise can be a complicated process.
It’s important to seek advice from an experienced lawyer who can advise you on the process and whether your Franchise Agreement includes the relevant provisions to make the sale seamless and successful.
If you’re considering selling your franchise or are interesting in purchasing one, don’t hesitate to give our team a call on 1800 730 617 or email us at team@sprintlaw.com.au – we are here to help!
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