Buying a franchise is an exciting opportunity if you’ve always wanted to start your own business.
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 a Franchise Agreement. Often, this will be given to you by your franchisor.
Before you sign it, it’s a good idea to have a lawyer review the Franchise Agreement and advise you of the key issues and your rights.
Here are the key things franchisees need to know about a Franchise Agreement.
What Is A Franchise?
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.
What Documents Do I Need As A Franchisee?
If you’re thinking of becoming a franchisee, you will need:
- A Franchise Agreement
- An 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 Franchise Agreement should outline 4 main things:
- The key terms of the business
- The franchisee’s obligations
- The franchisor’s obligations
- Procedures that will be relevant to the purchaser (the 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 note that no two franchises are the same.
This is because franchisors have the opportunity to structure their franchise differently from other existing franchises.
Therefore, specific clauses are needed to outline the relationship between you and the franchisee in a way that reflects the unique nature of 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—there might be some specifications specific to you as the franchisee, that have been left out.
What Is An Information Statement?
As a franchisee, it’s required that franchisors provide you with an information statement before you buy into the franchise.
Franchisors need to provide this to all prospective franchisees no later than 7 days after that franchisee shows an expression of interest. This expression of interest can be indicated in person or online.
Usually, an information sheet should include key information around the risks associated with franchising, due diligence obligations and common questions franchisees have when entering into a Franchise Agreement.
What’s The Difference Between A Franchise Agreement And A Franchise 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, with 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 Franchise Licences.
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 include specifics on location and where you are going to operate the franchise.
Sometimes, a Franchise Agreement will include an exclusivity provision to ensure that no other franchisee can open a franchise in your location.
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’ll need to adjust the period depending on your capacity.
Relevant fees must be included in the Franchise Agreement.
This could include 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.
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, for any reason, you decide that you no longer want to run the franchise, 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 if you 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’s in the interest of both parties to have a termination clause included in the Franchise Agreement. It provides a way out if things were to turn sour between you.
What To Take Away…
As a franchisee, the process of buying and selling a franchise can be a complicated process.
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
- Franchise Agreements
- 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
It’s important to seek advice from an experienced lawyer who can advise you on the process. They’ll also make sure your Franchise Agreement includes the relevant provisions to make the sale seamless and successful.
In particular, if it’s your first time buying into a franchise, it’s a good idea to speak with a lawyer who can walk you through how it all works.
As soon as you are given a Franchise Agreement, it’s best practice to reach out to a lawyer who can advise you on what’s included and what the contract means for you as a business.
If you’re considering selling your franchise or are interested in purchasing one, don’t hesitate to give our team a call on 1800 730 617 or email us at firstname.lastname@example.org for a free consult.
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