Thinking about buying a franchise? Here’s what you need to know.
Imagine, if you will, that you have dreamed of opening up your own McDonald’s restaurant since you were a child.
You’re a people person, have excellent business skills, love the smell of Big Macs, and are not afraid to roll up your sleeves and work hard.
But, after doing some Google searches, you realise that 80 percent of McDonald’s restaurants in Australia are local franchises, and that you’ll need to sign a franchise agreement to take up this golden opportunity.
Suddenly, your childhood dream feels a little more complicated.
Lucky for you, we’re about to change that – we’ve provided everything you need to know about the world of franchising. Let’s dive in!
What is franchising?
Franchising is when a business owner agrees to sell the rights to use the name of their business and its systems to a third party for a fee.
Some businesses who have chosen to set up franchises are McDonald’s, KFC, Subway, 7Eleven and Pizza Hut.
What is a franchisor?
A franchisor is a company, sole trader or partnership (e.g. McDonald’s) which allows a third party (e.g. Joe Blogs Pty Ltd) to run a business (e.g. a McDonald’s restaurant) and sell goods and/or services (e.g. McFlurries, chicken nuggets) using their business name and systems in exchange for a fee.
What is a franchisee?
A franchisee is a third party (e.g. Louisa Love Pty Ltd) who agrees to pay a franchisor (e.g. KFC) to run a business and sell goods and/or services using the franchisor’s branding and systems (e.g. Colonel’s Secret Fried Chicken Recipe, corporate colours) in return for a fee.
What is a franchise agreement?
A franchise agreement is a tailored, legally binding contract between a franchisor and a franchisee.
It sets out the franchising arrangement between them, as well as their rights and obligations.
What should a franchise agreement include?
This agreement addresses all issues that might arise between a franchisee and franchisor during a franchising arrangement.
Generally, a franchise agreement will include the following details:
- The franchise fee. This is an agreed amount that the franchisee pays the franchisor to run a business and sell goods and/or services using the franchisor’s branding and systems.
- The term of the franchise agreement. How long will the franchise agreement last for?
- How the franchisee will be able to use the franchisor’s business name and intellectual property. For example, what rights and restrictions will they have? Can the franchisee hand over the franchisor’s intellectual property to a prospective franchisee who wants to take over their business without the franchisor’s approval?
- What the franchisee needs to purchase for the business to operate. For example, will they need to buy an ice cream maker to make McFlurries?
- How disputes will be settled. For instance, if a dispute arises, will it be solved at mediation?
- When the franchisee can be terminated. This clause will be relevant if the franchisee breaches any of the terms of the franchising agreement.
- What rules a franchisee must follow when the franchise ends. Will the franchisee be required to give all the franchisor’s branding and intellectual property back at the end of the franchising agreement? What process will they be required to follow?
- What rules the franchisee will need to follow if they want to sell the franchise. How much notice do they need to provide the franchisor with? Can they approach the market without informing the franchisor?
I want to start a franchise. What documents does the franchisor need to provide me with before I enter into a franchise agreement?
To help you make an informed decision, the franchisor should provide you with the following documents:
- The key facts sheet. Items that should appear in this document include major disputes that the franchisor is or has been involved in, current and past franchisees, the territory or site of the business and the supply of goods and services to the franchisee.
- The Franchising Code of Conduct. If you’re interested in reading this ahead of time, click here.
- The disclosure document. This document will set out important information about the franchising arrangement.
- The franchising agreement.
- The lease and relevant lease disclosure statements. This will depend on your circumstances.
How can we help you with your franchising needs?
Our team can help you with:
- Drafting and reviewing franchise agreements, key facts sheets, disclosure documents, leases and lease disclosure statements.
- Advising on rights and obligations under the Franchising Code of Conduct for prospective franchisors and franchisees.
After reading all of that, do you now feel at ease to walk into the franchising world?
If you answered yes, good for you! If you’re a bit lost, we totally understand. It’s a lot to get your head around. Give us a call or click here to speak to one of our support staff to book an appointment with an experienced law.
We can provide you with advice on the Small Business Law Matters