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HOCW’s Franchise Series - Three steps to take before you commit to a franchise agreement

Tuesday August 23, 2022

HOCW’s Franchise Series - Three steps to take before you commit to a franchise agreement

We regularly act for franchisors and franchisees in the litigation and alternative dispute resolution context. Defending and advancing the rights of our clients is one of our key specialties.  We understand that franchise relationships can break down and we have the experience necessary to guide our clients through such times.
 

Over the coming months, we will be publishing a series of articles, of interest to franchisees and franchisors, alike, on strategies to employ to avoid the expense, stress, and opportunity costs of jumping into the wrong franchise relationship.


If you are a prospective franchisee considering making a significant investment in brand, then this month’s article is for you. It has been written to equip you with what you need to take your due diligence to the next level and empower you to ask the hard questions before you quit your job, take out a large loan, and sign that up to a long-term franchise agreement.

HOCW’s Franchise Series – Three steps to take before you commit to a franchise agreement

  1. Learn about franchising as a business model and whether it resonates with you
  2. Learn about the brand you are interested in by speaking with its former and current franchisees
  3. Obtain independent legal, accounting and business advice

  1. Learn about franchising as a business model and whether it resonates with you

The Australian Competition and Consumer Commission (ACCC) is Australia’s national franchise regulator.

The ACCC offers a variety of free resources that we encourage our clients to avail themselves of. These resources are general in nature, but our experience is that once clients have reviewed them, they are better placed to understand the franchise dynamic and ask more informed questions about the franchise they are interested in.

Below are links to two of the ACCC’s resources we have in mind. The first is an ‘information statement’ containing general information about franchising, its risks and rewards, and matters to consider prior to entering into a franchise agreement. The second resource is a 90-minute course you can do to assess whether franchising as a business model resonates with you.  

  1. Learn about the brand you are interested in by speaking with its former and current franchisees

If you have approached the franchisor of the brand you’re interested in, chances are that they will have provided you with material they have prepared to advertise the wonderful benefits of joining their franchise network.

Depending on how far advanced you are in discussions with the franchisor, they may also have provided you with a copy of a ’Key Facts Sheet’ and their ‘Disclosure Document’. This material tends to be voluminous, and it may very well appear boring when compared with the flashy advertising that the franchisor may have provided you. DO NOT let this stop you from engaging with this material – it is there to help you and it contains vital information about a franchise.

We consider that the most accessible and practically helpful information is the contact details of some existing and former franchisees. This information should be within Item 6.2, 6.4 and 6.5 of any Disclosure Document you receive. We always encourage our clients to contact both former and current franchisees to have a conversation with them about:

  • their reasons for leaving the brand;
  • their experience with the franchisor in terms of support, effectiveness of marketing campaigns, and generally, whether they wish they did or did not join the brand in question;
  • the current culture within the network (are franchisees scared of the franchisor, for example); and
  • whether there is anything they wish they knew before investing in the brand.

Former and current franchisees may not tell the full story; however, we have found that overall, our clients feel better off for going through the process of speaking with as many of them as possible. The insight that our clients gain from these conversations is astonishing.  

  1. Obtain independent legal, accounting and business advice

As mentioned, the documentation that a franchisor provides to a franchisee is extensive. It is also complicated.     

Obtaining independent legal, accounting and business advice, before you sign this documentation is critical. Note, we have emphasised the word ‘independent’ because we have seen the tragedy of resentment that can grow between a franchisee and their friend or relative that was relied upon for advice in what turned out to be a failed franchise endeavour.  

Do not let the cost of obtaining independent and specialised advice dissuade you from making an informed decision. Although, specialist advisors are known for their ability to help you understand the legal and financial implications associated with complex documentation, these advisors are equally equipped to help you negotiate more favourable terms and assist you in financial planning to maximise the return on your investment. Their advice can add value as much as prevent loss to you.

So many franchise disputes arise from matters that could have been discovered by a franchisee before they entered a franchise relationship. You owe it to yourself to ignore the flashy advertising, take the above steps, and ask the hard questions before committing to a brand.

If you are a prospective franchisee looking for some legal advice, we strongly encourage you to contact us. More generally, if you are a franchisor or franchisee seeking advice in relation to your franchise agreement, a potential dispute with a franchisor or franchisee, or even thinking about starting your own franchise, please do not hesitate to contact a member of our expert team: 

Next month, we will be providing franchisors with some general pointers on how to optimally handle their dealings with prospective franchisees.