Signing a franchise agreement is one of the most significant financial and legal commitments most people will ever make. The Franchising Code of Conduct gives prospective franchisees some protections — disclosure requirements, cooling-off periods, and obligations on the franchisor — but these protections are limited and the agreement itself is almost always heavily weighted in the franchisor's favour.
Here is what you need to understand before you sign.
The disclosure document is a starting point, not a guarantee
Australian franchisors are legally required to provide a disclosure document at least fourteen days before you sign. This document contains information about the franchise system, its history, its financial performance and the fees you will pay. Read it carefully — and have a lawyer experienced in franchising read it with you.
The disclosure document tells you what the franchisor is required to tell you. It does not necessarily tell you what you most need to know. Speak to existing and former franchisees directly — their experience of the system is more valuable than any disclosure document.
Territory protections may be weaker than they appear
Many franchise agreements specify an exclusive territory — an area within which the franchisor will not grant another franchise. But the definition of what constitutes "competition" within that territory can be complex. Online sales, mobile operations, and adjacent brand operations can all undermine the value of a territorial protection. Understand exactly what your territory covers and what it does not.
The renewal terms deserve as much attention as the initial term
A franchise agreement typically runs for five to ten years. What happens at renewal is often less clearly defined. Does renewal require payment of a new franchise fee? Will the agreement terms change? Does the franchisor have the right to impose a full fit-out refresh? The end of an initial term can bring significant costs that were not visible when you first signed.
Exit is harder than entry
Selling a franchise requires franchisor approval of the buyer. Transfer fees typically apply. The franchisor may have a right of first refusal on any sale. If your business is struggling, finding a buyer who meets the franchisor's criteria at a price that covers your original investment is not guaranteed. Understand your exit options before you enter.
Consider the alternative before you sign
Before signing any franchise agreement, it is worth spending five days understanding whether you could build an independent business with equivalent structure — without the ongoing fees, territorial restrictions and contractual obligations of a franchise.
The Franchise Alternative is a five-day program that helps you do exactly that, . It is significantly less than the legal fees you will spend reviewing a franchise agreement — and it gives you a complete business blueprint that belongs entirely to you. Register your interest here.