What is in a typical franchise agreement?

5 things your franchisor must provide you

So you’re thinking about purchasing a franchise business and taking the exciting step of becoming a small business owner.

You’ve met with your prospective franchisor, and things are looking good. You’re happy to take the next step since you’ve looked at their business model, and can see a future for yourself and your family.

What’s the next step?

If you’ve expressed your interest at this stage, your franchisor will send you a letter of offer or intention, and a disclosure document. You’ll pay your initial deposit (which may be refundable depending on the particular franchise), and then the franchisor will send you the franchise agreement for you to sign.

But before you do take that next step, it’s important that you understand exactly which documents your potential franchisor must provide you.

Here’s a list of the five important pieces of information that must be included in your franchise agreement.

What documents should a franchise or licence agreement include?

1) Your rights and obligations when operating the franchise

When you’re operating a franchise, it’s important to understand that you’re in a working partnership with the franchisor. Like any partnership, both parties will need to “do their bit” to ensure success.

That’s why you need to know the rules that govern the relationship – both what you have to do, and what your franchisor must do – now, so that you don’t find out down the track that the relationship is one-sided or onerous.

Your rights and responsibilities may include:

  • The need to operate within your territory (and what recourse you have to protect it)
  • Your responsibility not to add products or services that are not approved by the franchise group – or whether you have any scope to do so
  • How much you need to pay for marketing and promotion
  • How to resolve disputes between you and the franchisor
  • Any standards for staff uniforms and presentation
  • …and more.

2) All the fees that you’ll have to pay

Of course, you’ll need to make sure you have enough financial backing to cover your business’s costs – especially in the establishment phase of the business. That’s why you’ll need to fully understand the fees you’ll be liable for.

For example:

  • Annual fees
  • % of sale
  • Annual licence fees
  • Marketing fees
  • Rental/lease fees (if applicable)

Pro Tip: Take note of the way fees are calculated and how they increase over time – whether that’s according to CPI increases, a fixed percentage increase, or another formula.

Some fees will be calculated according to a specific formula, taking into account sales volume or other factors. If you don’t understand this formula, you could end up paying more than you anticipated.

That’s where having a lawyer to help you “translate” this document can be a big help. They can help you to see the real effect of these fees on the profitability (or otherwise!) of the franchise business.

3) A copy of the franchise code

The franchisor must provide you with a copy of the franchise code, which outlines all the laws in relation to franchising in Australia.

4) Financial and legal certificates

Franchisors will usually require you to seek independent financial and legal advice. These certificates, when signed off by your advisers, will demonstrate that you’ve done so.

5) A copy of the lease (If applicable)

If your franchise business is on a premises, you’ll need to enter into a lease with the landlord.

In some cases, the franchisor will enter into the lease with landlord and then sub-lease that premises to you. You’ll be agreeing to take over the responsibilities under that lease.

In other cases, (usually with smaller franchise businesses) you will be required to negotiate and enter into a lease directly with your landlord.

If that’s the case, make sure you:

  • Keep the duration of the lease consistent with the franchise agreement.
  • Understand your obligations to pay rent (and how much)
  • Are aware of any annual rent increases
  • Understand your outgoings, and what that entails (including utilities, garbage, rates, water, and land tax in some cases)

Before you sign a franchise agreement, talk to MDL for advice

As you can see, there are many different issues to consider before you sign a franchise agreement. That’s why it can pay to have an expert on your side.

If you need advice or assistance with interpreting a franchise agreement, a conversation with McCarthy Durie Lawyers can help. We’ll take the time to understand your situation, and offer you straightforward advice about your options and the best way forward. Contact the Business Law team at McCarthy Durie Lawyers on 07 3370 5100 or email info@mdl.com.au