Defending and advancing the rights of franchisees is one of our key specialties. We understand that franchise relationships can break down and we have the experience necessary to guide franchisees through such times.
Below are some strategies to employ to avoid the expense, stress, and opportunity costs of jumping into the wrong franchise relationship.
If you're thinking about buying a franchise and becoming a franchisee and considering making a significant investment in brand, then this 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 pose challenging questions before you quit your job, secure a substantial loan, and commit to a long-term franchise agreement.
Three steps to take before you commit to a franchise agreement
Learn about franchising as a business model and whether it resonates with you
Learn about the brand you are interested in by speaking with its former and current franchisees
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 recommend franchisees to utilise. While these materials are broad in scope, we've found that after franchisees go through them, they gain a deeper understanding of the franchise landscape and are more equipped to ask insightful questions about their desired franchise.
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.
2. Learn about the brand you are interested in by speaking with its former and current franchisees
If you've reached out to the franchisor of your desired brand, it's likely they've shared promotional materials with you, highlighting the advantages of becoming part of their franchise community.
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 franchisees 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 are happy they joined 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.
While former and current franchisees might not reveal everything, our observations suggest that most franchisees benefit greatly from interacting with as many of them as they can. The depth of understanding they obtain from these discussions is truly remarkable.
3. Obtain independent legal, accounting and business advice
As mentioned, the documentation that a franchisor provides to a franchisee is extensive. It is also complicated.
It's crucial to seek independent legal, accounting, and business counsel before signing any documentation. We've highlighted the term 'independent' due to witnessing the unfortunate strain and regret that can arise between a franchisee and a friend or family member whom they depended on for guidance in a franchise venture that didn't succeed.
Please also note, that many franchisors downplay franchisees obtaining independent legal, accounting and business advice by saying that the franchisee only needs to sign the franchise agreement in front of a solicitor. That couldn’t be further from the truth. Investing in obtaining independent advice as to the nature and effect of the franchise agreement is the best investment you can make in your franchise.
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.
Numerous franchise disagreements stem from issues that a franchisee could have identified prior to beginning a franchise relationship. For your own sake, look beyond the attractive promotions, follow the steps mentioned, and pose the tough questions before committing to a brand.
If you're a potential franchisee in need of legal counsel, we highly recommend reaching out to us for suggestions. More generally, if you're a franchisee seeking guidance related to your franchise agreement, or a possible disagreement with a franchisor or another franchisee, please feel free to contact us for a referral.