Published on 7th of April 2015 online – Franchising magazine
You have chosen a franchise brand. You have made contact with the franchisor. You have gone through the initial screening process, which is different for every franchise system. What’s next?
Once you, as a potential franchisee, sign the confidentiality deed, which is usually required before franchise documents can be provided, you will be issued with the following four documents by the franchisor:
- a disclosure document
- a franchise agreement
- a copy of the Franchising Code of Conduct
- an information statement outlining the risks and rewards of franchising
The franchisor may also provide you with other marketing and additional financial information about the franchise system, but is not required to do so. Please note that the above-mentioned four documents (with the franchise agreement in final form) must be given to you by the franchisor at least 14 days before you start, renew or extend a franchise agreement or pay a non-refundable deposit.
Time to get a lawyer and an accountant.At that point, you should engage professional advisers, such as an accountant and a solicitor, who specialise in franchising. You should also speak with a financial institution and apply for a loan, if required, to cover the total financial outlay required.
An accountant would assist with reviewing the facts and figures contained in the franchise agreement and disclosure document, creating of forecasts of the business’ financial potential and its ability to grow and provide a good return on your investment within the period granted under the franchise agreement.
In turn, a solicitor will review the franchise agreement and disclosure document to:
- ensure that they comply with the Franchising Code of Conduct and the current law;
- verify the information contained in these documents; and
- recommend any amendments required to protect your interests.
However, please be mindful that in most cases a solicitor’s role will be more of educational nature, limited to explaining the contents of the documents to you, as most franchisors will not amend their franchise agreements and, if anything, will only agree to one or two minor amendments.
Regardless, you must understand the obligations placed on you as a result of signing a franchise agreement, as it often involves very large financial commitment.
Before signing the franchise agreement, it’s imperative that you have done your due diligence and obtained as much information about the franchise system as possible. In addition to the information contained in the legal documents, you (or your solicitor for some of these) should:
- search the government registers such as ASIC, ACCC, IP Australia and ABR to verify the information provided by the franchisor in its documents;
- search court records in relation to any litigation involving the franchisor;
- search the Internet to ensure there is no bad publicity in relation to the franchisor’s brand and to find any other relevant information regarding the franchisor;
- speak to current and past franchisees, as they will be your best source of information; and
- seek any other industry relevant advice that will assist in your decision of committing to the brand you have chosen.
Once you have collected and evaluated all the information and obtained all the relevant advice from your professional advisers, you need to make an educated assessment of the opportunity presented and whether you wish to proceed with the purchase.