One of the most popular ways of starting a business is to purchase a franchise from an existing company. These so-called ‘businesses in a box’ allow the franchisee to benefit from a proven business model and the branding and marketing power of the franchise company.
Famous examples of franchise businesses include McDonald’s and Starbucks. however, not all franchises require the million-dollar franchise fees that these can incur. Many franchise opportunities can be started with fees of less than ten thousand dollars, however, whatever level you choose to start at, you must know the legalities and commercial law relating to franchise businesses.
Franchise Agreements – What They Are And What They Include
One of the legal documents you need to be aware of is the franchise agreement. This is the legal contract that exists between you, the franchisee, and the franchise company aka the franchisor. A franchise agreement will include the rights of each party and set out each of their respective obligations through the period of the franchise term.
Some of the specific terms within a franchise agreement will include:
- Franchise fees which are payable by the franchisee
- Rights of the franchisee as they relate to the branding and intellectual property of the franchisor
- Obligations of the franchisee relating to their staff and staff training
- Rights of the franchisee and franchisor upon the franchise agreement being terminated
It has to be understood that agreeing to and signing a franchise agreement is one of the most significant obligations any business owner can undertake within commercial law. As such, if you are considering a franchise you must seek the guidance of a commercial lawyer before signing any franchise agreement.
Protections Within The Franchise Code
Given the significant undertaking of a franchisee, the franchise code includes protections for them. These include a ‘Disclosure’ period and a ‘Cooling Off’ period.
This places an obligation upon the franchisor company to provide the franchisee with certain documents at least 14 days before the date the franchise agreement is due to be signed. These documents must contain the information prescribed by the franchise code to ensure that the franchisee enters the franchise agreement fully aware of what they are signing up to. The documents that must be made available are:
- A copy of the franchise code
- A disclosure document
- The franchise agreement
The information which must be provided within the disclosure document includes:
- Information and details of existing franchisees
- How many franchisee businesses have ceased operation, been terminated, or sold within the previous three financial years
- If the franchise is for a non-exclusive or exclusive territory
- Payment details which are due before and during the franchise agreement
Cooling Off Period
As with many commercial contracts, a franchise agreement must have a cooling off period that allows the franchisee to back out should they change their mind or have a change of circumstances. The usual cooling off period under the franchise code is seven days from either the date the franchise agreement is signed by the franchisee, or the date when the franchisee makes their first payment, whichever is the earlier.
If a franchisee invokes their right to withdraw during the cooling off period the franchisor must refund any monies they have paid no later than fourteen days. The franchisor may deduct its reasonable expenses but only those detailed within the franchise agreement with the method of calculation included. This prevents the franchisor from retaining expenses that were not outlined in the franchise agreement.