Opening a franchise risks many things, here are some issues to consider before entering into a franchised business.
For more information on franchise risks and returns please contact Serina Pace on 8410 9294 or send an email via this form.
When considering the purchase of a franchise you must conduct your own due diligence investigations.
What competition is there in regard to marketing the goods or services in the location of your franchise?
Is there a demand for the goods or services in the area where the franchise will be located?
Is the franchisor’s brand well recognised and reputable?
Is the demographic information provided by the franchisor sufficient, or should independent advice be sought?
What do company searches, litigation searches, trademark searches and permit searches reveal about the franchisor?
Is the franchisor being sued or threatened with legal proceedings? The brand name, reputation and your investment may be at risk.
If the franchisor does not own the intellectual property that makes its business successful, who owns it?
Is there any intention of setting up another franchise in the area that will compete with your business?
Essential documentation
The Franchising Code of Conduct states that it is mandatory for each franchisor to provide all prospective franchisees with the following:
- Disclosure document compliant with the Code;
- Draft franchise agreement; and
- Copy of the Code.
These documents must be provided to you at least 14 days before you agree to sign a franchise agreement or make a non-refundable payment.
The franchisor will require that you advise them in writing that you have read the franchise documents and have received independent legal, accounting and business advice. If you do not obtain such advice you will be asked to sign a statement to this effect.
You should consult an accountant with franchising experience about what fees are payable under the franchise agreement and whether or not they can be met from the gross turnover of the franchised business.
You also need the advice of a lawyer specialising in franchising to review the franchise agreement and disclosure document to ensure they contain no hidden provisions that may disadvantage or mislead you into entering the franchised business.
Cooling Off
A seven (7) day cooling off period exists from the date the franchise agreement is signed.
A cooling off period does not apply when the franchise agreement is renewed, extended or transferred.
If you decide not to proceed, the Code requires the franchisor to refund money paid under the franchise agreement, less a reasonable amount retained for its costs.
DISCLAIMER: this newsletter is not intended as legal advice; no reliance is to be placed hereon.