Franchising can be a good alternative to setting up your own business. It allows you to operate under the established brand of another business and to sell its products or services for a specified time.
However, it is important to carefully consider all of your options before buying a franchise. Once you sign a franchise agreement you are bound to a wide range of responsibilities.
Here are some key ongoing obligations that you should consider when entering into a franchise:
- The term and duration of the lease, including options. Do they match the term of the franchise agreement;
- The rent, outgoings, contribution to the landlord’s promotion/marketing fund and other costs. Do they fit into your business plan? Can you comfortably pay these costs?;
- Any refurbishment clause. These are common in shopping centres and require you to periodically update your fit out, at your expense;
- Make good obligations at the end of the lease. These often involve reinstating the premises and removing all fixtures and fittings and making good any damage.
A poorly negotiated lease could cost you a lot of money, particularly if your business does not succeed and you need to get out of the lease.
2. Marketing Fund: The franchisor often establishes a marketing fund, to which franchisees contribute money to be used to drive marketing campaigns for the brand. A well-run and successful marketing fund can be beneficial to you. However, you should be aware of the financial commitment involved, as contributions are usually ongoing for the term of the franchise and are often determined as a percentage of gross sales.
3. Ongoing capital expenditure: Franchisees may be required, at times, to undertake capital expenditure and this may be by way of updated branding, shop fit-out (separate to the Landlord’s requirement above) or even site-relocation.
4. Minimum Performance Criteria: To maintain standards and performance a franchisor may set minimum performance criteria and compliance obligations. Even if your franchise does very well in the early stages of the business, you may be required to maintain this success for the duration of the term to satisfy any minimum performance criteria. You should be aware of the consequences if you fail to meet these obligations.
5. Products and Services: It is often the case that franchisees will have to purchase products from the franchisor or other nominated suppliers. You may also be required to maintain minimum stock levels. You should carefully consider whether such minimum stock levels are commercially viable and make enquiries to ensure that the products you are required to purchase from the franchisor are reasonably priced, as part of your due diligence before entering into a franchise agreement.
What should you do before signing a Franchise Agreement?
Before signing the franchise agreement, it is important you obtain as much information about the franchise as possible.
To assist you, franchisors must give you:
• an information statement which is a short document which sets out some of the risks and rewards of franchising;
• a disclosure document, the franchise agreement (in its final form), and a copy of the Franchising Code at least 14 days before you sign an agreement or make a non-refundable payment.
You should seek advice from a lawyer and accountant with franchising expertise.
To see how we can assist you and to discuss any of your franchising questions, please contact us on 07 5443 9988 or [email protected]
Argon Law is a Sunshine Coast law firm based in Maroochydore. We are commercial and property lawyers and are eager to assist you in any way we can.
Always ensure you seek professional advice for your specific circumstances. The above is not advice and is intended to be general in nature only.