What is a franchise agreement?
A franchise agreement is a legally binding contract between a franchisor and a franchisee that details the parties’ respective rights and obligations.
It entitles you, as a franchisee, to operate a business within the franchisor’s network. Reviewing and signing one is a critical step in purchasing a franchise because it establishes the legal basis for your business relationship and specifies how it will operate.
To purchase and operate a franchise, you must sign a franchise agreement.
What’s included in a franchise agreement?
Your franchise agreement will set out the terms and conditions of your specific franchise relationship, but it must follow the guidelines of the Franchising Code of Conduct. The code regulates the rights and responsibilities of franchisors and franchisees within Australia.
A franchise agreement needs to include:
- How long the agreement is for
- The local area you’ll serve (your territory or ‘patch’)
- Restrictions on where, when, and how you can do your own advertising or marketing
- The fees you owe, for what, and how to pay them. This includes everything from marketing, training and utilities, to any termination costs and the royalties you’ll pay to the franchisor
- Any codes of conduct
- Your obligations around reporting sales, income and costs to the franchisor
- Franchisor obligations including advertising, training, support, and logistics
As well as the franchisor and franchisee duties, the agreement must include contractual obligations like:
- How to renew the agreement
- What happens if the agreement is terminated
- Dispute resolution processes
- Procedures for if the contract is breached
A franchise agreement must be accompanied by the franchisor’s disclosure document, which gives even more details about the business. Other documents, like the franchise operations manual, or Privacy Act consents, may also be mentioned in the official contract. These documents need to be read alongside the franchise agreement, as they form an important part of your franchise relationship.
Who should prepare a franchise agreement?
The franchisor will provide you with their franchise agreement.
Most franchise agreements tend to be complex and can be over 50 pages long, so you’ll need a lawyer and accountant onside to help you work through the document. Getting a lawyer that specialises in franchising is advantageous. They’ll help you ask questions, make changes and liaise with the franchisor as you go through negotiations.
A well established franchise is unlikely to change their terms, but it’s always worth asking. Remember, you’ll be the one signing the contract, not your lawyer, so make sure you personally read through each clause and know what you’re getting into.
Remember…
Signing a franchise agreement entails more than simply putting ink to paper. Your agreement’s details will establish the tone and ground rules for what will hopefully be a long and fruitful business relationship.
If you examine the details and have a firm grasp on what you’re getting into, you’ll be in the best position to begin your franchisee journey.
