5 Things To Consider Before Buying A Franchise

Starting a franchise business is an exciting business endeavour, but as with many business transactions, there could be legal implications for the parties involved. In this blog post, we discuss five things you should know before entering into a franchise business arrangement.

But first, what is a franchise?

A franchise is a business model that allows companies – franchisees, to resell and distribute the products or services of another business entity – the franchisor. Franchisors grant franchisees the right to sell a product or service and to use the franchisor’s name and other business assets in accordance with their guidelines.

Laws Governing Franchises

There are a number of laws that govern franchise businesses in Australia, notably the Franchising Code of Conduct (‘Code of Conduct’) and the Australian Consumer Law.

The Code of Conduct, implemented in 1998 and significantly revised in 2015, is one of the primary mechanisms that govern franchise businesses in Australia.  As such, every franchisor and franchisee business owner should familiarise themselves with the Code of Conduct.  

Some key areas that the Code of Conduct covers include:

  • Disclosure requirements.
  • A good faith obligation.
  • A dispute resolution mechanism.
  • A cooling-off period.
  • Procedures for ending a franchise agreement.

It is important to note that your franchise agreement needs to meet the definition of a ‘Franchise Agreement’ in order for your business to be governed by the Code of Conduct. A ‘Franchise Agreement’ is the contract between franchisor and franchisee which sets out each party’s rights and responsibilities in relation to the business, as well as each other.  According to the ACCC, parties usually ‘enter’ a franchise agreement by signing a written agreement, but [the] agreement can be written, oral or implied’.

In addition to the Code of Conduct, parties to a franchise have certain rights and obligations under other legislative regimes, such as:

  • The Fair Work Act,
  • The Australian Securities and Investments Act,
  • Australia’s Tax Laws, and
  • State and territory licensing schemes.

With that in mind, here are five questions you need to consider before purchasing a franchise:

1. What is the Franchisor promising?

Franchises can be lucrative businesses; however, it is essential to understand that franchisors can make misleading projections on the sales and revenue your franchise business can generate. As part of your due diligence, you should do extensive research and evaluate whether the opportunity is worth investing in. Make enquiries and find out how long it took for other franchisees to break even or to pay off the initial investment.

2. How does the Franchise Operate?

During your negotiations with the franchisor, you should ensure that you extensively understand how the business operates and what assets, systems and marketing support you will receive. It is also crucial that you understand your rights and obligations under the franchise agreement.

According to the ACCC, if you proceed with the franchise, the franchisor must provide you with a disclosure document at least 14 days prior to entering into an agreement or making a non-refundable payment.

A disclosure document should typically contain the following information:

  • Operating costs and fees you have to pay.
  • Contact details of current/former franchisees.
  • Terms regarding your exclusivity.
  • End of term arrangements.

If your prospective franchisor has not provided a disclosure document, make sure you obtain one before entering into an agreement with them.

3. What are the terms of the agreement?

Most franchisees have a standard franchise agreement with terms that define the franchise relationship. As a business owner however, it is in your best interest to negotiate any clause you find unsuitable or constraining. Engage a business lawyer to assist you in amending the franchise agreement to ensure you are comfortable and ready to begin that business relationship.

4. How long do you want to be in business?

Knowing how long you intend to be in business is essential to finding the right franchise. If you are seeking a short-term business opportunity, perhaps the current franchisor doesn’t offer terms that align with your business goal. Alternatively, if you are looking for a long-term business engagement, it is possible that the franchisor is not able to assist you for an extended period of time. Consider your short and long-term goals before engaging with prospective franchisors.

5. What are your IP rights and obligations?

A basic premise of a franchise model is utilising the name and trademark of the franchise, however, the terms of use for every franchise can vary. Make sure the franchisor’s intellectual property guidelines are explicit in order to avoid any legal disputes in the future.

Take Away

A franchise can be a great business opportunity. However, as a franchisee entering into a business relationship with another business entity, it is absolutely critical to familiarise yourself with your rights and obligations and to take all the precautionary measures outlined above before signing on the dotted line.

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Mark Lazarus

Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

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5 Things To Consider Before Buying A Franchise

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Barry Lazarus

CEO & Notary Public

barry@lazaruslegal.com.au 

We’d be lying if we told you that this bloke isn’t the big honcho of our team, but his name is a dead give-away. The founder of Lazarus Legal, Barry is an old school, tough as nails lawyer. They don’t forge litigators like this anymore.

With decades of experience in both Australia and South Africa, his wisdom is as renowned as his name. Back in the days when Schwarzenegger and Van Damme were kicking ass on VHS, Barry was kicking ass in the courtroom. And after all these years, he still has a reputation for refusing to back down.Barry is definitely the badass you’d want in a fight – in court or otherwise. But really, he’s a big softie. Just don’t let him know you know that (although he probably won’t read this anyway – navigating the Internet is not his strong point).

Aside from putting other lawyers in their place, taking long walks on the beach and spending time with his family, Barry enjoys seeing others succeed. Not only is Barry a staunch and unmoving litigator, he has sharp business and commercial acumen having started up ventures from scratch and growing them into full-blown franchises – from real estate to creating ice cream, to making pasta. With his experience on both sides of the commercial and legal equation, you want this guy to be on your side, whether you’re the next Zuckerberg realising your genius, or the next Zuckerberg taking on your opponents in court.

When Barry is not busy lawyering about, he is a part-time lawn bowler and a wannabe comedian, but never took both as a day job, because let’s face it, he’s a lot better at his day job.

If someone ever threatens you to lawyer up…relax, call Barry and he’ll handle the rest. 

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Mark Lazarus Director

Mark Lazarus

Director

mark@lazaruslegal.com.au 

The visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past stories and experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

He’s a bit of jet setter, splitting his time between Australia and the UK, maximising every hour of his professional life. He thrives on this adrenalin. It allowed him to work in private practice in Sydney, act for a host of famous celebrities in London, do a two year stint as a NSW barrister (and not the pretentious coffee type in the Melbourne laneways) and more recently did a gig as the Legal Director covering Europe, the Middle East and Africa for one of the world’s coolest fast-moving consumer good brands!  

As an Aussie and UK lawyer and former barrister, Mark not only has the gift of the gab but he’ll walk the walk to prove it too. He likes to think he’s a bit like Harvey Specter or Michael Corleone, the main difference is you can actually retain him as your lawyer and consigliere. He’ll tell you how it really is and will take on any challenge head on. Although litigation and court advocacy comes naturally to him, commercial and IP is what gets his blood pumping! 

When Mark is not out there doing his thing, you will probably catch him chilling at home with his family, on the sidelines of the soccer (football) pitch cheering on his two boys, crawling through mud obstacles, or training hard at the gym. Passion and commitment is what drives Mark to succeed, along with his burning desire to disrupt the legal profession by finding new ways to change the game.

He has sights on the future. So if you’re breaking new ground, ahead of the times, and on the verge of something big, but you need someone who’s got your back and who can give you straight up advice, this is the guy you will want on speed dial.

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