A question we, as experienced franchise lawyers, often hear from a prospective franchisee is, “It seems like a simple franchise agreement, do I really need a lawyer to review it?” This echoes a common misunderstanding in the world of franchising.
Whether you’re delving into a pharmacy, fitness centre, café, or professional services franchise, understanding the nuances of franchising risks is paramount. In this article, we delve into the role of a franchise lawyer and why such expertise is indispensable for prospective franchisees.
1. Franchise Disclosure Document
Ensuring the franchisor has provided the prospective franchisee with a Franchise Disclosure Document. This document is required to be provided by a franchisor pursuant to the Franchising Code of Conduct (the Code) and must be provided in a prescribed form. It provides important information about the franchise system, including, details about the franchisor and its litigation history, the franchise establishment costs, the obligations under the franchise agreement, and the franchisor’s financial position.
2. Franchise Agreement
Carefully reviewing the franchise agreement, which outlines the legal relationship between the franchisee and the franchisor, including ensuring that it is compliant with the Code, identifying specific terms and outlining the obligations of each party to the relationship, including, but not limited to the duration of the agreement, fees, royalties, territorial rights, marketing and advertising, intellectual property use, and renewal and termination clauses.
3. Territorial Rights and Exclusive Areas
Considering whether the franchise agreement should include territorial protection or exclusive rights to operate in a certain area and understanding any limitations and potential competition from other franchisees or from the franchisor.
4. Intellectual Property and Trademarks
Verifying the ownership of trademarks, logos, copyright material and other intellectual property rights. If the intellectual property belongs to the franchisor, understanding and explaining the terms under which a prospective franchisee can use those assets.
5. Renewal and Termination Conditions
Reviewing the conditions under which the franchise agreement can be renewed or terminated to ensure they are in line with the requirements of the Code.
6. Understanding Business Operations
Considering whether the prospective franchisee’s business will require a physical location to operate. If so, considering whether the site will be leased or licensed and whether the terms of the lease or licence align with the renewal and termination conditions of the Franchise Agreement.
Advising the prospective franchisee whether the franchise agreement has conditions or restrictions on relocation of the business.
7. Training and Support
Evaluating the training and support provided by the franchisor and advising the prospective franchisee whether the level of assistance provided by the franchisor is likely to be sufficient and aligns with prospective franchisee’s expectations and needs.
8. Advertising and Marketing
Understanding the franchisor’s advertising and marketing requirements and advising the prospective franchisee of the contributions the prospective franchisee is expected to make and how and when these funds will need to be paid.
Considering and advising whether the prospective franchisee is able to market its business through its own social media channels and what approvals or conditions are placed on advertising and marketing by the franchisor.
9. Restrictions and Obligations
Identifying any restrictions on products, services, suppliers, or business practices and advising the prospective franchisee of the obligations of the franchisee in connection with same.
10. Litigation History
Advising the prospective franchisee of the franchisor’s litigation history, if any. This can provide insights into prospective issues or disputes within the franchise system and provide the franchisee with some guidance on what they may expect during the franchise relationship, having regard to the franchisor’s past relationships with other franchisees. Speaking to current or former franchisees about the business may also give the prospective franchisee an indication of what to expect when entering business with the franchisor.
11. Exit Strategy
Discussing exit strategies with the prospective franchisee. Understanding and advising the prospective franchisee of the options available. If the franchisee decides to sell or exit the franchise before the end of the agreement.
12. Dispute Resolution
Considering whether there is a dispute resolution process contained in the franchise agreement and whether such process is consistent with the mandatory process set out in the Code.
13. Business Structure
Discussing with the prospective franchisee whether the business structure proposed to be adopted by the prospective franchisee is the preferred structure for operating the business and providing advice on the different possible business structures along with the advantages and disadvantages of each structure. Tax and accounting advice should be sought separately by the prospective franchisee.
Each business is unique in its own way and the advice provided by a lawyer to a prospective franchisee should be tailored to meet the needs of the prospective franchisee and its proposed business. Buying into a fitness centre will entail different considerations to buying a café or professional services franchise.
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Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.