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The 5 legal issues to watch out for when investing in a franchise
Mon 9 February 2015 - 2:14 pmEditor's Choice | Franchising | Legal | Opinion
Currently, there are over 73,000 franchise businesses is Australia that employ over 400,000 people.
Owning a franchise can be an attractive opportunity for many passionate entrepreneurs and it can be a desirable option for those who want to own a small business without the usual business risks involved.
Choosing a franchise over owning an independent business should provide you with constant back up and support. However, this doesn’t mean that you need to wash your hands of the legal and financial implications.
Whether you decide to buy into a franchise, or you’re the franchiser, there are key legal issues that you need to pay close attention to.
1. The Disclosure Document
By law, all Australian franchise networks are required to provide a Franchise Disclosure Document. This is one of the most important sources of information you’ll have regarding a franchise – it will explain issues including the company’s records, business experience, rights, costs and various other legal and financial aspects of buying into the franchise. Make sure you pay sufficient attention to all the details laid out in this document.
2. The Code of Conduct
The franchising Code Of Conduct is a legally binding document that describes how business between franchisor and franchisee should be conducted. Basically, this document sets the legal scene for the business relationship and identifies procedures and principles to which both parties need to adhere. Again, make sure you take the time to familiarize yourself with all the details highlighted in this document prior to signing.
One of the more famous cases in the Australian business and legal life has been the Ketchell case of 2008. In this legal case, the argument against the franchisor was that they had entered into an agreement without following the Code’s procedures and this was supposed to deem the franchise agreement invalid. The courts, however, ruled against this and the decision is that there must be something more than a technicality to make a franchise agreement invalid.
Therefore, the application of the Code of Conduct remains valid in situation where there is serious breach of trust or misconduct.
– Please be aware that there is currently new legislation passing through Parliament outlining new requirements which starts in January 2015.
3. Buy back clause at the end of the franchise.
You may work hard to build a valuable customer base, but at the end of your franchise agreement may not have the option to sell your business if the franchise agreement has a ‘buy-back’ clause. This clause gives the franchisor the right to buy the business from you at the end of the franchise term. Be aware that often the price for the buy-back is fixed at the time the original franchise was taken; therefore it may or may not reflect the added value you may have created in the business.
4. Not providing ongoing support.
Part of the franchisor’s responsibility is to provide initial training, coaching and ongoing support to his franchisees. Again, the framework for this support needs to be established in the franchise agreement and the disclosure document.
Problems might arise when these activities are not explicitly addressed in the beginning and expectations are not met.
5. Establishing too many competitors.
Territory is an issue often overlooked when entering franchising agreements. The competition policy of the franchisor should be clear and franchisors should adhere to the territorial policies stated in the disclosure document.
There are many legal issues originating from the complicated relationship between franchisor and franchisee. While a franchise might be a dream come true for entrepreneurs, it holds legal risks that need to be addressed prior to entering any agreements. We suggest that you do that with the help of a lawyer to avoid any legal problems.
About the Author:
Katherine Hawes is a lawyer who specialises in offering fixed fee and low cost legal advice to businesses. To download a free copy of her e-book on Legal issues for small business, please click here: http://www.newagelegalsolutions.com.au/
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