Franchisee rights

Franchises can be a dependable port of call in a crowded marketplace - but many Australians have paid dearly for signing on the franchisee dotted line.
 
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05.Doing the due diligence

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If you or someone you know is considering becoming a franchisee, Professor Lorelle Frazer, director of the Asia-Pacific Centre for Franchising Excellence, recommends at least six months of detective work. CHOICE consulted with franchise lawyer David Newhouse of Newhouse & Arnold Solicitors to put together the following checklist. 

  • Ask the person selling the franchise: Why is the franchise business being sold? What training will I get? How much money will I need to run the franchise in the first six to 12 months? 
  • Search the internet for media stories and comments about the franchise system and its directors; spend time observing the franchise system; fact-check all statements made by the franchisor; and understand who your competitors are in the marketplace. 
  • Employ an accountant and business adviser to carry out due diligence and make sure they understand franchise systems and the industry you’ll be working in. They should also review your business plan to confirm that the financial models supplied by the person selling the franchise are accurate and that the business is viable. 
  • Use a specialist franchise lawyer, and make sure they also do franchise dispute work so they know what to look for in the agreements. Never use a lawyer recommended by the franchisor. 
  • Make sure all financial statements or financial models provided to you form part of your contract and relate specifically to the franchise outlet you’re buying. 
  • Contact current and former franchisees and ask key questions: How much support does the franchisor provide? How much profit do you make? What are some of the challenges that the business faces? How many hours per week do you need to work, including administration? Can the business run without you? Are there any seasonal impacts on the business? If a franchisee has left the system, why did they leave? 
  • Never pay a deposit or sign documents until you’ve received legal advice from a specialist franchise lawyer, and set up the right legal and tax structures from the beginning. 

“By the time the franchisees come and see us, they’re about to lose everything – their house, franchise business, life savings and, in some cases, their marriage,” Newhouse says. “It is critical that once the relationship with the franchisor turns – usually when sales are down or a breach notice has been issued – you urgently seek legal advice and try to salvage the relationship before it’s too late.”

 

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