Buying a franchise can be an exciting opportunity for small business owners in Victoria. A franchise can provide an established business model, brand recognition and access to an existing customer base. However, buying a franchise also involves legal and financial risks.
Good legal advice can help you understand these risks before you commit. Before buying a franchise, you should consider the due diligence process, review the franchise agreement and understand your rights under Australian law.
Below, we explore the key legal considerations when buying a franchise in Victoria, including due diligence, disclosure requirements, franchise agreements and franchisee rights.
Key Legal Considerations When Buying a Franchise
If you are considering buying a franchise, you should carefully consider the following matters:
- Due diligence: Research the franchise opportunity, business model, financial position and reputation.
- Disclosure documents: Review the information the franchisor provides before you enter the franchise agreement.
- Franchise agreement: Understand the fees, territory, obligations, support, renewal and termination terms.
- Franchising Code of Conduct: Understand the rules and protections that apply to franchise relationships in Australia.
- Financial risks: Consider the costs of establishing and operating the franchise.
- Independent legal advice: Have the relevant documents reviewed by a lawyer before you sign them.
Conducting Due Diligence Before Buying a Franchise
Due diligence is a crucial first step when buying a franchise. It involves researching the franchise opportunity to determine whether it suits your business goals and financial position.
This process should go beyond the franchisor’s marketing material. You should investigate the franchise’s operations, financial performance, reputation and potential risks.
Review the Franchise Disclosure Document
In Australia, franchisors generally must provide prospective franchisees with a disclosure document at least 14 days before they enter into a franchise agreement.
The Franchising Code of Conduct disclosure requirements set out what information franchisors must provide to prospective franchisees. The disclosure document can contain important information about the franchise system, fees, supply arrangements, legal proceedings, franchisor solvency and other matters.
The current Code also includes additional disclosure requirements for matters such as significant capital expenditure and specific-purpose funds in certain circumstances.
Reviewing the disclosure document with a lawyer can help you identify potential red flags. You should also consider financial or accounting advice when assessing the financial viability of the franchise.
Speak With Existing Franchisees
Speaking with existing franchisees can provide valuable insight into the franchise system. They may be able to explain their experiences with the franchisor, business model and ongoing support.
You can also ask about operating costs, profitability, staffing issues, supplier arrangements and challenges they have experienced.
Assess the Business and Territory
You should also consider the location and territory of the proposed franchise. Check whether the territory provides any exclusivity and whether other franchisees can operate nearby.
Consider the expected operating costs, marketing obligations, staffing requirements and supplier arrangements. These factors can have a significant effect on the viability of the business.
Thorough due diligence can help you understand the risks before you sign the franchise agreement.
Understanding Franchise Agreements
The franchise agreement forms the basis of the relationship between the franchisor and franchisee. It sets out your obligations, the franchisor’s commitments and the length of the franchise term.
In Victoria, as elsewhere in Australia, franchise agreements are regulated by the Franchising Code of Conduct. The Code is a mandatory industry code that applies to franchising participants across Australia.
You should understand the franchise agreement before signing it. Key matters to check include:
- Fees: Understand all initial and ongoing fees, including royalties, marketing fees and renewal costs.
- Territory: Check whether you have an exclusive territory or whether other franchisees can operate nearby.
- Support: Confirm the training, marketing support and operational assistance the franchisor will provide.
- Termination: Review when the franchisor can terminate the agreement and what happens when the agreement ends.
- Renewal: Check what happens when the initial franchise term ends and whether you have a right or option to renew.
- Operating requirements: Understand requirements for suppliers, premises, equipment, staffing and business operations.
- Restraints: Check any restraint provisions that may apply during or after the franchise relationship.
A franchise agreement can contain complex legal terms. A lawyer who specialises in franchising can review the agreement and explain your rights and obligations.
Your lawyer can also identify potential risks, negotiate terms where appropriate and clarify provisions that may affect your business.
Legal Rights of Franchisees in Victoria
Franchisees in Australia receive protections under the Franchising Code of Conduct and the Australian Consumer Law (ACL).
These laws set rules for disclosure, dispute resolution and the conduct of franchisors. They also provide important protections for franchisees in certain circumstances.
Franchise Disclosure Requirements
Before entering a franchise agreement, prospective franchisees should carefully review the documents required under the current Code.
These documents can include the franchise agreement, disclosure document and a copy of the Franchising Code of Conduct, depending on the circumstances.
Prospective franchisees generally must receive the required disclosure documents at least 14 days before entering the franchise agreement.
This period gives you time to review the information and obtain independent legal and financial advice before you commit to the franchise. The ACCC’s guidance on information and document obligations provides further information about these requirements.
Franchise Cooling-Off Period
The current Code provides a 14-day cooling-off period for certain new franchise agreements.
In general, a franchisee can terminate a new franchise agreement within 14 days of entering into it. Limited circumstances allow a franchisee to opt out of the cooling-off period.
The rules can vary depending on the circumstances of the franchise arrangement. For example, different considerations may apply to a new franchise agreement and a transferred agreement.
If you are considering using cooling-off rights, you should obtain legal advice promptly. You can also review the ACCC’s guidance on ending a franchise agreement.
Good Faith Obligations
The Franchising Code of Conduct includes obligations concerning good faith during the franchise relationship.
These obligations can apply during negotiations and other stages of the relationship. They form part of the legal framework that governs dealings between franchisors and franchisees.
Misleading or Deceptive Conduct
The Australian Consumer Law also protects businesses and consumers from misleading or deceptive conduct.
If a franchisor provides misleading information about a franchise opportunity, a franchisee may have legal rights or remedies. The available options will depend on the circumstances.
This makes it important to review information from the franchisor carefully. You should also obtain independent advice before relying on important representations about the franchise.
Dispute Resolution
The Franchising Code of Conduct contains processes for resolving certain disputes between franchisors and franchisees.
Depending on the circumstances, these processes can provide an opportunity to resolve a dispute without immediately commencing court proceedings.
Understanding your legal rights can help you make informed decisions throughout your franchise journey. It can also help you understand the protections and obligations that apply to your franchise relationship.
What Should You Check Before Signing a Franchise Agreement?
Before signing a franchise agreement, take time to review the legal and commercial aspects of the proposed franchise.
- Review the disclosure document: Check the information provided by the franchisor and identify matters that need further investigation.
- Read the franchise agreement: Understand your fees, obligations, territory, operating requirements, renewal rights and termination provisions.
- Speak with existing franchisees: Ask about their experience with the franchisor and the business model.
- Assess the financial position: Consider the initial investment, ongoing costs, royalties, marketing contributions and other expenses.
- Check related agreements: Review any lease, guarantee, loan, supply or other agreement connected with the franchise.
- Obtain independent advice: Have the documents reviewed by an experienced lawyer and obtain financial advice where appropriate.
- Take your time: Use the disclosure period to investigate the opportunity before making a commitment.
Securing Legal Support for a Franchise Purchase
Buying a franchise in Victoria can provide an opportunity to operate an established business model. However, the process also involves important legal and commercial considerations.
Thorough due diligence, careful review of the franchise agreement and an understanding of your legal rights can help you make an informed decision. Obtaining legal advice early can also help you identify potential risks before you commit to the franchise.
At Irvine Lawyers, we understand the legal issues that can arise when buying a franchise. To discuss your franchise plans and receive tailored legal advice, contact Irvine Lawyers to book an appointment with Laurie Irvine.
Frequently Asked Questions About Buying a Franchise in Victoria
Do I need a lawyer to buy a franchise in Victoria?
You do not necessarily need a lawyer to buy a franchise. However, independent legal advice can help you understand your rights, obligations and potential risks.
A lawyer can review the franchise agreement and disclosure documents before you sign them. They can also identify provisions that may affect your business.
What is a franchise disclosure document?
A franchise disclosure document provides information about the franchise system. It helps prospective franchisees make an informed decision about whether to enter the franchise.
The current Franchising Code of Conduct sets out requirements for the information franchisors must disclose and when they must provide the relevant documents.
How long do I have to review a franchise before signing?
Under the current Franchising Code of Conduct, prospective franchisees generally must receive the required disclosure documents at least 14 days before entering into a franchise agreement.
This period gives you time to investigate the franchise and obtain independent legal and financial advice.
What is the cooling-off period for a franchise agreement?
The current Code generally gives franchisees a 14-day cooling-off period for a new franchise agreement.
There are limited circumstances in which a franchisee can opt out of the cooling-off period. The specific circumstances should be reviewed before you make a decision.
Can a franchise agreement be negotiated?
A franchise agreement is a contract, and some terms may be negotiable. However, the franchisor may use a standard agreement across its franchise network.
An experienced lawyer can identify provisions that may need attention and advise you about your options before you sign.
What happens if I have a dispute with my franchisor?
The Franchising Code of Conduct contains dispute resolution processes that may apply to disputes between franchisors and franchisees.
Other legal rights or remedies may also apply depending on the nature of the dispute. Legal advice can help you determine the appropriate next step.