ACCC Deputy Chair Mick Keogh on the checks every prospective franchisee must make before signing and when it comes time to renew or exit.
In my role at the ACCC, I see many franchising disputes come about due to franchisees not fully understanding their agreement before they sign it.
A prospective franchisee, excited about joining an established brand, moves quickly through pre-contract documents. Months or even years after signing, an unexpected fee, a change to supplier arrangements or the renewal process can expose obligations that were not fully understood at the outset. By then, the options available to the franchisee are often far narrower than they were before the agreement was signed.
The single most effective way prospective franchisees can protect their investment is to slow down before signing, understand the commercial obligations they are accepting and take their time to resolve unanswered questions.
Read the disclosure document as carefully as the price tag
Before entering a franchise agreement, franchisees must receive a disclosure document, franchise agreement and information statement. These documents exist precisely because the information gap between a franchisor and a prospective franchisee can be enormous. Reading these documents carefully helps franchisees understand the commercial obligations, ongoing costs and risks associated with the franchise before committing.
Franchisees should read the disclosure document closely to understand the full picture. The purchase price is only one part of the overall investment. In my experience, one of the most common mistakes prospective franchisees make is focusing on the upfront cost while underestimating the ongoing financial commitments that emerge over the life of the agreement. Understanding how those ongoing costs are triggered and calculated is just as important as understanding the initial investment and how ongoing costs can impact your profit.
It is critical for prospective franchisees to get a good understanding of how the business will operate in practice before they sign anything. This includes ongoing fees, supplier arrangements, operational support and things that could require additional investment throughout the life of the agreement. Getting the full picture before entering an agreement places franchisees in a stronger commercial position than trying to address the same issues after signing the agreement. In the disclosure document, prospective franchisees should receive contact details for current and former franchisees. It’s important to reach out to them (or other franchisees not listed in the disclosure documents) before committing to the franchise. They can offer valuable insights that aren’t always obvious from formal documentation such as whether costs matched expectations, what support was actually delivered, and what challenges emerged once they were operating. The ACCC website contains a list of suggested questions prospective franchisees can ask.
Independent legal, accounting and business advice is essential. A lawyer can explain the agreement in plain terms, an accountant can stress-test the financial assumptions, and a business adviser can help determine whether the opportunity is a realistic fit for the franchisee’s skills, goals and financial position.
Cooling-off rights may apply after signing, but franchisees should not rely on them as a safety net. Costs may still apply after cancellation, and lease or supplier obligations may not unwind easily. The better approach is always to be certain before signing.
Signing the agreement marks the beginning of an ongoing commercial relationship
Once a franchise is operating, it is easy to focus entirely on running the business. Many franchisees file their agreement away and only look for it when something goes wrong. By then, it is often too late to resolve an issue without it becoming a formal dispute.
Franchise systems change. Franchisors update branding, technology, supplier arrangements and operating requirements. Some of those changes are already permitted under the agreement. Others require consent. Franchisees who know the difference are far better equipped to respond when a change arrives, ask the right questions, and push back where it is warranted.
Supplier arrangements are worth ongoing attention. Many franchise systems require franchisees to purchase from approved suppliers, and these arrangements can affect costs significantly. Franchisees should understand whether alternatives are available and whether the franchisor receives rebates or other commercial benefits from those supplier relationships.
Contributions to shared funds for marketing, technology, training or refurbishment should also be clearly understood. Franchisees have a right to know what those funds are used for, who controls them and how they are managed.
If an unexpected cost arises, franchisees should ask where the cost is attributed to in the agreement before paying it. Raising concerns early, in writing, is far more effective than waiting. Documentation matters. Franchisees should keep records of emails, invoices, letters and conversations from the outset.
Renewal deserves the same scrutiny as the original agreement
One of the most consistently misunderstood aspects of franchising is what happens at the end of an agreement. Many franchisees assume renewal is a formality – that’s not always the case. A Franchisor may choose to end the agreement even if you wish to continue – and they can do this without paying you anything.
Franchisees who are offered a new agreement should review it with the same rigour applied when they first entered the franchise, check what has changed, whether new fees apply, whether supplier agreements differ, and whether the term is long enough to recover any investment required under the new agreement.
For franchisees considering a renewal, sale, transfer or exit, understanding the process early is essential. Most agreements require the franchisor’s written consent before a transfer can proceed, while restraint of trade provisions may affect future business activities after the agreement ends. Independent legal advice is strongly recommended before making decisions about exit.
Early guidance strengthens better business decisions
One of the biggest misconceptions I encounter is that businesses only seek guidance after problems emerge. Many of the ACCC’s franchising resources are designed to help franchisees make informed decisions before commercial issues develop.
The ACCC’s franchisee journey covers what franchisees should consider before signing, while operating, and when preparing to renew, sell or exit. The Franchise Disclosure Register allows prospective franchisees to compare information about franchise systems before committing. The ACCC’s free online course, Is franchising for me?, explains the fundamentals and the protections available under the Franchising Code of Conduct.
The ACCC’s franchising hub provides practical information for current and prospective franchisees, including guidance on the Franchising Code of Conduct, disclosure documents, franchise agreements, supplier restrictions, shared funds and dispute resolution.
For those whose English is not a first language, the ACCC provides franchising guidance in other languages, including, Hindi, Mandarin, Cantonese, Arabic, Korean, Vietnamese and Punjabi. Where a dispute does arise, the Australian Small Business and Family Enterprise Ombudsman can help both parties access resolution services.
By the time a franchisee is considering a call to a lawyer, many of the opportunities to ask questions and clarify expectations have already passed. That’s why informed decision-making before signing remains the strongest foundation for a successful franchise relationship.
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