Franchise agreements: Things to know before you sign

FAQs: January 27, 2020

What is a franchise agreement?

Buying a franchise is a significant monetary investment. It’s critical to carry out research and due diligence so you fully understand what you’re agreeing to before you sign a franchise agreement. 

Entering into an agreement carries certain legal obligations for both the franchisor and the franchisee. To be transparent and fair for all involved, there is a protocol in place for how franchising agreement procedures are carried out. This includes certain processes that must be followed and particular information that must be provided.

Let’s unpack what’s involved and what it means for you.

What is a franchise agreement?

A franchise agreement is the contract between a franchisee and the franchisor. It gives you (the franchisee) the right to operate a business using the franchisor’s name, brand and systems for a set amount of time. The agreement sets out the terms of what you can and can’t do when operating your franchise, as well as what the franchisor must provide so you can run your business successfully.

What you need to know before you sign a franchise agreement

Before you sign a franchise agreement, the franchisor is required to give you certain documents. This is to make sure you have all the information you need to make an informed decision before entering a legally binding agreement.

Once you’ve made a genuine enquiry into buying a franchise, the franchisor must give you an Information Statement as soon as possible. The Information Statement gives you information to help you weigh up the risks and rewards of buying a franchise business.

At least 14 days before you sign an agreement or pay a non-refundable fee, the franchisor has to give you the following documents:

  • the Franchising Code of Conduct, setting out the obligations and expectations of both the franchisor and franchisee
  • a disclosure document, which gives you enough information about the franchise to help you make an informed decision
  • the final version of the franchise agreement (not a draft version). 

What’s in a franchise agreement?

The agreement is a legally binding contract which lays out the:

  • key terms of the business
  • franchisee’s obligations
  • franchisor’s obligations
  • operating procedures.

The Code of Conduct says that the franchisor has to provide a franchise agreement to prospective franchisees. However, it doesn’t set out a required format for how it should look.

So, franchising agreements will differ between franchisors.

Chicken Treat’s franchise agreement sets out requirements including:

  • fees and how they’re to be paid
  • leasing agreements and location of premises
  • staff training and advertising
  • operating standards and record-keeping
  • prices and authorised products
  • insurance and taxation
  • termination clauses
  • restraints of trade

These requirements, and more, are detailed in the franchise agreement so you can carry out due diligence, seek legal advice and conduct your research before entering a franchise.

What information does the franchisor need from me?

You need to provide a range of documentation, such as identification and confirmation of residency or visa status, for the franchising agreement just like you would for any financial agreement.

Chicken Treat work with an independent third party to vet your background as part of our due diligence. Background checks include criminal, employment and company register checks. 

Who needs to review and sign a franchise agreement? 

You should seek professional legal, financial and business advice before you sign the franchise agreement. Ideally, the professionals you contract should be experienced in franchise agreements.

Once you’ve done due diligence, you’re ready to sign. Only a legal entity can sign an agreement or contract such as a private company, an individual or sole trader, partnership or trust. You can’t sign using a business name or trading name.

The franchise agreement is signed by the directors and/or company secretary of both the franchisor’s company and that of your company as franchisee.

If you’re signing as an individual, you should sign in the presence of an independent witness. 

Licence agreement or franchise agreement – are they the same? 

While researching franchises, you may come across the term ‘licence agreement’. 

A licence agreement is similar to a franchise agreement. In the case of a licence agreement, the licensor is giving the licensee rights to use something such as:

  • brand
  • logo
  • trademark
  • copyright
  • knowledge
  • intellectual property.

An example would be if you designed a style of sports shoe. You enter into a licence agreement with a manufacturer, giving them the right to manufacture your brand of shoe. 

The difference between a licence agreement and a franchise agreement is that in the latter, the franchisor has more control over how the franchise must operate. 

For example, a franchise agreement may specify elements like:

  • systems and procedures that must be followed
  • how the brand is marketed
  • minimum performance criteria.

Franchisees must follow these specified elements in order to comply with their franchise agreement, whereas licensees may have more flexibility. However, we know that our Chicken Treat operations have been tried, tested and refined to provide the best blueprint for success for our franchisees. Why wouldn’t you want to follow a proven business model

Want to know what it takes to join the Chicken Treat family?

If you’re interested in joining the Chicken Treat family we’d love to discuss the opportunity with you.

Get in touch today. 

Leisha Fontana 

Franchising Manager

leisha.fontana@craveablebrands.com.au 

0408 927 750