If you are considering buying a franchise, chances are you have already received a Franchise Agreement and Disclosure Document and are excited about the opportunity ahead.
At this point, many prospective franchisees ask the same question:
“Do I really need a lawyer to review the Franchise Agreement?”
In our view, the answer is almost always yes.
A Franchise Agreement is not simply a standard form contract. It is the document that will govern your relationship with the franchisor for years to come and will determine everything from the fees you pay, to your ability to sell the business, renew the franchise, exit the system or challenge decisions made by the franchisor.
The cost of obtaining legal advice before signing is usually insignificant when compared to the cost of trying to resolve a problem after the agreement has been entered into.
What Does a Franchise Lawyer Actually Do?
Many people assume that a franchise lawyer simply checks that the document is legally enforceable.
In reality, a proper franchise agreement review goes much further.
An experienced franchise lawyer should identify:
- clauses that are inconsistent with the Franchising Code of Conduct;
- drafting errors and inconsistencies;
- unusually harsh or one-sided provisions;
- hidden or unexpected fees;
- personal risk exposure for directors and guarantors;
- problematic restraint of trade clauses;
- renewal and exit risks; and
- provisions that fall outside current market practice.
Importantly, not every problematic clause is necessarily unlawful.
Some clauses are perfectly enforceable but still place the franchisee in a significantly worse position than would ordinarily be expected in the market.
A good franchise lawyer understands not only what the law permits, but also what is commonly accepted within the franchising industry.
Market Practice Matters
One of the most valuable aspects of engaging an experienced franchise lawyer is understanding whether a particular clause reflects current market practice.
This is particularly important because many franchisees only ever see one Franchise Agreement. By contrast, a lawyer who regularly works in franchising may review dozens of franchise agreements each year across multiple industries and systems.
That broader perspective can be extremely valuable.
Example 1 – Equipment and Fit-Out Buy Back Clauses
We recently reviewed a Franchise Agreement that allowed the franchisor to acquire the franchisee’s equipment and fit-out upon termination.
The issue was not the buy-back right itself.
The issue was that the franchisor could acquire the assets at the lower of:
- depreciated value; and
- fair market value,
with the determination effectively controlled by the franchisor.
In our view, that is not consistent with current market practice.
A more balanced approach is for assets to be acquired at fair market value determined objectively. This is the type of clause we would ordinarily seek to negotiate.
Example 2 – PPSR Security Over Personal Assets
Another issue we frequently encounter involves Personal Property Securities Register (PPSR) provisions.
In one recent matter, the Franchise Agreement permitted the franchisor to register security interests not only over the assets of the franchisee company, but also over all present and after-acquired property of the individual guarantors.
For many franchisees, this comes as a surprise.
Whilst security over the franchisee entity may sometimes be commercially justified, extending that security to the personal assets of directors and guarantors significantly increases personal risk exposure.
Where appropriate, we will often seek to limit PPSR security to the franchisee entity alone.
Example 3 – Above Market Fees
Another common issue relates to fees.
Most franchisees expect to pay an Initial Franchise Fee and ongoing royalties.
However, Franchise Agreements often contain numerous additional fees including:
- documentation fees;
- training fees;
- transfer fees;
- renewal fees;
- technology fees; and
- marketing contributions.
Recently, we reviewed a franchise arrangement containing a documentation fee of approximately $8,000.
Whilst not unlawful, it was notably higher than the level commonly encountered in comparable franchise systems.
Without industry experience, many franchisees simply assume these fees are standard.
Often they are not.
Independent Advice Is About More Than Legal Compliance
The franchisor’s lawyer acts for the franchisor.
Their role is to protect the franchisor’s interests.
Your lawyer’s role is to protect yours.
A franchise review should not simply involve explaining what a clause says. It should involve assessing:
- what the clause means in practice;
- whether it creates unusual risk;
- whether it is commercially reasonable;
- whether it is consistent with market practice; and
- whether it should be negotiated.
Sometimes the result is a list of proposed amendments.
Sometimes the result is reassurance that the agreement is broadly market standard.
Either way, the franchisee enters the arrangement with a much clearer understanding of the risks involved.
Can Franchise Agreements Be Negotiated?
Contrary to popular belief, many franchise agreements can be negotiated.
Not every franchisor will agree to every requested amendment, and some systems are more flexible than others.
However, reasonable amendments supported by commercial justification are often considered.
The key is understanding which issues genuinely matter and which are unlikely to move.
That is where experience becomes particularly important.
Before You Sign
Before entering into a Franchise Agreement, prospective franchisees should:
- carefully review the Franchise Agreement;
- read the Disclosure Document in full;
- understand all fees and financial obligations;
- consider whether any earnings information has been provided;
- speak with existing and former franchisees;
- obtain accounting advice; and
- obtain independent franchise legal advice.
Buying a franchise is a significant commercial investment. Taking the time to properly understand the legal documents before signing can save substantial time, cost and stress in the future.
Need a Franchise Agreement Reviewed?
At Magnolia Legal, we regularly advise prospective franchisees on Franchise Agreements, Disclosure Documents, earnings information, lease arrangements and franchise due diligence.
If you are considering purchasing a franchise, obtaining advice before signing can help identify risks, improve your negotiating position and ensure you understand exactly what you are committing to.