Buying a franchise is exciting.
You’ve found a brand you like, you’ve spoken with the franchisor and you’re already picturing yourself opening the doors to your own business.
It’s also the point at which many people make decisions they’ll spend years living with.
One of the comments I hear most often from prospective franchisees is:
“I just want to lock it in before somebody else gets it.”
Whilst that’s understandable, it’s rarely the best approach.
Australian franchise law is designed to give prospective franchisees time to properly consider the opportunity before committing. That time should be used wisely.
Before paying a deposit—or signing anything—I suggest asking yourself these five questions.
1. Do I Really Need to Pay This Deposit Right Now?
One of the biggest misconceptions I encounter is that prospective franchisees need to immediately pay a deposit to secure the opportunity.
Sometimes that’s commercially appropriate.
Sometimes it isn’t.
Importantly, the Franchising Code of Conduct provides prospective franchisees with a statutory consideration period before entering into a Franchise Agreement. The purpose of that period is to allow you sufficient time to review the Franchise Agreement and Disclosure Document and obtain independent legal, accounting and business advice.
The Code also contains an important protection that many prospective franchisees are unaware of.
If, during that consideration period:
- you make a payment (whether money or other valuable consideration) to the franchisor or one of its associates in connection with the proposed Franchise Agreement; and
- you later give the franchisor written notice requesting repayment,
the franchisor must refund that amount within 14 days.
Failure to do so may expose the franchisor to significant civil penalties.
This doesn’t mean every payment made to a franchisor is automatically refundable. Whether this protection applies will depend on the circumstances, including whether the payment was made during the statutory consideration period and in connection with the proposed Franchise Agreement.
The broader point, however, is an important one.
The law recognises that prospective franchisees should have an opportunity to properly evaluate the investment before feeling pressured into making a financial commitment.
If you’re being told that you must pay a deposit immediately “or you’ll miss out”, it’s often worth taking a step back and obtaining advice before reaching for your wallet.
2. What Will This Business Actually Cost Me?
One of the most common mistakes I see is prospective franchisees focusing almost exclusively on the initial franchise fee.
In reality, that’s often only a small part of the overall investment.
Before committing, I encourage clients to understand the full financial picture, including:
- the initial franchise fee;
- fitout costs;
- equipment and stock;
- lease obligations;
- working capital;
- royalties;
- marketing contributions;
- technology fees;
- software subscriptions;
- training costs; and
- any refurbishment obligations during the term.
The question shouldn’t simply be:
“Can I afford to buy this franchise?”
It should also be:
“Can I comfortably afford to operate it?”
Having sufficient working capital during the first 12 months can often be just as important as having enough money to open the doors.
3. What Support Am I Actually Entitled to Receive?
Every franchisor talks about support.
The real question is what that support actually looks like.
Before investing, consider asking:
- How long is the initial training?
- Is there ongoing operational support?
- Will someone help me open the business?
- What marketing assistance is provided?
- Is there field support after opening?
- Are there additional fees for training or assistance?
It’s also important to distinguish between sales discussions and contractual obligations.
Many prospective franchisees remember conversations they had during recruitment. However, if those promises don’t appear in the Franchise Agreement or other written documents, disputes can arise later about what was actually promised.
One of the things I do during a franchise review is compare what my client has been told with what the legal documents actually require.
4. What Happens If Things Don’t Go According to Plan?
Nobody buys a franchise expecting it to fail.
Nevertheless, it’s one of the first things I review.
Questions worth asking include:
- What happens if I fall behind on payments?
- How does the franchisor issue breach notices?
- Can the Franchise Agreement be terminated immediately?
- Am I given an opportunity to remedy any breach?
- What happens if I want to walk away?
It’s also important to understand the financial consequences if the agreement comes to an end.
Some Franchise Agreements provide that, following termination, the franchisee may become liable for:
- unpaid royalties;
- marketing contributions;
- legal costs;
- liquidated damages;
- other contractual payments triggered by termination.
These provisions can have significant financial consequences and should always be carefully reviewed before signing.
Understanding the worst-case scenario doesn’t mean you expect it to happen.
It simply means you’re making an informed investment decision.
5. How Easy Will It Be to Sell the Business One Day?
Buying a franchise is only half the story.
Eventually, most franchisees will want to retire, pursue another opportunity or simply move on.
Before investing, consider asking:
- Can I freely sell my franchise?
- Does the franchisor have to approve the buyer?
- What transfer fees apply?
- Does the buyer need to complete training?
- Are there refurbishment requirements before sale?
- Will I remain liable after settlement?
You should also understand any restraint of trade provisions that may apply after you leave the network.
Some restraints are entirely reasonable.
Others can be broader than many people expect.
Knowing your exit strategy before you enter the business is just good commercial planning.
Final Thoughts
Buying a franchise isn’t simply about finding a brand you like.
It’s about understanding the investment you’re making, the obligations you’re taking on and the risks you’re accepting.
The good news is that Australian franchise law doesn’t expect prospective franchisees to make that decision overnight. The Franchising Code of Conduct deliberately provides time for buyers to review the documentation and obtain independent advice before committing.
Use that time.
Ask questions.
Speak with current and former franchisees.
Obtain accounting advice.
Most importantly, have the Franchise Agreement and Disclosure Document independently reviewed before you sign or pay money.
At Magnolia Legal, our fixed-fee franchise reviews go beyond simply explaining the legal documents. We review both the Franchise Agreement and Disclosure Document, answer your specific questions, identify unusual risks, explain what is market standard and, where appropriate, recommend provisions that we believe should be negotiated before you commit.
Buying a franchise can be a fantastic opportunity. Taking the time to understand what you’re signing is one of the best investments you can make before the business even opens.