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Franchising is an exciting and rewarding way to earn an income or change your career path. To enter into a franchise system, you will have to sign a franchise agreement. However, entering into a franchise agreement is not a decision you should make lightly. This article will outline some of the steps you should take and information you should seek before signing a franchise agreement.  

Read Your Franchise Agreement

The franchise agreement is a legal document that both creates and governs the relationship between a franchisee (i.e. the person buying a franchise) and a franchisor (i.e. the person selling the franchise). This document will set out the rights and obligations of the franchisee and the franchisor. Other terms will detail the:

  • cooling off period;
  • length of the franchise arrangement;
  • territory of the franchise; 
  • franchise fees; and
  • grounds for termination. 

Before you sign a franchise agreement, it is crucial that you read through the document extensively and understand the obligations that you will be taking on as a franchisee. After reading through the franchise agreement, you may wish to ask the franchisor:

  • whether the terms of the franchise agreement are negotiable;
  • if there is any other documentation that you will be provided with; or
  • any questions you may have about one of the terms of the agreement. For example, you may wish the franchisor to elaborate on what happens if you want to sell your franchise agreement, or what happens when the agreement expires.

Reading through the document and talking with the franchisor is no substitute for seeking legal advice. You should get a lawyer with franchising experience to examine the franchise agreement before you sign it.

Franchise Association of New Zealand Code of Conduct

Most franchisors in New Zealand will be a part of the Franchise Association of New Zealand (FANZ). As such they will be bound to the FANZ Code of Conduct. It is a good idea to review your franchise agreement in accordance with the Code of Conduct to make sure they are not breaking any of the regulations. The Code of Conduct forces franchisors to add a termination clause and a cooling off period. FANZ provides a complaints process as well as a dispute resolution service if you feel as if your franchisor is not following the code of conduct. If a franchisor is not a part of FANZ it can be a sign that they are not a good party to go into business with.

Read Other Franchise Documents

When you enter into a franchise, you will receive a number of legal documents. You should be read your franchise agreement in conjunction with the: 

  • operations manual; and 
  • disclosure document.

The Operations Manual

The operations manual is a core part of the franchise package that a franchisee receives once they have bought the location. The franchise manual will contain a guide on how to set up your franchise to give it the best chance of success. The manual details: 

  • how the franchise should operate;
  • branding requirements;
  • the franchisee’s systems; 
  • the training procedure; and 
  • health and safety procedures that all staff members should follow. 

When you are reading through the franchise agreement, you will likely be shown or loaned the operations manual to read alongside. It is a critical document for franchisees as it will outline how to operate your franchise so that it is as successful as the franchisor’s business. It is important that you follow the advice given in the franchise manual as it will be the best way to run your business. 

The Disclosure Document

You may also receive a disclosure document. A disclosure document is intended to provide all potential franchisees with an insight into the franchise and the franchisor, to ensure that they have all the information they may need to make an informed decision. 

Even though most franchisors will put together a franchise disclosure agreement, as they are wanting to convince you to buy a franchise, in New Zealand, a franchise disclosure agreement is not compulsory. However, the Franchise Association of New Zealand (FANZ) does set out a minimum standard for disclosure documents that all of its members must abide by. It is best practice to ask the franchisor if they have a disclosure document before signing the franchise agreement. The absence of such a document may indicate that the franchise is not the right model to enter into. 

Some of the things that a franchise disclosure agreement might contain include:

  • the business experience of the franchisor;
  • financial projections;
  • the fee and cost structure of franchise system;
  • the length of the franchise agreement; and
  • a summary of particulars and features of a franchise system.

As both the operations manual and the disclosure document contain information crucial to the franchise’s success and operation, you will likely need to sign a confidentiality agreement before receiving this documentation.

Ask the Franchisor Questions

Alongside reviewing any documentation provided by the franchisor, you should also take the opportunity to talk to the franchisor and ask them questions. The following are some questions you may wish to ask the franchisor on different areas of concern.

Business Experience

You may wish to ask:

  • how much experience the franchisor and other key individuals have in the industry;
  • how many franchised businesses the franchisor operates; and
  • about the success and failures of these businesses.

Financial Issues and Costs

You may wish to ask:

  • what the initial and ongoing costs will be for running the franchise; 
  • whether there is any form of work or income guarantee that accompanies the franchise; and
  • how the franchisor makes their money.

Support

You may wish to ask:

  • what level of support you can expect from the franchisor;
  • whether this support comes directly from the franchisor, or if they have hired staff into support-based roles; and
  • how this support will vary from the opening period to the day-to-day running of the business.

Key Takeaways

Entering into a franchise is a major commitment. It is crucial that you make that decision whilst you are in the most informed position you can be in. Prior to agreeing to buy a franchise location, you should:

  • thoroughly read through the franchise agreement, alongside any other legal documents; 
  • get a legal professional with franchising expertise to examine all of the legal documentation; and
  • speak to the franchisor and ask any queries you may have.

Doing so ensures that you are in the best position possible when deciding whether you wish to buy a franchise. If you are interested in signing a franchise agreement and becoming a franchisee, contact LegalVision’s franchising lawyers on 0800 005 570 or complete the form on this page. 

Frequently Asked Questions

What is a franchise agreement?

A franchise agreement is a legal document that creates and governs a franchisee and a franchisor’s relationship.

What is included in a franchising agreement?

A franchising agreement should include terms on issues such as: the length of the franchise arrangement; the territory of the franchise; franchise fees; and the grounds for termination.

Why is a franchising agreement important?

A franchising agreement is crucial because it details the obligations and responsibilities of the franchisor and the franchisee.

How long is a franchise agreement?

The term of each franchise agreement will differ between each agreement. 

 

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