Legal Issues Regarding Franchise Ownership
Starting a business from scratch and making a name for yourself can be pretty challenging regardless of the industry. You must compete against existing players and win the hearts of customers, two areas that require significant money, time and effort. Thus, most investors find owning a franchise a more desirable option since it comes without the usual business risks. For instance, an established brand, technical support, advertising and ready customers are just some of the benefits of owning a franchise. However, you still need to familiarise yourself with the legal issues that come with owning a franchise. This article delves into some of the critical legal issues you should pay attention to.
The Disclosure Document
Australian commercial law requires all franchisors to provide a Franchise Disclosure Document (FDD) to their constituent franchisees. The primary role of an FDD is to disclose critical information about the parent company so that a franchisor can make an informed decision before buying a franchise. Under the franchise law, an FDD must disclose information about the company's records, business experience, fees charged by the franchisor, franchisee-franchisor legal and business relationship and the franchise opportunity on sale. While most of the information might be complex, you should pay close attention to every detail if you plan to buy a franchise. Alternatively, you can hire a commercial lawyer specialising in franchise law to help you understand the contents of an FDD better.
Franchise Buy Back Clause
There is no doubt that a franchisor invests significant resources to make a franchise successful. While customers might recognise the brand name of a franchise, you are still required to put in work to build your valuable customer base. After all, your income comes from the sales that your franchise makes, not the franchisor. Notably, most franchise agreements include a buy-back clause, which gives a franchisor the right to buy your business at the end of the contract term. Unfortunately, the buy-back price on most franchise agreements is often set at the beginning of a franchise term, but it does not reflect the effort and value you add to a franchise. Therefore, you should talk to a commercial lawyer to help you work out the buy-back clause with the franchisor so that your efforts do not go to waste.
Territorial Competition Policy
Any successful franchise attracts investors with the financial muscle to own a portion of the business. However, when many franchise outlets of the same company open in the same territory, you might struggle to make profits. Sadly, most investors often overlook competition policy concerning specific territories when entering into a franchising agreement. Therefore, ensure that a franchisor stipulates the company's fair competition policy clearly to prevent disagreements and loss of your investment. Again, you can talk to a commercial lawyer for guidance.
Contact a local commercial law lawyer to learn more.