Thinking of buying a Franchise, then make sure you read the fine print … otherwise it could bite you!
In Australia there are over 1100 Franchisor Business Formats and an estimated 73,000 Franchisee Businesses operating. The contract binding the Franchisor and Franchisee is known as a Franchise Agreement and is an agreement between the parties to develop and run a business. The choice of which Franchise may vary from the Butcher or Baker or Candle Stick Maker … and yes there are candle business opportunities.
The basic concept of a Franchise is that for a fee which is usually a percentage of turnover a Franchisee (ie the business owner) becomes part of a large group which increases buying power and also, gives the owner the benefit of well established and proven business models and collective advertising and promotion.
The downside is that often, especially in regional areas, the benefit of being a Franchise owner is sometimes not that great. Often, the business owner asks themselves whether or not it is worthwhile to remain as part of the Franchise structure or whether it would be better to go out on their own. By doing that it will save the cost of the Franchise fees.
We are sometimes asked to look at a Franchise Agreement at a point in time when the Franchisee may wish to get out of the Agreement or simply not exercise an option to extend the Franchise Agreement which may have expired.
Most Franchise Agreements contain a Restraint of Trade clause which prevents the Franchisee business owner from going out on their own in a similar business for a period of time after the Franchise Agreement either is terminated or expires. That can mean that the business owner is confronted with the situation of having to either continue with the Franchise Agreement or potentially have an argument with the Franchisor and this can be costly and expensive. This may serve as a negative inducement to remain in the Franchise arrangement.
The Courts will consider many factors when determining the enforceability of the Restraint of Trade clause, such as the business site location, catchment area for the business, customer good will, the terms of the Restraint of Trade, geographical location, Franchisor options to purchase the business and existing Franchise businesses in the area. These are just a few matters when considering the enforceability of the Restraint of Trade.
Being part of a Franchise structure can be very beneficial. It can also have unforeseen and expensive consequences and that is why you must carefully consider the pros and cons before signing such an Agreement.
