A. The following items should be checked:
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Are all the attachments present?
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Is the disclosure document current?
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Has the disclosure document been signed?
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Are the franchisor's details about business experience present?
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Are there details of any relevant court proceedings or arbitrations involving the franchisor together with information about convictions, judgments or insolvencies of the franchisor or any of its directors?
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Is there a section on a breakdown of the number of franchisors, franchisees and company-owned stores on a state-by-state basis? One of the most critical parts of a prospective franchisee's due diligence will be making enquiries with existing franchisees. Accurate knowledge about these franchisees is important in the disclosure document.
Has the franchisor disclosed relevant information about any intellectual property ownership?
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Has the franchisor disclosed the level of exclusivity which the client can expect from both the franchisor and other franchisees? For example, in many franchise systems, the franchisee is given an exclusive territory within which they can operate their business. There is no right or wrong position here. Rather, lawyers should assess for clients whether the level of exclusivity granted provides adequate protection for the client.
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Has the franchisor disclosed whether the franchisees will be automatically supplied with the stock as they sell? This section of the disclosure document should also disclose if there are any restrictions upon whom or from where the franchisees may buy goods or services. It is common for the franchise agreement to provide that franchisees must buy goods or services from the franchisor or its nominated suppliers subject to the provisions of the Trade Practices Act. One way around this prohibition is where the franchisor supplies the goods/services and the arrangement does not substantially lessen competition. However, if the franchisees are compelled to buy from either a related company of the franchisor or another third party supplier, then the arrangement constitutes a fundamental breach of the Trade Practices Act. The only way of overcoming such a breach will be for the franchisor to have lodged a notification with the Australian Competition & Consumer Commission. By doing this, the franchisor can obtain immunity from action for breach of the Trade Practices Act. The ACCC will allow the notification so long as the positives of the arrangement (for example consistency of quality of goods or services, or lower prices to franchisees due to bulk buying power) outweigh any negatives (for example, limitation of choice for the clients and customers of franchisees).
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Is there any information about sites or territories?
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Is there any information about any marketing funds and how such funds operate? This will ensure transparency as far as who is contributing, how much and what the money is being used for.
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Is there information about establishment costs? Does this information include not just money payable to the franchisor but also money payable to suppliers, plant and equipment and the fit-out of the store, initial franchise fees payable to the franchisor, site related costs such as security deposits or bank guarantees or rent in advance and money required by the franchisee for working capital?
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Has the franchisor given earnings information? The franchisor does not have to give this information but must include a statement to that effect. If the franchisor does give earnings information, then a client will need to ascertain what type of earnings information the franchisor has given and assess how it applies to the business being purchased.
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Does the franchise agreement contain the franchisor's financial information? At least one director of the franchisor is required to sign a solvency statement to the effect that there are reasonable grounds to believe that the franchisor will be able to pay its debts when due.
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Does the franchise agreement clearly establish the nature and extent of the rights being granted? Is the franchisee being given an exclusive territory or a customer list?
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Does the franchise agreement identify the fixed term of the franchise? The franchise agreement needs to be of sufficient length to enable the franchisee to recoup the investment and have something to sell down the track. Most franchise agreements will be for a period of around 20 years. However, there is a shift more recently towards 15 years.
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Does the franchise agreement outline what it is that the franchisor will do to support the franchisee both at the start of the relationship and on ongoing basis?
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Does the franchise agreement contain provisions under which the franchisor agrees to provide both initial and ongoing training, manuals, marketing, support etc.?
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What are the franchisee's obligations? If these are set out in an operations manual, this should be obtained and read carefully.
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What does the franchise agreement say about sales of the franchise?
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Does the franchise agreement provide for the payment of an initial franchise fee? This should only be between 5% - 10% of the total set-up costs.
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Does the franchise agreement provide for a royalty sometimes called the management fee, which is payable to the franchisor for use of its system by the franchisee and for ongoing advice and support? If the franchisor provides administration services such as central booking or invoicing services, there may be some sort of administration fee payable. This will often be the case with mobile franchises.
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Does the franchise agreement provide for a group marketing fund? This aspect of the agreement is regulated by the Code.
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Does the franchise agreement contain minimum performance targets which the franchisee is required to achieve? This will usually apply where the franchisee is given an exclusive territory.
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How can the franchise agreement be terminated? This is regulated by the Code which sets out a process to be followed if a franchisee breaches the franchise agreement.
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Does the franchise agreement contain restrictive covenants? Are the restrictions geographically or temporarily reasonable?
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Does the franchise agreement require the franchisee to organize for guarantees? This will often occur if the franchisee is a company. If so, the guarantee needs to be read carefully. Guarantees may contain charging provisions enabling the franchisor to register a caveat over real estate owned not only by the franchise or company but also by its directors and shareholders.