Key questions you should ask before committing to a franchise

By Ben Ryan, Lawyer at Hillhouse Legal Partners
| 4 min. read

Key takeaways

  • Buying a franchise may seem like a great opportunity to work for yourself, but buyers should always understand what they are signing up for
  • Franchise agreements are usually heavily weighted in favour of franchisors
  • The financials of a franchise should be examined before any agreement is signed

If only all things in life were as easy to determine as a yes or no question. However, as with most things, the devil is in the detail.

While franchises may appear to be a nice and easy network of businesses you can immediately join and reap the benefit of, there are several issues that may result in you biting off more than you can chew.

That is not to say that all franchises are inherently bad; you just need to know the risks before taking the plunge and committing pen to paper.

To assist you with this process, I’ve compiled four key questions you should ask yourself when considering a franchise agreement. These include:

  1. What is in it for me?
  2. What is in it for the franchisor?
  3. What if I want out early?
  4. What if the business doesnt perform?

What is in it for me?

While the upfront costs of a franchise may seem like a fair deal, if you don’t look carefully at a franchise agreement before signing and get the proper advice, you may commit yourself to significant emotional and financial stress for several years.

Franchise agreements are often heavily favoured toward the franchisor and as such, the obligations imposed on the franchisee can be imposing.

Ensuring that you understand exactly what benefits you will enjoy from the franchise, as well as what obligations you must meet before signing the agreement are a must.

What is in it for the franchisor?

In short, the answer is everything. Franchises are designed to benefit one party above all others, the franchisor.

This is evident in the terms which provide for a generous franchise fee, as well as other advantages to the franchisor such as their use of "preferred suppliers".

This is not unusual for franchises as they have already done the hard work in building their brand.

However, when considering a franchise make sure you look carefully at what the franchisor is contributing and what you are contributing to them.

If your benefits don’t add up, you may want to reconsider.

What if I want out?

Franchises are notoriously difficult to terminate. If you change your mind early on, you may be able to terminate the franchise agreement within the cooling-off window of seven days before either:

  • Entering the franchise agreement; or
  • Making a payment under the franchise agreement.

If you are not able to terminate within the standard cooling-off window, then you will need to look carefully at the franchise agreement’s terms and conditions. Usually, it will cost a lot of money to get out and you may lose everything you own in the process.

Unfortunately, franchises will often require a significant fee in the event you terminate early unless there is a breach by the franchisor or you are able to mutually agree to terminate with the franchisor.

What if the business doesn’t perform?

Franchises seem to be a common part of Australian business, so they can’t be that bad. Right?

While many franchises perform financially, there is no guarantee of success. In the unfortunate situation where your franchise fails to turn a profit, or only turns a nominal profit, you may want to consider terminating the franchise.

Unfortunately, franchise agreements rarely provide for this situation and franchisees often find themselves working hard for little to no benefit. If you are fortunate enough to have an understanding franchisor, you may be able to agree to a reduction, fee vacation or set-off, but there are no guarantees.

Before entering into a franchise agreement you should ensure that the business can perform well financially for a prolonged period. This may require some lengthy discussions with your accountant to ensure the numbers add up.

Setting yourself up for success

While the above questions are not exhaustive, they are a great starting point to find out if a franchise is the right option for you. If you are considering a franchise business, it is also very important to make sure you seek the right legal advice.  

Having an expert, who has experience in this space, read over all agreements and provide advice is paramount in protecting you and your family.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.