One of the most important things a franchisee or prospective franchisee must do is to read and understand the franchise agreement. You need to know what you’re taking on and expected to do, and the potential financial returns. 

The agreement will set out what must happen while everything is going as planned, and how unplanned matters will be dealt with. Examples of unplanned events include ending the franchise early, insolvency of the franchisor or franchisee, significant changes to the business and dealing with disputes. 

This is a business transaction so you can sign agreements with as little or as much risk as you feel comfortable – just don’t be surprised by not knowing the risks. The franchise industry is regulated to make sure important information is disclosed to support informed decision-making and to protect both franchisors and franchisees from bad conduct – it doesn’t protect you from bad business decisions.

Invest in professional help. A lawyer who specialises in franchising understands agreements and can explain the clauses to you. Business advisors and accountants are also excellent options for asking questions, seeking advice and testing the financials of the investment opportunity. You should also ask the franchisor questions about things you don’t understand, and make sure you get answers in writing. Remember, as the franchisor is the other contractual party, they cannot provide independent advice.

Franchise systems are designed with varying degrees of autonomy and co-dependence. If you are entrepreneurial and want a lot of autonomy to grow your business in innovative ways, then a franchise probably isn’t the right business for you. If you’re not interested in any of the design or innovation aspects of business, then you will be able to find franchise opportunities where you need invest only capital, time and effort. 

Many franchise systems are somewhere in the middle; you are expected to bring your entrepreneurial skills and drive to activate the assigned market area within the franchise systems. Reading the agreement will help you understand the business model you are buying into. 

Take a practical approach. As you read the agreement, highlight in orange what you will be required to do and pay, in green what you will receive for your investment, and in yellow the clauses that contain obligations and benefits for both sides. 

Read it more than once and put yourself into the ‘what if’ scenarios.

• What if you become unwell and can’t work? Is there a clause about paying out the remainder of the time? If this happened, would you have enough money to pay? If you need to leave a franchise early, the franchisor must act in good faith but does not have to act in your commercial interests. They may not consent to a sale and or offer less favourable terms to buy you out compared to what you paid.
• What if the franchise makes changes to the business model that you don’t agree with or that will impact your profitability? Does the agreement have terms about what happens if ownership changes? Can changes be made to territory arrangements? Are there any terms about what happens if the franchise goes broke?
• What if you are in dispute with the franchisor or another franchisee? Do you understand the process for working through disputes? Are you prepared to manage disputes?

Remember that disclosure documents and agreements are written to avoid legal uncertainty. They are not usually written in easy-to-understand language and are likely to have unfamiliar words and concepts. They can be long and detailed. Investing in professional help to read and explain the disclosure document and agreement is one of the best things you can do as a prospective franchise business owner.

If you enter into a franchise agreement after carefully considering the disclosure documents, the professional advice you have wisely sought, and your own ‘due diligence’ inquiries, your early work understanding the agreement will help you identify when a legal obligation is not being met. It will prepare you for working through challenges through internal dispute resolution or via independent advice. You will be in a good position to protect both your interests and relationships.