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Franchisees and Food Businesses

What do you need to know

Ensure you choose the right franchise business for you

Well known franchise brands in the food industry can be appealing as exciting and successful business models. They usually have pre-established market-share, are often well advertised, liked and trusted by the general public, and may seem to come with a sizeable, consistent and steady customer base – however franchise businesses are not risk-free.

It is very important to conduct careful due diligence – ensure you know all the upfront and ongoing costs associated with the franchise and have considered the reputation and commercial viability of your particular franchise geographically before you commit to purchase one.

Find out exactly what support is being offered to you as franchisee – does your agreement give you access to the franchisor’s industry knowledge, planning information, training and marketing strategies? How much advertising is undertaken by the franchisor? How many other franchisees are there in your state / territory?

Some unique risks you may be exposed to as a franchisee – common terms to be aware of

• You may not have an exclusive territory, and your franchisor or other franchisees may be allowed to compete with you, including online.
• The franchisor often mandates where supplies and ingredients are sourced for the business, even if you can find lower cost produce elsewhere, or higher grade produce at the same cost.
• You must strictly comply with the operating procedures set out by the franchisor including all changes to those procedures, noting that the franchisor is usually entitled to to make changes to the system without discussing them with you, and a failure to comply will put you in breach of the franchise agreement.
• If the franchisor decides to update computer systems, uniforms, or change the franchise appearance or branding, you will be required to implement these changes with costs normally falling to you as franchisee.
• Food-based franchises may require long periods of training to be undertaken – find out the exact requirements for your franchise business and ensure you have capacity and finances to complete this as well as the resources to ensure all staff are also trained as required.
• Franchise agreements have an expiry date so it’s important to understand that the business is not yours indefinitely. The franchisor may also be entitled to terminate the franchise agreement without any breach by the franchisee, and you may or may not be able to keep your franchise business after the agreement ends.

In addition to set-up costs, franchise businesses usually attract considerable fees payable to the Franchisor on an ongoing basis. Make sure you have obtained full disclosure of all ongoing costs and if necessary, have these figures appraised by your accountant to determine whether the business will be viable.

Be as informed as possible going into a franchise agreement:

• Understand your initial and ongoing fees, and exit provisions.
• Understand your rights and obligations under the Franchising Code of Conduct issued by the ACCC.
• Once you have entered into a franchise agreement it is a legally binding contract: seek legal advice prior to entering the franchise agreement to avoid unfair terms that could destroy your business and/or cause serious financial hardship. It may also be worth ensuring you have obtained accountant’s advice in relation to the financial viability of the business.
• Your lawyer will assist with the disclosure document, franchise agreement, lease agreement and any other documents. Your lawyer will alert you to any hidden adverse terms and conditions, seek to change or remove those terms, and assist in amending the contract to include terms beneficial to you and your business and protect you as a franchisee. However, many franchise agreements are not open to negotiation, so it is extremely important that you understand all legal and commercial risks associated with the franchise based on your lawyer’s advice.

Inspect the business’ food preparation equipment

• If the business is not brand new, ensure the equipment you are purchasing with the business is not in need of replacement or repair – any costs of upgrade, replacement or repair will likely fall to you as franchisee.
• Find out if the franchisor provides you with the option to inspect existing equipment prior to entering the franchise agreement, if not – request that they do so.
• Will improvements or upgrades to equipment l be required in the foreseeable future? If so find out if the outgoing franchisee or the franchisor pays for this.
• Will there be any large equipment purchases required? This should be disclosed by the franchisor in the disclosure statement, but it is still important to clarify timing, assess these costs and to budget accordingly.

Terms of the Lease

• Ensure the term of the lease lasts for the term of your franchise agreement.
• Budget for the rent and outgoings, and rent increases and any security deposit. If leased within a shopping centre, confirm additional promotional costs with lessor and make sure you are aware of any and all other ongoing costs under the lease as well as your permitted hours of trading.
• Shopping centre leases may require refurbishment to base building standard prior to renewal of a lease or certain upgrading or refurbishing during the term. If this is applicable, understand this is incredibly expensive and you will be responsible to pay.
• At the end of your franchise agreement what is required of you to reinstate the premises under the lease agreement? Again, this is a complicated area and legal advice is necessary

Food Preparation Licences

• If you are taking over an existing food franchise business, approval is likely to already be in place and the franchise agreement should set clear food safety preparation requirements as part of the operating procedures you are required to follow. Work with your lawyer to ensure all relevant food safety licences are applied for or otherwise transferred.
• Check the existing business is compliant with safety requirements, and has a good reputation with food authorities (you can check for penalties on a state register).
• If you are setting up a new food franchise outlet in Victoria, register your business with the local council and apply accordingly. Find out what certifications you need to operate the food business. Make sure you understand all food preparation and food retailing safety requirements under the relevant Regulations as administered by FSANZ. If you are unsure, seek advice from your lawyer or FSANZ.

This is general advice only. Liability limited by a scheme approved under Professional Standards Legislation. 

Published Jan 22, 2018

Jessica Kerr is the Director of Sinclair + May, a female-led, boutique commercial law firm based in Melbourne’s inner north.  Sinclair + May work with small businesses to ensure their legals are in order. Book a free 15-min chat here to talk with one of our solicitors.