When buying into a Franchise it is important that the Franchisee has located premises which are acceptable to both the Franchisor and Franchisee. This may sound like a simple process, however finding suitable premises to conduct ones business could be a long and arduous process.
If one has not located suitable premises at the time that they enter into a Franchise Agreement, it would be unwise for both the Franchisor and the potential Franchisee to execute a Franchise Agreement on the basis that details of the Premises and the Territory will be provided at a later date, as such an agreement could potentially be unenforceable.
What options then are available to Franchisees who would like to be part of a Franchise on the basis that they will locate suitable premises at a later date?
One option would be for the parties to enter into an Agreement in which the potential Franchisee would pay a deposit to the Franchisor, who would then in turn agree to enter into a Franchise agreement (in an agreed form) on a fixed date provided the potential Franchisee locates suitable premises by this date.
If the potential Franchisee locates suitable premises by this date, their deposit can be used as payment towards their Franchise Fee.
This initial Agreement would ensure that the commercial objectives of both parties are achieved as it would:
(a) impose a legal obligation on the Franchisor to offer the proposed Franchisee membership of its franchise if the proposed Franchisee locates a suitable site within an agreed period of time; and
(b) impose a legal obligation on the proposed Franchisee to use its best endeavours to locate a suitable site and then enter into a Franchise Agreement (in an already agreed form) with the Franchisor.
It is also important to be aware that a well drafted Initial Agreement can create a favourable situation for all parties involved provided that amongst others the following pitfalls are avoided:
(a) the parties should not attempt to alter the Franchisor’s standard Franchise Agreement to deal with a situation in which the Premises and possibly the Territory have not been fully identified;
(b) the Initial Agreement should be treated as a distinct and separate agreement and should not in any way be used to replace or form part of the Franchise Agreement; and
(c) in its dealings with the proposed Franchisee, the Franchisor must ensure that it complies with all its requirements under the Franchising Code of Conduct prior to, during and after execution of the final version of the Franchise Agreement.
With a number of Franchise opportunities available in the market-place, consideration of this issue when entering into negotiations regarding a Franchise can save you a lot of time and money.
As is always the case in a business transaction, never assume! Rather, consider all issues and get advice if you need it. For help on any business issue you may be facing, please pop in to meet with us or call 8296 6222.