How to time a franchisee’s start date
By Stone Group Lawyers on June 25, 2019
Setting the dates for a new franchisee to start training and business operations can be somewhat like a tug of war. Everyone and their respective professional advisors will have different motivations during this busy time. Knowing the competing issues at play and having a well-structured process will ease the formation of your exciting new business relationship.
From a legal and risk management perspective, every franchisor should start by making a flowchart. This should account for the minimum time that each step will take. Some of these steps should include:
- Assess the prospective franchisee's application and do your background checks into their suitability. Don't rush to the next step until both of you are happy to proceed with the franchise.
- Issue disclosure documents to your prospective franchisee as early as possible. Streamline this by obtaining their consent to issue disclosure by email (for instance, incorporating an authority into your franchise application form). The franchisee must have these disclosure documents in their possession for at least 14 clear days. During this time they must return a signed receipt for the documents.
- Once the receipt is returned, the franchisee can sign their franchise agreement from day 15 onwards. At the time of signing they must also provide a written statement:
- confirming they had a reasonable opportunity to understand the disclosure document and Franchising Code of Conduct (Code); and
- indicating whether or not they obtained independent legal, accounting and business advice.
- When the franchisee signs the franchise agreement (unless they've previously made a non-refundable payment to you), their 7 day cooling off period will start.
- Wait 7 days for the cooling off period to expire, then start your training program.
- Depending on how your franchise agreement is structured, the franchisee's commencement date for their business operations will generally be once training is completed successfully.
Whilst there's no legal requirement to follow this process when setting a training date, it's preferable from a risk management perspective.
Commencing training before cooling off expires runs the risk that your franchisee may 'cool-off' and walk away from the deal during (or even after) training. Yes, a well-drafted franchise agreement may give you a degree of protection by:
- allowing you to recover the costs you've incurred in providing that training, but you will have lost your valuable time;
- binding the franchisee to confidentiality obligations, but you can't erase trade secrets learnt during training from someone's memory.
If you've trained a franchisee before they've signed their franchise agreement, then if they have a change of mind, recovering the costs you've incurred can be complicated.
Finally, always remember that you cannot 'enter' into a franchise agreement with a franchisee or accept a non-refundable payment until you've satisfied Step (3) of the above process. That generally means that you shouldn't allow a franchisee to start operating their franchised business until you've satisfied that Step.
Franchisees can hesitate to sign a franchise agreement (or even to sign the receipt for their disclosure document) until the lease is negotiated.
Franchisees holding the lease in their own name generally prefer to wait and sign the lease and the franchise agreement concurrently. They'll be hesitant to commit to a franchise agreement without having a guaranteed lease, and vice-versa.
If the franchisor will hold the lease, again, franchisees will generally prefer to see the final lease before signing the franchise agreement. Under the Code, a franchisor is only required to give a franchisee a copy of the lease within 1 month of the lease being signed. This can be problematic for franchisors wishing to secure a franchisee for a site with a far-off operational commencement date, and no final lease in sight (such as a shopping centre under early stages of construction).
Take time to understand how the franchisee will be funding their initial fees and start-up costs. Securing finance approval is rarely a simple process. Sometimes a financier/bank will want to see a signed franchise agreement and lease before granting finance approval. For a franchisee, signing these documents before having guaranteed finance is a risk in itself - signing a franchise agreement kickstarts the cooling off period, and leases aren't subject to a cooling off period.
Remember, the franchisee will generally have their:
- financier wanting to see documents before approving finance; and
- lawyer warning not to sign anything until finance is unconditionally approved; and
- franchisor (and possibly landlord) wanting the franchise agreement/lease signed immediately.
Finally, always factor in the time the franchisee will need to secure the licences and permits necessary to operate their business. These can include a food licence, liquor licence or building licence, which will all take time.
If you want a smooth transition into your franchise relationship, establish a clear timeframe and be prepared for open communication and some simple planning ahead.
Luke McKavanagh is a regular contributor to online and print media for Inside Franchise Business. This article was previously published on the Inside Franchise Business website: https://www.franchisebusiness.com.au/news/time-franchisees-start-dates/