Entrepreneur Success # Franchising
# Q&A Brought to you By Elisabeth Gore-Jones- Bywaters Timms Lawyers What Happens When A Franchise Agreement Ends?
When entering into a franchise agreement many potential franchisees do not consider what will happen once the franchise agreement ends.
The Franchising Code of Conduct (which governs franchising in Australia) was amended last year to, amongst other things, require a franchisor to disclose what will happen at the end of a franchise agreement in the disclosure document. For those of you who do not know, the disclosure document is a document which must be provided to a potential franchisee before they enter into a franchise agreement.
Many potential franchisees do not realise that in most cases the franchisee’s business will come to an end once the franchise agreement ends. The franchise agreement will usually give the franchisee the right to use the knowledge of the franchisor however once the franchise agreement ends this right also ends.
Most franchise agreements contain a restraint of trade provision. This is specifically inserted to prevent franchisees from learning the trade secrets, know-how and business operations of the franchisor and then leaving the system to set up in competition.
It does make sense that a franchisor should be able to protect their goodwill in this way. Let us look at a coffee shop franchise. The franchisee, before entering the franchise, has no idea how to set up or operate a coffee shop. The franchisor teaches them all of that including how to make a coffee, run a kitchen, manage staff and so on. Generally a franchisor has spent years establishing this know-how and invested considerable expenditure in the process. It would hardly seem fair that a franchisee could then take this knowledge and set up in competition to the franchisor.
Provided the restraint of trade is properly drafted it will usually be enforceable against the franchisee. The Courts have shown a willingness to enforce a restraint of trade against a franchisee to protect the goodwill and intellectual property of the franchisor. The restraint must however be fair.
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