Franchisors, how to handle the cooling-off period

Cash Converters CFO exits

The Franchising Code of Conduct (Code) allows all new franchisees an opportunity to get out of the franchise agreement within seven days of signing it or paying any fee to the franchisor.

This cooling-off provision only applies to new franchisees and is not applicable in cases of renewals, extensions or transfers of existing franchises.

If a franchisee chooses to exit the franchise within the cooling-off period the franchisor must properly manage all actions to ensure full compliance with the Code and meet all its requirements. One such requirement is that, within 14 days of receiving the cooling-off notice, the franchisor must refund all the franchisee’s payments made under the franchise agreement. Failure to do this is a breach of the Code.

However, the Code also allows the franchisor to retain reasonable costs they have incurred, provided the expenses or their method of calculation are set out in the franchise agreement. In the event that such costs are not clearly specified in the franchise agreement, the franchisor may not be able to retain any funds and end up out of pocket.

It is therefore paramount that the franchise agreement and the franchisor’s disclosure document clearly state what these reasonable costs will be or outline a method to calculate the costs.

Each franchisor in Australia charges a different amount as part of such “reasonable costs”.  In general, the franchisor should be able to claim the following, provided they are real and reasonable costs:

  • Legal fees incurred in drafting the franchise documents
  • Training costs
  • Administrative costs in recruiting the franchisee.

There may be other costs that the franchisor can legitimately retain, but the main point to remember is those costs must be clearly specified in both the franchise agreement and the disclosure document provided to each franchisee.

One other point to make is if a franchisee cools off under the franchise agreement, they  must also comply with the clause of the franchise agreement which outlines the termination requirements.

In turn, the franchisor must monitor this to ensure that the franchisee complies with any termination clause and does the following:

  • Returns the manuals and any intellectual property of the franchisor
  • Transfers the business name to the franchisor or another entity specified by the franchisor
  • Takes off any signs and marketing materials containing the franchisor’s intellectual property
  • Complies with any restraints listed in the franchise agreement
  • Complies with all other requirements of the franchisor upon termination of the franchise agreement.

All franchisors should have a dedicated person within their organisation who monitors that the franchise agreements are complied with for this cooling off provision or any other type of termination.