What franchise buyers need to know about an IT agreement

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Inside Franchise Business: will your franchisor provide an IT agreement?Information technology is an integral part of business today, so franchise buyers need to understand the role of an IT agreement. 

Here law firm Mills Oakley tackles the issue.

It is common for a franchisor to require a franchisee to acquire specific software and IT as part of the franchised business. Such software and IT may relate to, amongst other things the point of sale system, stock management, payroll and security or surveillance.

In the process of purchasing a franchise, a software or IT agreement can be easily overlooked.

However, it is important for a franchisee to understand what software and IT it is required to obtain either from the franchisor directly or the franchisor’s approved third party supplier(s) and the terms that will govern the ongoing supply, use and maintenance of that software and IT. Such arrangements are likely to affect the day to day operation of the business and IT costs can be a significant initial and ongoing business cost.

A franchise agreement will typically contain a term requiring the franchisee to acquire certain software or IT from the franchisor or an approved third party in accordance with a separate IT agreement. Where a franchisor requires the franchisee to enter into an IT agreement, that IT agreement must be provided 14 days prior to the franchise agreement being signed (if available) or, if not available at that time, when it becomes available.

Where a franchisor requires a franchisee to acquire software or IT from a third party as a condition of the franchise agreement, this constitutes what is known as ‘third line forcing’ for the purposes of the Competition and Consumer Act 2010  and the relevant franchisor must have lodged a specific notification with the ACCC and received no objection prior to implementing such a requirement in its network. It is common for franchise networks to undertake this notification process without objection.

A franchisee should check the provisions of the franchise agreement and disclosure document carefully, to determine what (if any) software and IT the franchisor requires the franchisee to acquire and should request a copy of the relevant IT agreement if it has not already been provided.

A franchisee would typically except to find the following in the IT agreement:

  1. IT Licence fees – franchisees should check whether the fee is periodic, lump sum and/or usage based, per system, per user or per screen, and if upgrade fees apply.
  2. Owner protections – franchisees should check for rules against manipulating software, or using it for different purposes such as another business or personal use.
  3. Service Levels – some IT firms commit to specific levels of system availability, helpdesk support, restoration times etc., and offer credits if not met.  Franchisees should check that the metrics and the credit process are easy to work with.
  4. End-of-term handback rules – franchisees should make sure they can get records or extracts of their data at the end of the licence.
  5. “End User Licence Agreement” – many IT firms are distributors for third party owners, and pass on terms from the owner to franchisees as “End User”, meaning there may be two sets of terms to deal with.

It is important that franchisees identify all relevant terms of the IT agreement as part of their investigations before purchasing a franchised business.

Authors: Mills Oakley corporate advisory partners Mick Coleman and Warren Scott  with associate Jacqui Murphy.

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