A franchise is a business model where the owner licences it’s products, branding and operating models in exchange for a franchise fee. The person paying the licencing fee is known as the Franchisee, the owner of the business is the Franchisor.

In simple terms, the Franchisor has created a successful business model and branding, and allows a Franchisee to replicate this business model in return for a fee.

A franchise is a long term relationship where the franchisee follows a strict business model and sells the franchised products or services. In return for the franchise fee the owner will provide the franchisee with the right to use the business model, products and trademarks.

The franchisor will usually be involved on an ongoing basis with each franchise to ensure that acceptable standards are met for training, marketing, brand use and management of the franchise.

While franchisees must accept certain restrictions in their operations, when you choose to buy into a franchise you’re getting an established business model and true benefits in the marketplace of owning a business that is already well known. Franchises usually have strong brand presence, best practice systems and ongoing support to launch and get profitable as soon as possible.

The Franchising Code of Conduct

While there is always a risk when investing in a business, there are legal protections in place for franchisees in Australia. All franchisors and franchisees are bound by the Code of Conduct which sets out how each party should behave toward the other.

The Franchising Code of Conduct exists to help even out the power imbalance between the parties, given the Franchisors generally have greater power and control. The code of conduct also aims to make potential franchisees aware of the significant commitment they are entering into when signing a Franchise Agreement.

The Code of Conduct includes specific areas to address:

• Disclosure requirements before entering into a franchise agreement. This information is in a prescribed format and is intended for the franchisee to have the information they need to make an informed decision before entering into a franchise agreement.
• Each party has an obligation to act in good faith toward the other party. This means that each party should act honestly and without ulterior motive.
• The code of conduct outlines a dispute resolution mechanism which should be used for any disputes in the event that there isn’t a complaint handling procedure defined in the franchise agreement
• The rules governing how the Franchisor operates a marketing or advertising fund for the franchise system to which the franchisee makes contributions.
• There are defined procedures for ending a franchise agreement, which can be by transferring the agreement to a third party, by terminating by mutual agreement, or the agreement ending at the end of the term.

Non compliance with the Code may expose you to enforcement action by the Australian Competition and Consumer Commission (ACCC) with hefty fines can apply for breaching the Code.

The Franchise Agreement

The franchise agreement is a commercial contract between the franchisor and the franchisee; It formalises the legal relationship between the parties and contains the rights and responsibilities for each party.

After you have been given the franchise agreement you have a minimum of 14 days to review it. Our commercial lawyers are experienced with franchise agreements, representing both franchisors and franchisees, and will be able to advise you on any adverse contract terms.

The Franchise Agreement usually contains the agreed performance criteria, payment of fees, training requirements, reporting requirements, marketing fees, and which products or services the franchisee is entitled to use.

The agreement must be also be accompanied by the Franchisor’s disclosure document. The agreement may also set limits on the specific area, known as the territory, that the franchisee can operate.

There aren’t many limits on what can be in a franchise agreement, and once signed, you will be bound by what it says.

A franchise agreement can only take effect if the franchisee has confirmed in writing that they have received, read and had opportunity to understand the disclosure documents and the Code of Conduct.

Franchisees must also seek independent legal advice before entering a franchise agreement, or sign a statement indicating that they have decided not to seek this advice. Our experienced business lawyers can help you understand your rights and responsibilities under a franchise agreement before you sign it.

Once you have signed the franchise agreement, you have a 7 day cooling off period in which you can change your mind. If you cancel the agreement during the cooling off period any monies paid are refundable, with the exception of any reasonable expenses the franchisor has incurred.

Before embarking on purchasing a franchise or for assistance with your franchise agreement contact our specialist commercial law solicitors.