If you’re looking at investing in an Australian franchise, it’s important to have the right information going in. You need to know what rights you have as a franchisee – and what legal obligations you have to your franchisor.

Every aspect of a franchise partnership is governed by a franchise agreement. In this article, we’re going to explore what a franchise agreement is, when it applies to business relationships, how to avoid common risks, and what you need to do to sign the dotted line.

Joining a franchise can be an incredible opportunity to quickly scale your own business, but you should always understand the legal side of things before you make any decisions.

What Is a Franchise Agreement?

A franchise agreement is a legally binding contract between a franchisor and a franchisee. It regulates the relationship between both parties and sets out rules that need to be followed.

In Australia, all eligible franchises must have franchise agreements in place that comply with the Franchising Code of Conduct. The Franchising Code of Conduct is set out in the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth).

Like other types of contracts, franchise agreements can be written, oral or implied – you don’t always have to have a signed document for your agreement to be legally binding (although a signed, lawyer-proofed agreement is always best).

A franchise agreement is a type of licensing agreement.

What Types of Business Models Do Franchise Agreements Cover?

Franchise agreements cover any business model where a franchisor grants a franchisee the right to run a business under the franchisor brand for a certain period of time. Franchises also involve the franchisee using certain systems or marketing plans substantially determined, controlled or suggested by the franchisor.

In return for using the franchise brand, products and services, marketing playbooks, and/or operating systems, the franchisee must compensate the franchisor in some way. This compensation can include upfront franchise payments and ongoing fees. Franchise payments don’t include wholesale purchases of goods and services, loan repayments, or purchases of assets like property and equipment.

So, for a franchise agreement to be required, a business relationship must have the following traits:

• The franchisor grants the franchisee the right to run a business using systems or marketing substantially influenced by the franchisor or its associates.
• The franchisee’s business is substantially or materially associated with the franchisor’s brand, which can include trade marks, marketing and commercial symbols.
• The franchisee agrees to compensate the franchisor financially for the above rights.

The Franchising Code of Conduct

The Franchising Code of Conduct is a part of the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth). It regulates how parties to franchise agreements in Australia must conduct themselves.

Keep in mind that the code doesn’t apply to every franchise agreement. For example, agreements created before 1 October 1998 aren’t covered, nor are agreements that fall under other mandatory industry codes (such as the Food and Grocery Code of Conduct). Always make sure you check with your lawyer about whether your agreement is regulated by the code.

The code covers areas such as:

• disclosure requirements for parties entering into agreements;
• how franchise agreements work;
• how parties can resolve franchise disputes; and
• the obligation of franchisors to submit their disclosure documents to a federal register.

While it’s important to understand that the Franchising Code of Conduct exists, you shouldn’t try to make business decisions based on your understanding of it. Commercial law is very complex with lots of different legal factors – you should always get legal advice before signing or agreeing to anything.

What Needs to Be in a Franchise Agreement?

A franchise agreement should cover every aspect of the franchise relationship, including:

• how the franchisee can use the franchisor’s brand and IP;
• the obligations of the franchisee, such as payments;
• the obligations of the franchisor, such as disclosures;
• how a franchisee can dispose of their business;
• how disputes will be settled;
• how long the agreement lasts; and
• the conditions under which a franchisee can be terminated.

Franchisor’s Obligations

Under the code, a franchisor has certain obligations to franchisees (although these don’t normally apply in a master franchisee/sub-franchisee scenario). These include providing copies of legal documents like leases and financial statements for marketing funds, notifying the franchisee about agreement expiry options within certain timeframes, telling the franchisee about ‘materially relevant facts’ (such as civil penalties previously incurred by the franchisor), and keeping certain documents (such as evidence of claims made in the franchise disclosure document).

A franchisor must also make certain disclosures to prospective franchisees. These include a franchise disclosure document and a key facts sheet. Both documents must be structured and include information in compliance with the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) and this form respectively.

Transferring an Agreement

A franchisee can request, in writing, that their franchise agreement be transferred to another party. The franchisor can’t unreasonably deny or revoke approval of this request.

They can, however, deny or revoke it under the following circumstances:

• The proposed transferee is unlikely to be able to meet the financial obligations.
• The proposed transferee doesn’t meet a reasonable requirement for transfer laid out in the franchise agreement.
• The proposed transferee doesn’t meet the franchisor’s selection criteria.
• The proposed transferee won’t sign the franchise agreement.
• The franchisee has not paid or started to pay money owing to the franchisor.
• The franchisee previously breached the franchise agreement and hasn’t remedied the breach.
• The franchisor hasn’t received a written statement from the proposed transferee indicating that they understand the franchise disclosure document and the Franchising Code of Conduct.

In short, make sure you’ve started to pay your debts to your franchisor and have a suitable candidate in place before you request a transfer.

Terminating an Agreement

You can terminate an agreement with a franchisor under certain circumstances. One of these scenarios is the 14-day cooling-off period – regardless of what your franchise agreement says, the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) gives you 14 days to change your mind. The franchisor must refund any payments you’ve made to them, although they are allowed to deduct reasonable expenses as per the franchise agreement.

You can also apply to terminate the agreement after your cooling-off period is over, although the franchisor can refuse your request.

The franchisor can terminate the agreement under three different circumstances:

• if you breach the agreement (they must give you reasonable written notice and reasonable time to remedy the breach);
• if you don’t breach the agreement (they must give you reasonable written notice of their intentions and their rationale); or
• if there are grounds for termination, such as you becoming bankrupt or being convicted of a serious offence.

Resolving Disputes

If you and the franchisor have a dispute while your agreement is in place, you can use the complaints handling procedure in your franchise agreement to settle it. The procedure will detail how disputes need to be resolved.

Alternatively, you can use the complaint handling procedure specified by the Franchise Code of Conduct. Under that procedure, you can resolve disputes through one-to-one negotiation (best conducted with your lawyers), alternative dispute resolution (ADR), or arbitration.

If you feel as though you can’t reach a satisfactory compromise through either of the complaints handling procedures, you can take your matter to a tribunal or to court.

Risks of Franchise Agreements

Franchise agreements, especially with larger organisations, are normally safe to sign. The risk, if there is any, stems from three things:

1. The franchisee has a poor understanding of their rights and obligations under the agreement.
2. The franchisor has failed to comply with its obligations under the Franchising Code of Conduct and has withheld information or included unfair conditions.
3. The business opportunity is unsuitable for the franchisee.

Luckily, all three areas of risk are easy to fix.

1. Don’t try to interpret a franchise agreement yourself. Always give the agreement and other relevant documents to an experienced commercial solicitor to review. A lawyer can help you understand what the legal jargon means and, if they provide you with bad advice, you may be able to recoup any financial losses through litigation.
2. If the franchisor has failed to comply with relevant legislation, you may be able to sue them for any losses you’ve suffered. Keep in mind, though, that shady franchisors won’t necessarily have money available for you to take – always get a lawyer to conduct due diligence for you prior to signing anything.
3. Don’t go into a franchise without fully understanding the business model. You should have a clear idea of how to operate the business, how to drive revenue, and what your profit margins will look like. The best franchises offer comprehensive onboarding and marketing support to help you succeed. Talking to a business coach, a financial advisor, or a commercial lawyer before committing to a franchise is often a good idea.  

What to Do Before You Sign

There are four steps you should take before you sign an agreement with a prospective franchisor. The most important takeaway: talk to a lawyer before doing anything.

1. Take a gut check. Ask yourself: is this the right opportunity for me? Do I really want to be in this niche? Do I have access to the right knowledge and resources to make this work? Does this franchisor feel like an organisation whose values align with mine? If the answers are all ‘yes’, move to the next step.
2. Run a feasibility study. At this stage, you should have gathered all the information you need to make a decision. Put together a business plan and work out how you’re going to undertake critical functions like setting up premises, hiring staff, driving revenue, and turning a profit. Get advice from a business coach or a consultant if you don’t know how to assess feasibility. If you feel confident, move to the next step.
3. Conduct due diligence. This is the ‘red flag’ stage. You’ll probably want a solicitor’s help to run checks on the performances of past franchises in your chosen territory, the franchisor’s legal history and credit scores, and other relevant information.
4. Check the paperwork. Get your solicitor to go through the franchise agreement, the franchise disclosure document, the claims made in the document, and any other relevant information. Look for missing information, clauses that seem non-compliant, or inconsistencies. You should also make sure that the agreement is favourable to both parties and includes everything that the franchisor promised – you can always negotiate before signing.
5. Sign the dotted line. Make sure you receive copies of everything.

Summary

Investing in a franchise is one of the easiest ways to build a scalable, profitable business. You don’t have to invest in developing products or services. You can leverage an existing brand to quickly drive revenue. If your franchise is a good one, you’ll even get access to onboarding and marketing support to help you grow.

But the first step to building any successful franchise business is to have a fair agreement. Now you understand how franchise agreements work, you can move forward with the four steps we talked about earlier: gut check, feasibility study, due diligence, and contract review. Although the Franchising Code of Conduct does offer protections for franchisees, you can avoid any nasty surprises by having a lawyer read through your agreement before you sign it.

Starting your own business is an incredibly exciting time in your life. And, by doing the right groundwork, you’ll be able to enjoy every minute of it.

Want advice about the feasibility of a franchise opportunity?

The information contained on this page is general and informative in nature and should not be interpreted as advice of any kind. Do not make any business, legal or financial decisions based on this information. Always seek the advice of an appropriately qualified professional before engaging in any franchise-related activities.