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.
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.
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 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:
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.
A franchise agreement should cover every aspect of the franchise relationship, including:
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.
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:
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.
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 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.
Franchise agreements, especially with larger organisations, are normally safe to sign. The risk, if there is any, stems from three things:
Luckily, all three areas of risk are easy to fix.
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.
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.
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.