Franchising

Franchising is a method or relationship for distributing goods or services involving a Franchisor, who has established a reputation in a brand or Trade Mark and systems for selling goods or services, and a Franchisee, who pays an initial and ongoing franchise fees for the right to operate a business utilising the Franchisor’s reputation and systems.

Franchising has become a common way for entrepreneurs to expand their existing businesses and for individuals to start a business that is perceived to be less likely to fail. Since the 1970’s Franchising has revolutionised retailing in Australia, and provided small business proprietors with competitive resources to compete against the large corporations that dominate Australian retailing.

Franchising in Australia is regulated by the Franchising Code of Conduct, but the Franchise Agreements are still key to the parties’ rights and obligations.

The Franchising Code of Conduct set out mandatory obligations including in relation to:

• Franchises, Master Franchises and New Vehicle Dealerships,
• Obligations to act in good faith,
• Provision of Information Statement for Prospective Franchisees,
• Disclosure Documents and Record Keeping,
• Key Facts Sheets,
• Pre-conditions for entering into or renewing Franchise Agreements,
• Statements of Independent Legal, Business and Accounting Advice,
• Terms of Franchise Agreements,
• Cooling Off Rights,
• Marketing and Other Cooperative Funds,
• Transfers of Franchise Agreements and New Vehicle Dealership Agreements,
• Proposals for Early Termination of Franchise Agreements,
• Termination of Franchise Agreements,
• Internal Complaint Handling Procedures, and
• Arbitration of Franchise Disputes.

Fines of up to $66,000 apply for breaches of the civil penalty provisions under the Code.

The requirements under the Code with respect to prospective Franchisees obtaining independent legal, business and accounting advice confirms the importance for such advice in relation to franchises and the significant obligations that Franchisees undertake when entering into Franchise Agreements.

Before entering into a Franchise Agreement, Franchisors must have received from the prospective Franchisee either:

• separate Statements signed by an independent legal advisor, business advisor and accountant certifying that they have given the Franchisee advice about the Franchise Agreement or franchised business, or
• a signed Statement by the Franchisee certifying that they have been given legal, business and accounting advice or that they have been told that such advice should be sought but decided not to seek it.

Many Franchisees experience great success and end up owning numerous Franchise businesses. These are typically the people who have properly investigated the franchise and sought appropriate advice before signing each Franchise Agreement.

While the costs associated with obtaining legal, accounting and business advice in relation to a Franchise may be an undesirable expense, these costs will be insignificant to the costs associated with becoming involved in litigation against the Franchisor or the risk of losing everything you own if the business fails for whatever reason.

Instead ask yourself; can I afford to enter into a Franchise Agreement without fully understanding the obligations and risks? Most people can not afford to throw away tens or even hundreds of thousands of dollars.

Whether you are buying an existing Franchise or seeking to start a new Franchise it is important to obtain legal advice in relation to the obligations of a Franchisor as dictated by relevant legislation and regulations, including the Franchising Code of Conduct, from an experienced Franchise Lawyer.

Conducting legal due diligence on your business can also maximise the franchise potential by making the franchise business more attractive to prospective Franchisees. This includes making sure:

• your intellectual property is properly protected,
• you have comprehensive procedures and training models in place, and
• all key supplier or other important agreements are documented in clear and comprehensive written contracts to guarantee availability of required supplies etc.

A Disclosure Document is a document that all Franchisors must prepare and maintain to allow them to operate a Franchise, as required by the Franchising Code of Conduct.

A Franchisor must provide this document to anyone proposing to enter into, renew or extend a Franchise Agreement.

The purpose of a Disclosure Document is to give a prospective or current Franchisee information about the franchise systems. This information includes details of legal proceedings against the franchisor or its directors, contact details of current and former franchisees and movement of other Franchise businesses in the franchise system (such as sales of business and opening and closing of territories). It is a handy tool for your lawyer to review in carrying out their legal due diligence.

A Key Fact Sheet is one of 5 disclosure documents that a Franchisor must provide to a Franchisee.

The 5 documents being:

• Franchise Agreement;
• Disclosure Document;
• Key Facts Sheet;
• Franchising Code of Conduct; and
• Lease documents (if applicable).

Disclosure Documents are often long and complex documents (think 80+ pages) and a Key Fact Sheet is intended to help guide a Franchisee in understanding the Disclosure Document.

A Key Fact Sheet is usually no more than 10 pages long and contains key information about the franchise including details about:

• The Franchisor;
• Any major disputes the Franchisor has been involved in;
• Numbers of current and past Franchisees;
• What the Franchisee has to pay to operate the franchise business;
• What happens at the end of the franchise agreement.

Franchisors: you must keep your Key Fact Sheet updated as you must provide it within 14 days, to a Franchisee if they request a new Disclosure Document (which they can do once every 12 month period).

Franchisees: you must be provided with a Key Fact Sheet (and the other 4 documents) at least 14 days before you sign a Franchise Agreement.

The Franchising Code of Conduct was updated with effect from 1 June 2020 to add Parts 5 and 6 which deal specifically with new vehicle dealership agreements.

Franchised new car dealerships now:

• Have obligations on both Franchisors and Franchisees to notify each other of their intentions regarding the expiry of a new vehicle dealership agreement;
• Must plan for the wind down of a dealership (vehicle stock and management of spare parts) if the vehicle dealership agreement is not being renewed or extended;
• Abide by rules around significant capital expenditure with a Franchisor having to disclose any significant capital expenditure required of a Franchisee, prior to a new vehicle dealership agreement being entered into; and
• A Franchisee has the ability to combine disputes of the same nature against a Franchisor, where the Franchisee has more than one new vehicle dealership agreement with a Franchisor.