If you are considering franchising in Australia, it’s vital to know where you stand with the law. There are certain franchise rights and responsibilities around entering into a contract, so it is important that you consult a legal professional as part of your due diligence before entering into a Franchise Agreement.
A lawyer can help to ensure that the contract you enter into is in your best interests, and can help you work out whether it’s a sound investment.
If you are considering buying a franchise and would like legal advice for peace of mind during this process please get in touch with Rose Law business franchise lawyers on 03 9878 5222.
What is a Franchise Agreement?
A Franchise Agreement is a contract that exists between a franchisor and a franchisee. The contract can be written, verbal, or implied. A Franchise Agreement outlines the way in which an established business (the franchisor) allows a franchisee to run a business associated with the franchise brand. The Agreement also outlines the duties each party needs to perform, and what kind of compensation each party can expect.
For example, Dominos Pizza is a franchise. Individual franchisees own their own branch and produce pizzas under the Dominos brand, and to Dominos specifications. Each franchisee pays a pre-determined portion of their income to the Dominos franchise in compensation for using their brand.
What are the laws that surround franchise agreements?
The franchise industry is regulated by the Franchising Code of Conduct (the Code). The Code is in place to regulate the conduct of parties to a franchise. The Code outlines set guidelines for how to deal with matters at all stages of the agreement, including:
- Good faith obligations
- Disclosure requirements
- Methods for dispute resolution
- A cooling-off period
- Procedures for ending a franchise agreement
The Code is regulated by the Australian Competition and Consumer Commission (ACCC).
As a business owner, you may also operate under various other laws like the Fair Work Act, the Victorian taxation laws and any relevant Victorian licensing agreements and schemes. A recent bill was passed to update the Fair Work Act, specifically with the purpose of protecting workers in franchises and to ensure they are receiving appropriate wages and working conditions. The franchisee is responsible for ensuring compliance with the Fair Work Act, but under the new bill, the owner of the franchise may also be responsible for a serious contravention of the Act.
What does each party need to do as part of the franchise agreement?
Buying a franchise is not without its risks, so it is important that you do plenty of research and consult a legal professional prior to entering into a Franchise agreement. Each party has varying responsibilities in terms of what they have to perform as part of the Franchise agreement.
The franchisor is required to provide information that is material to running their franchise business. This includes a disclosure document which has information about:
- Business experience
- Any relevant litigation against the franchise, a franchise director or an associate of a director
- Any serious offences
- Introduction fees
- The number of existing franchises and master franchises
- Any intellectual property and trademarks
- Exclusivity or limitations on locations
- Inventory levels
- Supply of goods and services
- Establishment costs and access to funds
- Earnings and historical data
This must be provided to a prospective franchisee, along with an information statement which looks at some of the risks and rewards of buying a franchise.
A Franchisor must provide you with specific information to help you make your decision, including a 2-page information statement, once you either express an interest in, or formally apply for, a franchised business.
If you decide to become a Franchisee, the Franchisor has to provide you with a disclosure document and a copy of the Code. You must review this disclosure document and look at what sort of flexibility and rigidity exists. For example:
- Is there exclusive territory where the Franchisor cannot have another franchise?
- Can the Franchisor change your territory?
- Are there limits on selling online?
- Do you have to make an initial capital investment?
Once you have received, read and understood the Code and the disclosure document, you must give the Franchisor a written statement stating your understanding. A Franchisor cannot enter into an Agreement with you without a written statement from an independent legal or business advisor or accountant confirming they have provided advice to you. It is important to get legal advice to avoid surprises later. It is also helpful to speak to other Franchisees if possible to find out what owning the franchise is like.
Get legal advice for your franchise agreement
As a prospective franchise owner, there are four key stages of your agreement:
- Cooling-off period
- During your agreement
- Ending your agreement
You have certain rights at each stage of your agreement, and it is important that you get professional advice before undertaking what is likely to be a significant personal and financial commitment.
For example, if you wish to end your Franchise Agreement by transferring it to another party, you have to request the franchisor’s written consent. If you have a dispute within your franchise relationship, there are certain dispute resolution steps outlined in the Code.
Legal advice is recommended at each stage of your franchise agreement to ensure positive business ownership and operation.
Looking to get started with franchising in Australia? Contact Rose Law, your franchise business lawyers. Call us on 03 9878 5222 for a complimentary 15 minute consultation about your franchise business.