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What is a Franchise?

Think McDonald’s, Marriot Hotels or Anytime Fitness. A common business structure, a franchise is a relationship under which one party (the ‘franchisor’) provides the right to use its business name, and to sell or distribute its business’s goods or services, to another party (the ‘franchisee’). This right is provided to the franchisee at a fee, and for a fixed period of time.

Benefits

There are numerous potential advantages for a franchisee joining a franchise. For example, it provides an opportunity for the franchisee to align themselves with an established business and brand, and to have access to both the reputation and goodwill associated with that brand – as well as the expertise and knowledge of the franchisor. The franchisee can operate their own business, while having the benefit and support of the business systems the franchisor has already put in place.

Restrictions and Risks

While, to an extent, the franchisee can run their own business, they will also have contractual obligations to the franchisor to do so in a particular way. The franchisor will have certain systems and restrictions in place to protect its brand, and the franchisee will be subject to strict compliance with these, as well as to an administrative burden of ongoing reporting to the franchisor.

Another important factor for a franchisee to take in to account are start-up costs and ongoing franchisee fees involved in the franchise. These costs can often prove significant, and they sometimes place considerable financial pressure on a franchisee – especially early on.

A franchisee should also be conscious of the ongoing risk that, at any time, the behaviour and/or issues of other franchisees in the franchise, or the behaviour of the franchisor, can negatively impact the brand and business.

Franchise Agreement

The relationship between franchisor and franchisee is generally set out in a written franchise agreement. Under this agreement, the franchisor will seek to establish the terms under which the franchisee may use the franchisor’s intellectual property, and sell or supply the goods or services that form part of the franchise. Other written agreements such as licences and supply agreements are sometimes also required.

Code of Conduct

In addition to any franchise agreement, all franchises in Australia are regulated under the Franchising Code of Conduct (‘the Code’), put in place by the Competitions and Consumer Act 2010 The Code was updated on 1 January 2015, and it specifies rights and responsibilities of both the franchisor and franchisee. In particular, the Code sets out certain processes and requirements that a franchisor must comply with before a franchise agreement is entered into, including pre-contract disclosure of important information to the franchisee. It also provides franchisees with a seven-day cooling-off period, following the signing of the franchise agreement.

Important Considerations and Advice

It is essential that anyone considering joining a franchise obtain both legal and financial advice before entering into any franchise agreement. This includes, but is not limited to, advice on the following:

  • Ensuring the Franchisor has complied with the Code – including the supply of necessary disclosure material;
  • Familiarising yourself with all costs involved, both in setting up, and in the day-to-day running of the franchise – including any hidden or unforeseen costs;
  • The level of involvement the Franchisor has in the business, as well as your administrative and reporting requirements to the Franchisor;
  • Any marketing and training requirements involved with the franchise;
  • Any additional contracts and agreements necessary to operate the franchise, such as a commercial lease of premises or supply agreements for products;
  • Any security required under the franchise agreement (such as personal guarantees or bank guarantees); and
  • The processes and restrictions, should you wish to sell or transfer the franchise during the franchise term.

If you are looking into setting up a franchise business, or would like to know more about franchising in general, please call Anthony Simpson on (02) 6140 3263 or email [email protected]