It’s often said that franchising is the greatest invention for the creation of wealth since the limited liability corporation. But a lot of people, including those seeking to enter into a market as franchisees, don’t know much about how franchises operate or the framework that they operate within in Australia. In this article, we attempt to offer an introduction to franchising and franchising law in Australia and give you some tips on what you should look out for before buying a franchise.
What is Franchising?
Put simply, franchising is a model for conducting business. Take, for example, a painting company. The party that owns the name, products, branding and intellectual property associated with the painting company is the franchisor. In some circumstances, the franchisor will offer some painting services directly to the general public, but usually their business is the franchising of the painting company itself. This is where the franchisee comes in. The franchisee contracts with the franchisor to conduct the business of painting people’s houses. Under this contract, the franchisor lets the franchisee use their company’s name, products, branding and intellectual property to expand their network and build their business. In return, the franchisee agrees to pay the franchisor a fee, either fixed or scaled, for the privilege of continuing to use the company’s name, products, branding and intellectual property when conducting the business of painting houses. By establishing this franchising relationship, the franchisee gets to use a recognised and established business name, branding and intellectual property, while the franchisor gets a portion of the franchisee’s earnings without having to conduct any painting work themselves.
What governs Franchises in Australia?
To become a franchisee in Australia, you will need to enter into a franchising agreement with a franchisor. These agreements can be highly complex and are accompanied by a number of supporting documents, which are covered in more detail below. In Australia, these agreements and the relationships they create between franchisees and franchisors are governed by the Franchising Code of Conduct (the ‘Code’). This Code establishes the roles and responsibilities of the franchisee and franchisor both before and during the operation of a binding franchising agreement. You can find a copy of the Code here.
What is the process of becoming a Franchisee?
Under the Code, there is a highly regulated process for entering into a franchise agreement. This process occurs as follows:
- As a franchisee, you will usually approach the franchisor to inquire about the possibility of entering into a franchise agreement.
- Once you have demonstrated a genuine interest in the possibility of entering into a franchise agreement, the franchisor must give you a copy of the Information Statement. The Information Statement is laid out in Annexure 2 of the Code and contains some basic information about and warnings around entering into a franchising agreement.
- After you receive the Information Statement, the franchisor will start drafting a Franchise Agreement and Disclosure Document specific to your circumstances.
The franchisor will then issue you with copies of the Franchise Agreement, the Disclosure Document, and the Code. The franchisor must then wait 14 days before requiring you to sign the Franchise Agreement or make any non-refundable payment under its terms.
- Once you’ve signed the Franchise Agreement or made any non-refundable payment, you have a 7-day period during which you can elect to terminate the Franchise Agreement. This is called the cooling-off period.
- If you enter into the Franchise Agreement and do not elect to terminate during the cooling-off period the Franchise Agreement will be binding, and you will then be a franchisee.
This process is strictly regulated and laid-out in its entirety in the Code. Any deviation from this process will result in the franchisor being penalised and would otherwise indicate that you, as a franchisee, should take your business elsewhere.
Before buying a Franchise
Entering into a franchising agreement, particularly a complex one, is not a small commitment. It is important that you take a number of actions before initiating the process of buying a franchise in Australia. Here’s a list of some of these actions:
Aside from the above, it may also be helpful to imagine yourself as a franchisee. It can be a highly regulated business relationship and it is important to consider not just whether the terms of the franchise agreement are fair, but also whether you want to enter into the agreement at all.
Do you need some help considering a franchise or franchise agreement?
The specialist commercial lawyers at Standard Law Co have a wealth of franchising experience and can assist with the process from beginning to end.