Most people have a basic understanding of how a franchise works however this post is to help provide a more detailed understanding of what’s involved from a legal perspective.
In a nutshell, the Franchisor allows another operator, the Franchisee, in certain terms, to license their business model and operate under the Franchisor’s brand structure and business model.
The legislation that regulates the relationship between Franchisor and Franchisee is the Franchising Code of Conduct (Code) and other various regimes like Trade Practices (now the Competition and Consumer Act 2010), Occupational Health and Safety laws and Workplace Relations laws.
The Code gives the meaning of a franchise Agreement as follows:-
4 Meaning of franchise agreement
(1) A franchise agreement is an agreement:
(a) that takes the form, in whole or part, of any of the following:
(i) a written agreement;
(ii) an oral agreement;
(iii) an implied agreement; and
(b) in which a person (the Franchisor) grants to another person (the Franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the Franchisor or an associate of the Franchisor…..
The Code goes on further to particularise what a Franchise Agreement is however the above extract is enough to give a specific understanding of what it encompasses.
When you have a business you wish to franchise you need to see a franchise solicitor who can prepare the necessary documents including the franchise agreement.
The documents include the following:-
Initial documents – given at the time of interest by Franchisee:
- Confidentiality agreement & Application form
- Details of the franchise and your business
Formal franchise documents:
- Disclosure document as per the Code
- Franchise Code of Conduct (copy to be given to the Franchisee)
- Franchise Agreement – sets out the terms and conditions of the arrangement
- Trade Practices Compliance Program
If you are looking at setting up a franchise, you will need to have your brands, internal systems and manuals in place to allow the Franchisee to run the franchise systematically after going through a training program.
We can review your training programs and systems to ensure they comply with occupational health and safety legislation and workplace laws.
You will need to consider the costs charged to the Franchisee.
- Initial costs – this usually include the start up fees paid by the Franchisee. This fee goes towards setting up the site fit out and training.
- Ongoing fees – this usually includes royalties and marketing fees (For example 8% royalties and 3% marketing).
Other points to consider:-
- You will need a good leasing agent to find suitable sites at the time a new franchise is being negotiated.
- You will need to have the design and cost of the fit out.
What are the effects of not complying with Franchise Laws?
If the Code is not complied with, the Franchisee may, in some circumstances, get out of the franchise agreement and the courts have considered in some cases the reimbursement of franchise fees collected by the Franchisor.
Article by Jack O’Reilly
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