Franchises can be an attractive option for new business owners. By buying into an established franchise, you receive the benefit of the franchisor’s business procedures, network, and market presence. However, there are many risks particularly as franchise agreements usually heavily favour the franchisor.
The Franchising Code
The Franchising Code of Conduct (Code) is an enforceable code under the Competition and
Consumer Act 2010 (Cth) and applies to all franchisors and franchisees in Australia. The Code is designed to protect franchisees against unscrupulous franchisors. The Australian Competition and Consumer Commission (ACCC) is the government agency responsible for enforcing the compliance with the Code.
Before you can enter into a franchise agreement, the franchisor must give you the proposed agreement, a disclosure document, a copy of the Code, and a key facts sheet. After receiving these documents, the Code provides that you must wait at least 14 days before you are able to sign the agreement. You should use this time to obtain independent legal and financial advice.
The disclosure document must include details of existing franchisees. We recommend that you attempt to speak to a few of these franchisees, to get a better understanding of the franchisor and how the franchise system works in practice.
After you sign the agreement, there is a further 14-day “cooling off’ period during which you can terminate the agreement. If you exercise this right, the franchisor must refund you all money you have paid to the franchisor, less their reasonable expenses. Many franchisors will specify an amount in the agreement which they consider their reasonable expenses. Some franchisors will claim large amounts in their documents as ‘reasonable expenses’, so we do not recommend relying too heavily on this cooling off period. Instead, you should only sign the agreement once you are entirely comfortable with its terms.
Franchise agreements usually specify a particular territory in which you must conduct your business. Preferably, this will be an exclusive territory, which prohibits the franchisor from granting competing franchises to other people in the same area. Sometimes the territory is exclusive but there are exceptions (e.g., if you are unable to service a client).
Alternatively, the franchise document may only permit you to conduct the business from particular premises.
There are many different fee structures for franchises. These may include an initial franchise fee and ongoing fees based on a percentage of your weekly or monthly revenue. Other common fees include marketing, training, and assignment fees (if you wish to sell your business). You may also be responsible for paying the costs of buying equipment, uniforms, and for fitting out premises.
The disclosure document should include a list of fees as well as the franchisor’s estimates of operating expenses. However, you should make your own enquiries as to these operating expenses.
Minimum performance criteria
Most franchise agreements contain minimum performance criteria. This may be expressed as revenue targets or the number of clients gained within a particular time frame. However, these can vary widely. You should make sure that you understand these criteria, and ask the franchisor if you have any questions. If you fail to meet the criteria, it could have serious consequences. Repeat failure can result in the franchise agreement being terminated.
These are many considerations when entering into a franchise. If you are looking to enter into a franchise agreement, or have an issue with an existing franchise, our experienced Rouse Lawyers team is here to assist. If you have any questions, you may contact us via our website or call us on 07 3648 9900.
The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.
Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.