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Understanding the Basics of Franchising in Australia

Owning your own business can be a very productive and rewarding experience but it is not without its pitfalls. There are a number of people looking to spare themselves the hardships by buying into a recognisable brand or franchise.

There are over a thousand franchise systems in Australia with an estimate of 79,000 franchise units – generating half a million job roles. Knowing what is involved from the legal standpoint before investing hard earned savings is key.

Compliance with Australian laws

Whatever franchise you are considering buying into, remember that the franchisor has certain obligations towards you. On an ongoing basis, they have to provide the guidance, resources and training to help you set up the franchise unit. As well as supporting you to use the required franchise systems and procedures, they also have obligations to make sure their network is compliant with the laws of the country.

They have to make sure that they recruit and set up their franchisees correctly and provided ongoing support. Their obligations are set out under the Franchising Code of Conduct and depending on the industry sector under which they operate, they have to abide by the relevant regulations and laws.

One of the key pieces of legislation is the Australian Consumer Law (ACL) designed to protect consumers. If the franchise deals with providing services or products to customers, then ACL will apply. If, as part of the franchise agreement, the franchisee provides goods or services to the franchisor, then these arrangements fall under the ACL. Employment legislation will also apply so the franchisor should have a suitable business model in place. However, your legal representative can check out what is needed in regard to any of your employees.

The Franchising Code of Conduct (the Code)

The Code came into force just over five years ago but from July 2021, the Australian Government has begun to set out a number of changes which are aimed at redressing the balance of power between franchisor and franchisee. From now on, if someone provides an expression of interest form to a franchise, they should still be sent the Information Statement, but it is the new Annexure 2 – Information Statement which is the most current version. The franchisor also must refer to this current version of the code in any formal documentation, including the Disclosure Document.

A Key Facts sheet has also been introduced with the aim of summarising the information set out on the disclosure documents (these documents can be in hard copy or electronic format). Further disclosure obligations have been proposed, setting out rebates and earning information, capital expenditure and marketing funds. Lease and relevant lease disclosures should be provided where franchisors sub- license or sub-lease the franchise. These have to be provided at least 14 days before the start of the franchise agreement. Before finalising any franchise agreement, you do need to ensure your legal representative reviews any documentation. Remember to not sign any paperwork until you have spoken to your law firm in Melbourne.

Expression of interest

Once you have submitted a formal expression of interest, you have to be given a set of key documentations before you enter into a franchise agreement. This also is the case if you are renewing or transferring a franchise agreement. Some of these documents have been highlighted above but they are as follows:

  • Franchise agreement
  • Information statement
  • Disclosure document
  • Key facts sheet
  • Lease documents

Next steps

In order to ensure you have fully understood all the relevant commitments, you are not allowed to sign the franchise documents shown above, until you have had them at least 14 days. You also have a “cooling off” period after you have signed the paperwork and have the right to terminate the agreement within 14 days of signing. If this is the case, you must have all funds refunded by the franchisor. However, they do reserve the right to deduct any reasonable expenses they have occurred. Before signing, make sure you have booked an appointment with your legal advisor who can take a thorough look at the agreement on your behalf. Any problems or concerns can be highlighted at the point so that you are making an informed decision before investing in a franchise.

Obligations of the franchisor

Once you are signed up, then your franchisor has a number of obligations they still have to meet. If asked for by a current franchisee, they have to provide an up-to-date copy of their disclosure document. Yearly financial reports have to be available – they include their solvency, financial position and if applicable, how the marketing fund operates. They have to resolve any disputes using the correct process under the Code and when the franchise agreement ends, there are a number of processes to be followed, including how restraints operate.

Intellectual Property

You should be provided with the right to use the franchisors IP such as copyrights, patents, designs or brand mark. You may have to sign a non-disclosure or confidentiality agreements as well.

Lease arrangements

This is where getting a legal advisor to oversee any lease arrangements is important, especially if you are running the business from a leased premise. You need to have documents to show you have occupancy rights for the business unit. There are also different risks and paperwork linked to how premises are leased, and it needs to be clear who is going to be the tenant on the lease, the sort of service provided from the lease and the type of business premises leased. It also depends on the territory and state where the business is located, so this is where it helps to check out local legislation with your law firm in Melbourne.

For further help and support, contact the professionals before making a final decision on your franchise.

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