Since the early 1970’s buying and operating a franchise business has become an increasingly popular way for many Australians to own and operate their own business. Initially franchising in Australia almost always involved a foreign parent company or brand. However, today the majority of franchise businesses operated in Australia are home grown.
Just as the number of franchises has continued to rise so too has the array of products and services offered under the franchise model grown from the early days of “Would you like fries with that”. These days franchise businesses offer services as diverse as mowing your lawns, walking your dog or doing your tax returns.
A franchise is a business relationship in which the owner of the business that produces the products or supplies the service (the Franchisor) assigns to an independent third party (the Franchisee) the right to use the business name and to market, sell and distribute the nominated goods or service for an agreed period of time.
This is a continuing relationship for an agreed period of time. Ordinarily a Franchisor will be involved on an ongoing basis to ensure that training, marketing (including branding of merchandise) and management are all carried out to an acceptable level by a Franchisee.
The two most common models for franchises are:
Given that a franchise generally involves a small business person (the Franchisee) contracting with a larger business entity (the Franchisor) it will probably not come as a surprise that most franchise agreements have a tendency to favour the Franchisor.
In order to ensure the ongoing viability of the franchise model it is essential for a Franchisor to retain control over operational and quality standards and for any Franchisee to be able to meet the standards imposed by the franchise agreement.
Under Australian Law all Franchisors and Franchisees are now required to comply with the Franchising Code of Conduct (“FCC”). The FCC applies to all conduct that occurs on or after 1 January 2015 in respect of all franchise agreements that were entered into, transferred or renewed after 1 October 1998.
In practice, the majority of franchise agreements are for a period of 5 – 10 years (possibly with an option for extension) and are caught by these provisions.
If you are thinking about becoming a franchisee, or conversely, thinking that your business model may be suitable to franchise, it is important that you understand the full extent of what is involved.
Prior to entering into a franchise agreement a Franchisee should be provided with certain information by the Franchisor. Franchisees also need to be proactive in undertaking their own investigations into the viability of a franchise.
Some important things to note are as follows:
It is important for Franchisees to be certain that the Franchisor they are dealing with is genuine. Scams do exist in the franchise world.
The following ‘alarm bells’ should give cause for particular concern:
Churning occurs when Franchisors repeatedly sell a franchise site even though the Franchisor would have reasonable reason to suspect or know that the site is likely to be unsuccessful regardless of any individual skills the Franchisee may have or the efforts they may put into the business. If this occurs a Franchisor may be guilty of misleading and deceptive conduct or unconscionable conduct.
It is always far better to seek legal advice before entering into a franchise agreement rather than waiting until there is a problem to be sorted out. Our experienced lawyers are able to assist you at every stage from early enquiries through to documenting and execution of franchise agreements.