Franchise Agreements Explained

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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.

Ordinarily a Franchisor will be involved on an ongoing basis to ensure that training, marketing (including branding of merchandise) and management are carried out to an acceptable level by a Franchisee.

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.

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:

  • Franchisors that promises to help you ‘get rich quick’;
  • If the Franchisor is reluctant or won’t provide details of other Franchisees already operating under the franchise model; and
  • If a Franchisee is being pressured to act immediately to avoid losing a “once in a lifetime opportunity” or similar hyperbole.

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. 

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances.