Purchasing a Franchise?
What is a franchise?
A franchise is a business system controlled by the franchisor, using the franchisor’s symbol or trade mark for a fee, subject to rules/restrictions/restrictions as stated in the relevant Franchise Agreement.
Given the bargaining power of the franchisor and franchisee being very different, the relationship of franchisor/franchisee is regulated to help ensure fairness in their dealings.
The Australian Competition & Consumer Commission (ACCC) regulates the Franchising Code of Conduct (Franchising Code), which is a mandatory industry code that applies to the parties to a franchise agreement.
The Franchising Code is in Schedule 1 to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 made under s. 51AE of the Competition and Consumer Act 2010. The Franchising Code applies from 1 January 2015 and replaces the previous 1998 code.
In short, the Franchising Code:
- requires parties to act in good faith (for example, reasonably, honestly etc) in their dealings
- introduces financial penalties and infringement notices for serious breaches
- requires franchisors to provide prospective franchisees with a short information sheet (Disclosure Document) outlining the risks and rewards of franchising
- requires franchisors to provide greater transparency in the use of and accounting for money used for marketing and advertising and to set up a separate marketing fund for marketing and advertising fees
- requires additional disclosure about the ability of the franchisor and a franchisee to sell online
- prohibits franchisors from imposing significant capital expenditure, except in limited circumstances
- provides a dispute resolution process
An important requirement of the Code is the requirement for the franchisor to provide a prospective franchisee with a “Disclosure Document”.
The purpose of the Disclosure Document is to provide prospective franchisees, and existing franchisees that wish to renew or extend their existing agreement, with information about the business and the franchisor to allow the franchisee to make an informed decision about the franchise and obtain current information regarding the franchised business.
The Disclosure Document must provide information on the business, including:
- the franchisor, its contact details, its business and its directors and their business experience
- details of any master franchisor
- the franchise site or territory
- details of legal proceedings against the franchisor and its directors
- contact details of current (and former) franchisees
- financial details
- the franchisor’s requirements for supply of goods or services to a franchise
- whether online saes are permitted and any restrictions
- details on marketing or other cooperative funds
- details of payments such as pre-payments, establishment costs and other fees
- details on any trade marks and patents that are part of the franchised business
- details of arrangements when the franchise arrangement ends
If you are purchasing a franchise, before entering into an agreement, you should seek legal and accounting advice.
Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to buying/selling businesses, franchises or any commercial law matter, contact Craig Pryor on (02) 9521 2455 or email firstname.lastname@example.org.
This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your legal concerns or objectives.