Franchising is often described as one of the most dynamic business sectors in the Australian economy. Since the early 70s it has accelerated its growth and now represents in excess of 12 per cent of the nation's gross domestic product (GDP).
Franchising is essentially a
business system that delivers business products and services to a particular market place under the franchisor's brand or trade mark in return for a fee which may be a combination of an upfront fee and an ongoing royalty.
Essentially franchising allows a person to set up their own business but their business is supported by a tested business system. This is known as a "business format" franchise. In these types of businesses, the franchisor provides training, equipment, marketing tools and brand recognition which you may otherwise have to create and develop if you were developing your own business concept.
The Franchising Code which is underpinned by the Commonwealth Trade Practices Act regulates the rights and obligations under a Franchise Agreement.
The Franchising Code defines "
Franchise Agreement" as an agreement:
a. That takes the form in whole or part, of any of the following:
i. a written agreement
ii. an oral agreement
iii. an implied agreement
b. In which a person (the franchisor) grants to another person (the franchise owner) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor, and
c. Under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:
i. owned, used or licensed by the franchisor or an associate of the franchisor, or
ii. specified by the franchisor or an associate or the franchisor, and
d. Under which, before starting business or continuing the business, the franchise owner must pay or agree to pay to the franchisor or an associate of the franchisor an amount including for example:
i. an initial capital investment fee
ii. a payment for goods or services
iii. a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee
iv. a training fee or training school fee but excluding:
- payment for goods and services at or below their usual wholesale price
- repayment by the franchise owner of a loan from the franchisor
- payment of the usual wholesale price for goods taken on consignment
- payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement
The following relationships are specifically excluded from the definition of "franchise agreement":
a. Employer and employee
b. Partnership
c. Landlord and tenant
d. Mortgagor and mortgagee
e. Lender and borrower
f. The relationship between the members of a cooperative registered, incorporated or formed under Australian State and Federal Cooperatives legislation.
The most significant requirement under the Franchising Code and the ACCC is the requirement for the franchisor to give full disclosure of a number of matters to the franchise owner before receiving any non-refundable money from the franchise owner or before the franchise owner enters into a Franchise Agreement ("Disclosure Document"). Advice may be sought from a
franchise lawyer.
Franchisors must update their Disclosure Document at least annually within three months after the end of each financial year. The Federal Government has recently announced a review of the disclosure obligation in the Franchising Code.
There are three exemptions or exclusions from the operation of the Franchising Code.
1. Where the franchisor is resident, domiciled or incorporated outside Australia and grants only one franchise or master franchise to be operated in Australia.
2. Where another mandatory industry code, prescribed under section 51AE of the TPA applies to the franchise agreement.
3. If the franchise agreement is for goods or services that are substantially the same as those supplied by the franchise owner before entering into the franchise agreement and the franchise owner has supplied those goods or services for at least two years immediately before entering into the franchise agreement and sales under the franchise are likely to provide no more then 20 per cent of the franchise owner's gross turnover for goods or services of that kind for the first year of the franchise.
The Disclosure Document must be given to a prospective franchise owner not less than 14 days prior to the franchise owner entering into a franchise agreement or agreement to enter into a franchise agreement or paying any non-refundable money to the franchisor or an associate of the franchisor.
The Disclosure Document must be set out, be numbered and contain prescribed information and answers to prescribed questions.
This is set out in clear detail in Annexure 1 and Annexure 2 of the Franchising Code and includes:
- Information pertaining to franchisors' details and business experience
- Litigation history
- Payments to agents
- Details of existing franchise owners
- Franchise site or territory selection procedure
- Intellectual property ownership
- Supply of goods and services to and by franchise owners
- Marketing or other co-operative funds
- Payments due under the franchise agreement
- Summaries of the franchisors and franchise owners' obligations
- Other material conditions of the agreement
- Financial details and earnings information of the franchisor
The ACCC keeps a close watch to ensure the franchisors comply with their disclosure requirements.
The ACCC has power to take legal action on behalf of members of the public or on its own behalf against any party not complying with the disclosure requirements.
A franchise owner may terminate the franchise relationship:
a. within 7 days after signing the franchise agreement or making a payment under the franchise agreement (the cooling off period)
b. with the consent of the franchisor
c. in accordance with any other rights under the particular franchise agreement
d. at common law if:
- the franchisor has repudiated the franchise agreement by indicating that it no longer wishes to be bound by its terms
- the franchisor breaches an essential term of the franchise agreement
- the franchise owner was induced to enter into the franchise agreement by a false representation or statement and has not, since becoming aware of the falsity of the representation or statement, elected to affirm the franchise agreement
In relation to selling your business the Franchising Code provides that the franchisor may not unreasonably withhold consent to a transfer. It further provided that it would be reasonable for the franchisor to withhold consent to a transfer where:
a. The proposed transferee is unlikely to be able to meet the financial obligations that the proposed transferee would have under the franchise agreement
b. The proposed transferee does not meet a reasonable requirement of the franchise agreement for the transfer of a franchise
c. The proposed transferee has not met the selection criteria of the franchisor
d. Agreement to the transfer will have a significantly adverse affect on the franchise system
e. The proposed transferee does not agree in writing to comply with the obligations of the franchise agreement f. The franchise owner has not paid or made reasonable provision to pay an amount owing to the franchisor
g. The franchise owner has breached the franchise agreement and has not remedied the breach
Franchising is a great business model but you need to be aware of your rights and responsibilities and the normal checks and due diligence that you would apply in starting your own business equally apply in relation to a franchise.
This article appears courtesy of
Mason Sier Turnbull.
29-Aug-2007