How do I know this is a franchise?

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Inside Franchise Business: is your franchise agreement really a licence?Have you been given an agreement and you’re not sure if it’s a franchise or something else, like a licence or distribution agreement?

Franchising in Australia is regulated by the Franchising Code of Conduct. If the arrangement is a franchise, then the franchisor (the person granting you the rights) has certain obligations it must comply with, and you have additional rights above and beyond what’s in the agreement.

What is a franchise agreement?

A franchise agreement is defined under the Code as an agreement:

  1. in which a person (the franchisor) grants to another person (the franchisee) 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
  2. under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol of the franchisor; and
  3. under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount - including, for example:
  • an initial capital investment fee; or
  • a payment for goods or services; or
  • a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or
  • a training fee or training school fee;

System or marketing plan

What might constitute a “system or marketing plan” under point one above?

The following factors have been said to satisfy this element:

  • specific requirements for accounting and record keeping

  • reservation by the franchisor of a right to audit the books of account and other records

  • inability of the franchisee to supply goods or services to customers without the franchisor’s approval

  • reservation by the franchisor of the right to approve promotional and advertising material

  • training on sales or the goods/services

  • restriction on the franchisee selling competing products

What if it’s a franchise agreement?

If the agreement is a franchise, then you have certain rights under the Code, such as:

  • the right to receive a disclosure document, which contains important information about the franchisor and the franchise system

  • the right to have the franchise documents for 14 days before signing them

  • if there’s a marketing fund, the right to obtain marketing fund financial statements each year

The franchisor also has certain obligations it must comply with, like updating its disclosure document each year and being restricted from including certain types of provisions in the franchise agreement.

Other agreements

The arrangement might actually be more like a licence or distribution agreement. In order not to be caught by the Code, a licence arrangement must have one of the above elements missing.

Usually, the key difference between a licence/distribution agreement and a franchise is that the licensor does not have much control over the licensee’s business. The licensee is often free to conduct its own marketing and according to its own business plan, and sometimes operate under its own brand name.

Be cautious of agreements that are not called franchise agreements but actually meet the definition of one under the Code. Just because it may be called something else, like a licence agreement, it doesn’t mean that’s what it actually is.

Remember – if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck!

Marianne Marchesi

Marianne is the founder and principal of Legalite, and is a start-up, small business and franchising lawyer. View More...
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