Why the Code matters to franchise buyers

By Sarah Stowe | 18 Jan 2017 View comments

Transparency and good faith are fundamentals underlying the rules and regulations governing the franchising industry.

Worth $146 billion to the Australian economy, the franchise industry is highly regulated with the Franchising Code of Conduct the foundation of this governance.

Since 1998, the franchise sector has been regulated by the Australian Competition and Consumer Commission (ACCC). There have been updates to the rules over the years, with the code being overhauled with effect from January last year.

A new requirement is that both franchisors and franchisees act in good faith at all times, and that franchisors provide greater transparency. The new code also includes court-ordered penalties of up to $54,000 for certain breaches, and allows the ACCC to issue infringement notices.

It is easy to access the code online, but ACCC deputy-chairman Dr Michael Schaper offers an overview of what the Franchising Code of Conduct does and why it is important. He says there are three key points:

  1. It is a mandatory code with the force of law under the Competition and Consumer Act 2010.

  2. The code aims to help prospective franchisees make an informed decision about buying a franchise. It also entitles them to specific information during the life of their franchise agreement, and gives them certain rights as their agreement comes to an end.

  3. The code also provides a cost-effective dispute resolution procedure.

When does the code apply?

The code applies to any franchise agreement in Australia.

A franchise agreement is a written, oral or implied agreement:

• under which one person (the franchisor) grants to another person (the franchisee) the right to run a business supplying goods or services under a certain system

• that is associated with a trademark or a commercial symbol

• under which the franchisee must pay an amount to the franchisor or its associate (for example, a royalty or training fee).

What are your rights before signing?

Before you sign up to run a franchise, a franchisor must give you:

• an information statement that highlights the risks and rewards of franchising

• a copy of the code

• a current disclosure document

• a franchise agreement in its final form at least 14 days before you enter into, renew or extend a franchise agreement, or pay a non-refundable amount relating to a franchise agreement.

The franchise agreement is a legally binding agreement that sets out your rights and obligations, as well as those of the franchisor. Read it carefully and seek legal advice if you do not understand one or more of its clauses.

The disclosure document includes critical information you need to know before you buy a franchise, including the business experience of the franchisor’s officers, details of any litigation against the franchisor or one of its officers, contact details of current franchisees and some past franchisees, whether you will have an exclusive territory, whether you or the franchisor can sell online, and any restrictions on where you can source goods or services.

The disclosure document will also include your start-up costs and any other payments you must make, details of what will happen when your agreement ends (including whether you will have an option to renew and whether you will be entitled to an exit payment), and any requirement to enter into a related agreement (for example, a lease agreement).

The franchisor is not required to give you earnings information about any of its franchises.

What are your rights after signing?

As a franchisee you can terminate a franchise agreement within seven days of entering into it or paying any non-refundable fee, whichever comes first. If you do choose to exercise your cooling-off rights, the franchisor must provide you with a refund – minus any expenses incurred that are deemed reasonable – within 14 days.

The Code of Conduct also provides rules on:

  • Franchisor termination and what happens if you breach the agreement

  • Transparency around marketing funds

  • Dispute resolution

  • Leasing incentives

Alleged breaches of the code or the Competition and Consumer Act can be investigated by the ACCC, which has the power to take enforcement action.

Disputes about contractual issues are best resolved directly by the franchisee and franchisor or via a mediator. You can find mediation services through your franchise agreement, a small-business commissioner or the Office of the Franchising Mediation Adviser.

Mediation is often a quicker and cheaper option, allowing both parties to continue working together.