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If you wish to expand your already successful business, franchising might be a good option. Franchising a business involves granting a franchisee the right to market and distribute your goods and services under your brand. In this sense, franchising can open your business to new markets. There is no specific franchise registration or approval process. However, establishing a franchise is a legal process that requires specific documentation.
This article explains what documents you will need to franchise your business.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
A franchise agreement is a contract that outlines the legal rights and obligations of the franchisor and their franchisees. The Franchising Code of Conduct (the Code) requires that every franchisor provides a franchise agreement to prospective franchisees. Without a franchise agreement, the franchisee cannot use the processes and marketing strategy to conduct business.
Further, the Code requires you to have a franchise agreement, although it does not specify what the contents must be. Therefore, franchisors have the flexibility to include terms that are specific to their franchise model. Nevertheless, there are some areas a franchise agreement should typically cover, including:
- the duration of the franchise agreement, as well as any rights to renew the agreement;
- the territory within which the franchisee can operate the franchise business;
- any fees the franchisee must pay, such as marketing fees;
- confidentiality clauses that protect your business’s intellectual property;
- rights to terminate, and obligations arising in the event of termination;
- dispute resolution procedures following the Code;
- your franchisee’s obligations, such as their duty to meet performance criteria and reporting requirements; and
- your obligations as the franchisor, including marketing assistance and the training and support you will provide.
The Code also requires you to provide prospective franchisees with the agreement at least 14 days before signing it. For this reason, drafting your franchise agreement earlier rather than later is essential.
A disclosure document outlines certain information about your business so prospective franchisees can decide whether they wish to enter your franchise network. Furthermore, a disclosure document allows existing franchisees to make decisions about how they go about conducting their business.
As a franchisor, you have an important obligation to disclose materially relevant facts to prospective and existing franchisees. Furthermore, this obligation involves the continuous disclosure of information concerning:
- change of ownership;
- insolvency; and
- other significant events.
As a general rule, your disclosure document should include:
- your previous business experience;
- any disputes with former franchisees, alleged breaches of the franchise agreement or illegal activity relating to the operating of the franchise;
- the details of current franchisees;
- a breakdown of how you spend franchisee’s contributions to the marketing fund (if applicable);
- details of any costs franchisees might face before opening their site, such as the expense associated with purchasing new equipment;
- the different franchise territories;
- the suppliers you want franchisees to source particular products from if applicable; and
- what rights franchisees have to the franchise’s branding and other intellectual property (IP).
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Key Facts Sheet
You must also supply franchisees with a key fact sheet at least 14 days before signing the franchise agreement. This document highlights critical information within the disclosure document. Often, the disclosure document can be quite lengthy. As a result, the key facts sheet helps franchisees navigate the disclosure document and understand its content.
Furthermore, you must ensure you draft the key facts sheet in the approved format. Additionally, you must update the key facts sheet and the disclosure document simultaneously, within four months after the end of the franchisor’s financial year.
Lastly, the information statement is a standard document by the Australian Competition and Consumer Commission (ACCC). As a franchisor, you must also provide your franchisees with the information statement. Ultimately, this document highlights some of the issues they should consider before becoming a franchisee. Often, some of these issues include:
- the risks of franchising;
- the due diligence they should undertake; and
- questions a franchisee should ask if they are thinking about buying a franchise.
Ultimately, the Code places you under a duty to act in good faith before, during and after the franchise agreement. This duty requires you to act reasonably. To be clear, you must not exercise your powers arbitrarily or for irrelevant purposes.
By providing the information statement and the documents described above, you can moderate any power imbalance between yourself and your franchisees.
When franchising your business, the Code outlines specific documents you must provide to your franchisees. These documents include:
- the franchise agreement;
- disclosure document;
- key facts sheet; and
- information statement.
If you have any questions about the documents you need to franchise your business, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
The Franchising Code of Conduct is a mandatory industry code that regulates the conduct of Australian franchisees and franchisors. Notably, it imposes strict disclosure obligations on franchisors.
A disclosure document gives current and prospective franchisees key information about the franchise system in which they show interest.
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