What are the five fundamentals of franchising?

Understanding the Franchising Code of Conduct

Franchisors are expected to operate in compliance with the Franchising Code of Conduct at all times. 

While you are not required to pre-register with any statutory authority prior to franchising, franchising is specifically regulated by the Code and the Code is particularly relevant in the lead up to a franchise agreement being signed. 

The Code is an off-shoot from the Competition and Consumer Act which means any breach is punishable by significant fines or penalties.

The most important rule is that the franchisor be open and upfront about the transaction.  In law the franchisor is considered the ‘stronger party’ because they control access to information.  The franchisor must provide the franchisee with copies of the Code, the franchise agreement and a disclosure document at least 14 days before an agreement is signed or the franchisee hands over non-refundable money (e.g. a deposit or franchise fee).

It’s important that the franchisee clearly understand his or her rights. It’s vital that you seek advice from a specialist franchise lawyer before signing a franchise agreement.    

The Franchisor must Reveal Franchise History

The franchisor must give relevant information to the franchisee about any businesses under the franchise that have been terminated, bought back or not renewed before any franchise agreement is finalised.  The franchisor must also provide contact details of any of these businesses to the franchisee.

If a previous franchise operated at the same location, details of the previous franchise including the circumstances in which the previous franchisee ceased to operate must also be provided to the franchisee.

The Franchisor Must Disclose all Material Facts

Before an agreement is finalised the franchisor must disclose all “material facts” to the franchisee or the agreement will be invalid.

Material facts are defined as anything that might have an effect on the value or price of the franchise granted. The list is therefore potentially endless and calls for the franchisor to be scrupulous and genuine. 

Examples listed in the Code of Conduct are:

• a change in the franchisor’s majority ownership;
• details of criminal and civil legal proceedings involving the franchisor;
• an award in arbitration against the franchisor;
• the existence and content of undertakings or orders under section 87B of the Competition and Consumer Act given by or made against the franchisor;
• insolvency matters.

The Franchisee Must get Independent Advice

An agreement will not be legally binding until the franchisee provides a signed statement saying that they have received advice from:

     (i)    an independent legal adviser;

     (ii)    an independent business adviser;

    (iii)    an independent accountant; or

have decided not to seek such advice.

You Must Create a Disclosure Document

What is a franchise disclosure document (FDD)?  The FDD is a legal document which must be presented to potential buyers of franchises in the pre-sale disclosure process or the franchise agreement will be void. As set out above, by law the franchisor must provide the franchisee with copies of the Code, the franchise agreement and a disclosure document at least 14 days before an agreement is signed or the franchisee hands over non-refundable money (e.g. a deposit or franchise fee).

The disclosure document should include information such as:  

• the company’s key staff;
• management’s experience, record and credentials in managing franchises;
• the franchisor’s bankruptcy and litigation history; and
• the responsibilities of the franchisor and franchisee.

Template disclosure documents are included in the Code.

The FDD must also be maintained by the franchisor as the franchisee has the right to request an updated FDD once every 12 months.

Conclusion

Entering into a Franchise Agreement as either the franchisor of the franchisee is a big decision. Make sure that you seek expert advise before making such a life altering decision.