Aligning yourself with an established brand by buying a franchise offers many advantages. It provides the opportunity to run your own business with the support of a franchisor. You can also access established systems to avoid the difficulty of building a brand from scratch. However, this comes with some legal obligations. This article will take you through four legal obligations to consider when buying a franchise.
1. Act in Good Faith
The Franchising Code of Conduct (the Code) mandates good faith from both franchisors and franchisees throughout their entire relationship. This includes negotiations conducted prior to the franchise agreement, ensuring all interactions are conducted honestly and ethically.
Although the Code does not define what “good faith” entails, to assess if a party acted in good faith, the Court considers:
- a party acted honestly and not arbitrarily; and
- a party co-operated to achieve the purpose of the franchise agreement.
The ACCC Australian Competition & Consumer Commission’s (ACCC) Franchisor Compliance Manual also helps us understand good faith. This manual indicates that the following might give rise to concerns about good faith:
- a franchisor treating a franchisee differently from other franchisees because the franchisee has raised concerns about the system;
- a franchisor raising numerous minor and immaterial breaches with a franchisee in an aggressive and intimidatory manner designed to extract concessions or cessation of complaints;
- franchisees using confidential information provided by the franchisor to compete with the franchisor; and
- franchisees using social media to post negative comments about the franchisor or their dispute with the franchisor.
2. Meet Financial Requirements
The franchising model can be appealing due to its access to a broader umbrella business. Franchising allows you to leverage an existing business’:
- proven processes;
- procedures;
- branding;
- training; and
- marketing.
In exchange for these benefits, you must pay specific fees. These fees might include:
- the upfront buy-in or purchase price;
- a royalty fee (usually as a percentage of sales);
- a contribution to a marketing fund;
- training fees; and
- renewal fees.
Ensure you take charge of your finances! While your franchisor will want you to succeed, it is your responsibility to manage the financial aspects of your business. This includes budgeting and meeting all tax and reporting requirements.
Continue reading this article below the form3. Comply With the Franchise Agreement
The franchise agreement is what governs the relationship between you and the franchisor. This agreement will outline a number of provisions regarding the operation of your business. For example, the franchise agreement will provide details on:
- maintenance of any equipment or premises;
- how to market your business;
- what fees you have to pay the franchisor;
- ongoing reporting requirements;
- where to source your supplies; and
- what products or services you may supply.
You must comply with the franchise agreement. During the negotiation stages, you can amend or raise issues or questions about the agreement.
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4. Operate Lawfully
Franchises may operate in a number of industries. Depending on the goods or services they trade in, you may be subject to different laws that you must be aware of and comply with.
Some examples include:
- the Fair Work Act 2009 (Cth). This sets out your obligations concerning salaries, hours, leave, and other entitlements, making this vital if you employ staff;
- licensing laws may also impact your business. For example, you need a license to sell alcohol or medications. If you collect any personal information about your customers or employees, you will need to check if you are subject to privacy laws;
- if your business operates in the food industry, you need to be aware of food health and safety laws that strictly regulate food standards; and
- any laws relating to the terms of your lease.
Key Takeaways
Owning a franchise offers a compelling path to business ownership. It allows you to leverage established processes, brand recognition, and support from an established franchise network. However, this comes with legal responsibilities. Accordingly, you are required to fulfil four essential obligations: acting in good faith, meeting financial requirements, adhering to the franchise agreement, and operating lawfully by following industry regulations. Understanding these obligations empowers you to make informed decisions with franchise ownership.
If you need assistance understanding your legal obligations when buying a franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
What is a franchise?
Franchising empowers you to market and distribute an established brand’s goods or services. This business model is experiencing rapid growth across various industries.
What are my legal obligations when buying a franchise?
Franchise agreements come with several legal obligations that must be considered. These include the obligations to:
- act in good faith;
- meet financial requirements;
- comply with the franchise agreement; and
- operate lawfully.
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