In Short:
- A franchise agreement is a legal contract governed by the Franchising Code of Conduct.
- It outlines both the franchisee’s and franchisor’s obligations, key business terms, and operational procedures.
- Be sure to thoroughly review the agreement before signing, especially if purchasing an existing franchise.
Tips for Businesses:
When entering a franchise agreement, ensure you fully understand your obligations, such as meeting performance standards and following operational systems. Pay close attention to clauses on fees, territory, termination, and confidentiality. Seek legal advice to ensure the agreement aligns with the Franchising Code of Conduct and protects your interests throughout the business relationship.
If you are looking to purchase a franchise business, it is likely that the franchisor has provided you with a document or two along the way. This is particularly true if you are in advanced negotiations with a particular franchisor. But, what does the big bundle of documents that you receive from the franchisor actually cover? The franchise agreement is one of five key documents that you can expect to receive from the franchisor. This article will go through a few important points about franchise agreements, to help you get a better understanding of how this document will affect your business.
Is a Franchise Agreement Required?
The Franchising Code of Conduct (the Code) requires that every franchisor should provide a franchise agreement to prospective franchisees. Essentially, this document is the contract between yourself and the franchisor. However, it is different to other commercial contracts, in that its terms are also governed by the Code.
As the Code does not set out a required form or consistent ‘look’ for the franchise agreement, there is a great deal of variance from agreement to agreement. Therefore, the franchise model itself will determine the length and details of a specific franchise agreement.
When Should I Receive the Franchise Agreement?
Under the Code, you must receive the franchise agreement at least 14 days before you can sign it. Otherwise, the code does not detail any further requirements on when you should receive the franchise agreement during the process of purchasing a franchise.
Buying an Existing Franchise
If you are buying an existing franchise from an outgoing franchisee, you will likely receive a copy of the franchise agreement after you have made an offer to purchase the business.
However, you should not complete the sale without first receiving and going over the franchise agreement. In most circumstances, the franchisor can insist that you enter into a contract where the terms differ from what the seller was originally operating under.
Continue reading this article below the formWhat Should My Franchise Agreement Contain?
A franchise agreement is a contract that contains the following:
- key terms of the business;
- franchisee’s obligations;
- franchisor’s obligations; and
- procedures that will be relevant as you operate the business.
Common Contract Clauses
Your franchise agreement will contain many clauses commonly found in commercial contracts, more generally. Some of these include:
| Clause | Information |
| Term | Firstly, the franchise term is the duration of the years that the agreement will operate. If not renewed at the end of the term, the agreement will expire. |
| Territory | The territory is the place where you are contractually able to carry on your business. Furthermore, this clause will often also specify where you can market your franchise business and take referrals for new businesses. |
| Fees | All of the fees that must be paid and the mechanics for making these payments will be detailed in the franchise agreement. |
| Governing Law |
When purchasing a franchise business that originated overseas, you should ensure that your documents have been amended to reference Australian law. When purchasing an Australian franchise, however, your franchise agreement may reference a state jurisdiction. For example, food franchise businesses around Australia might operate under different state food safety laws. |
| Confidentiality | The Code provides that there are very specific circumstances where a franchisee or franchisor can terminate the agreement. These circumstances will be set out in your franchise agreement. This ensures that all parties to the agreement can assume a level of certainty. Just as your franchise agreement will have a fixed term, the agreement may also set out the circumstances where you can exit the agreement before its expiry. |
| Termination |
The Code provides that there are very specific circumstances where a franchisee or franchisor can terminate the agreement. These circumstances will be set out in your franchise agreement. This ensure that all parties to the agreement can assume a level of certainty. Just as your franchise agreement will have a fixed term, the agreement may also set out the circumstances where you can exit the agreement before its expiry. |
Clauses on the Franchisee’s Obligations
Your franchise agreement will also contain many clauses that are specific to the business relationship you will have with the franchisor. Furthermore, it will also contain clauses on your obligations as the owner of a franchise. Some common clauses in your agreement regarding this obligation may include your:
- responsibility to comply with the business operations systems;
- duty to meet the franchisor’s training and performance standards;
- reporting requirements;
- supply arrangements and requirements;
- responsibilities to staff;
- responsibilities to personnel in your local area;
- promotion and marketing practices; and
- performance criteria.
Clauses on the Franchisor’s Obligations
Additionally, some common clauses in your agreement will deal with the franchisor’s obligations to you. Some of these obligations include providing ongoing:
- training and support; and
- marketing assistance.
In addition to the parties’ obligations, the franchise agreement will also be a reference point and impose contractual obligations at all points of the franchise life cycle. Some of these reference points might be the:
- renewal provisions;
- termination provisions;
- dispute resolution process; and
- breach procedures.
The Code also has provisions containing these, so it’s important that the franchise agreement is consistent with the terms of the Code.
Key Takeaways
Even when purchasing a ‘simpler’ everyday business operating under a franchise model, it is essential to understand the obligations and rights within your franchise agreement. This will ensure that the terms of the agreement are implemented in your day-to-day business operations.
If you have any questions about a franchise agreement, 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 1800 532 904 or visit our membership page.
Frequently Asked Questions
A franchise agreement is a contract that contains the key terms of the business, the franchisee’s obligations, the franchisor’s obligations and procedures that will be relevant as you operate the business.
The Franchising Code of Conduct (the Code) requires that every franchisor should provide a franchise agreement to prospective franchisees. Essentially, this document is the contract between yourself and the franchisor. However, it is different to other commercial contracts, in that its terms are also governed by the Code.
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