When is a business a franchise?

Apart from the infinite number of business and commercial considerations that you will need to take into account, in order to franchise your business, there are also a number of legal considerations that you will need to stay aware of. Our Franchise Lawyers lists out a few below:

Documentation

The most important part of franchising your business is ensuring that you have the right documents. This includes, but is not limited to, the Franchise Agreement and Disclosure Document.

Disclosure Document

The Franchising Code of Conduct sets out exactly what needs to be included in the Disclosure Document. The Disclosure Document template can be found at Annexure 1 of the Franchising Code of Conduct. Every franchise must have a Disclosure Document. The Disclosure Document sets out some of the basic information that you need to disclose to any potential Franchisees. It also provides a good guide as the type of things that you will need to consider when structuring your Franchise.

In addition, in order to complete the Disclosure Document, you will also need to have an auditor in order to comply with item 21 of the Disclosure Document, which requires you to provide finical information about your business.

Franchise Agreement

The Franchise Agreement is your main contract between you and the Franchisee. It will generally set out all of the terms and conditions that you expect the Franchisee to follow and what the Franchisee can expect from you.

Granting Franchises

Depending upon the level of involvement and familiarity you have with a particular region, you may want to grant new franchises either:

• Directly; or
• By a master franchisee

If you grant a franchise directly, then this will mean that you are directly granting a franchisee a specific territory for them to conduct their franchised business. You will have direct control over them, however, you will also be directly responsible for them. You will need to directly monitor them and ensure their compliance.

Entering into a master franchisee agreement with another party effectively makes that other party the franchisor in a particular area (generally determined by state and territory). This allows you to benefit from their local knowledge of a particular area, and gives you the opportunity to concentrate on running your business rather than needing to directly oversea every franchisee (you effectively outsource this responsibility to the master franchisee). Obviously this also has some disadvantages, as you will still need to monitor the master franchisee and you have less control of your franchisees, although this can be mitigated somewhat by having strict obligations under you agreement with the master franchisee.

Suppliers

In order to control the quality of your products, you may want to limit from whom your franchisees may buy supplies. This is one of the most common ways to do this, however, you must first seek approval from the ACCC, as this may be considered anti-competitive behaviour. Our Franchise Lawyers have come across Franchisors who try to force a Franchisee to only buy supplies from certain suppliers only to be knocked back because they never sought approval from the ACCC.

Marketing Fund

If you intend to have a marketing fund, or another similar group fund which requires franchisee contribution, you will need to ensure that you have a qualified auditor to do the financial reporting for it. This is a requirement under the Franchising Code of Conduct. In addition, as you cannot make a franchisee also pay for any costs associated with administering or auditing the fund (the money must come directly from the fund), you must take this cost into consideration when determining how much franchisees are required to contribute.

Conclusion

These are only some of the legal issues which our franchise lawyers recommend that you consider before you begin to Franchise your business. If you want more information please contact us and we will put you into touch with one of our franchise lawyers.