How to Lawfully Operate a Franchise

In Short

• • Choosing the right franchise model—business format, manufacturing, or product franchise—is crucial for structuring your business effectively.

• • Franchisors must comply with the Franchising Code of Conduct by providing a Disclosure Document and a legally compliant franchise agreement.

• • A well-structured franchise protects intellectual property, ensures transparency with franchisees, and minimises legal risks.

Tips for Businesses

Before franchising, select a model that aligns with your business goals. Ensure your Disclosure Document and franchise agreement comply with the Franchising Code of Conduct. Consider structuring your business as a company or trust to protect assets. Legal advice can help navigate complexities, avoid compliance breaches, and build a strong foundation for long-term success.

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Table of Contents

• Choose a Franchise Model
• Develop your Business Structure
• Prepare a Disclosure Document
• Prepare the Franchise Agreement
• Key Takeaways
• Frequently Asked Questions

Australia boasts a higher number of franchising outlets per capita than nearly any other country. Whether you are keen on establishing a franchise system or have already set up a franchise network, the road to successful franchising is filled with legal intricacies and regulatory requirements that both franchisors and franchisees must navigate carefully. This article outlines:

• the various franchise models available in Australia;
• the complexities involved in structuring a franchise network; and 
• the key components of disclosure documents and franchise agreements. 

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Choose a Franchise Model

When structuring your franchise in Australia, choosing the right model to suit the goods or services you are selling is essential. The three main franchise models are:

1. business format franchises;
2. manufacturing or processing franchises; and
3. product franchises.

Business Format Franchises

The business format model is the most prevalent structure for franchising. In this model, the franchisee is granted the right to utilise the franchisor’s intellectual property. This encompasses the business name, logo, and operational systems used to promote a service or product. This comprehensive format addresses all business running aspects, from marketing strategies to customer service protocols.

Manufacturing or Processing Franchises

Under the manufacturing or processing franchising model, the franchisor supplies the franchisee with:

• the proprietary knowledge; and 
• methods necessary to manufacture the franchisor’s products. 

This includes detailed guidance on production processes and quality control and may involve sourcing raw materials. Once equipped with this information, the franchisee can produce and sell the products under the franchisor’s brand.

Product Franchises

The product franchise model focuses on the distribution and sale of the franchisor’s products. In this arrangement, the franchisee is granted the right to sell the franchisor’s goods through a retail outlet or a warehouse. The franchisee often receives exclusive rights to sell the product within a specified territory or location, which provides a competitive edge and ensures effective market saturation management. This model is exemplified by automotive dealerships, where the franchisee sells cars and related products under the manufacturer’s brand.

Develop your Business Structure

Once you have settled on a suitable franchising model, the next crucial step is determining your franchise’s appropriate business structure. Choosing the proper structure is vital for safeguarding your business and personal assets to the greatest extent possible. It is highly advisable to consult an accountant to understand the tax implications and other financial considerations of the various business structures available. 

Several business structures can be considered for a franchise, including:

• a sole trader; 
• a partnership;
• a trust; or 
• a company. 

Generally, franchisors prefer to operate as a company or a unit trust. These structures provide added protection for the personal assets of the individuals establishing the franchise. To further protect the franchise’s assets, it is common for franchisors to create a separate corporate entity that owns the franchise’s intellectual property (IP). This entity can then license the IP to the operating franchisor entity. This offers better protection for business-critical assets. 

Prepare a Disclosure Document

In Australia, the Franchising Code of Conduct (Code) requires franchisors to provide a comprehensive disclosure document to prospective franchisees, which must be updated annually. This document must adhere to the prescribed format set out by the Code. Its primary aim is to furnish prospective franchisees with sufficient information to make an informed decision about joining the franchise and entering into the franchise agreement. 

Moreover, the Code outlines in detail what must be disclosed in the Disclosure Document, covering aspects such as:

• financial details;
• legal obligations; and 
• operational guidelines. 

In addition to the prescribed content required by the Code, as a franchisor, you should aim to provide clear and transparent information that goes beyond mere compliance. This includes insights into: 

• the franchise system’s performance history;
• potential risks involved; and 
• any support offered to franchisees. 

Detailed financial projections and disclosures regarding the use of marketing funds and ongoing fees are also crucial for establishing realistic expectations with franchisees. You should see the Disclosure Document as a legal obligation and a chance to establish trust and nurture a mutually beneficial relationship with potential franchisees.

Prepare the Franchise Agreement

The franchise agreement is the key document that outlines the franchisor’s and franchisee’s rights and obligations. According to the Code, specific terms must be included in the franchise agreement. These terms include, but are not limited to:

• cooling off rights;
• the franchisee’s rights to transfer the agreement; and 
• the franchisor’s termination rights. 

The Australian Competition and Consumer Commission (ACCC) regulates the Code. The ACCC states that a franchise agreement must include the following four essential elements:

1. evidence of an agreement between the franchisor and the franchisee;
2. the franchisor grants the franchisee the right to carry on the franchise;
3. detailed information regarding the franchise’s intellectual property, including the rights and licences the franchisee will have in relation to these assets; and
4. the franchisee agrees to pay the franchisor a specified amount in return for the rights to operate the franchise.

Key Takeaways

Establishing a franchise is an exciting step in the growth of your business, but it requires careful planning and consideration. Compliance with the Code is essential to operating lawfully in Australia. 

If you’re seeking legal assistance to establish your franchise, our knowledgeable franchising lawyers can help as part of your LegalVision membership. You will have unlimited access to lawyers for any questions and to draft or review your documents for a low monthly fee. Give us a call today at 1300 544 755 or check out our membership page.

Frequently Asked Questions

Why is business structure important when setting up a franchise?
Choosing the proper business structure (sole trader, partnership, trust, or company) helps protect personal and business assets. Many franchisors opt for a company or unit trust structure, often setting up a separate entity to hold intellectual property.

What is a Disclosure Document, and why is it required?
The Franchising Code of Conduct requires franchisors to provide a Disclosure Document outlining key details about the franchise. This includes financial, legal, and operational information to help prospective franchisees make informed decisions. It must be updated annually.