How to lawfully operate a franchise

Franchise businesses are becoming increasingly popular in Australia, appearing in a wide range of industries including fashion retail, fast food, restaurants, fitness facilities, professional services, real estate and many more. If you are interested in setting up a franchise system or if you have already established a franchise network, there are a number of legal and financial considerations that you should be aware of. We have highlighted below five useful tips about how to lawfully operate a franchise business and ensure it satisfies any legal requirements under Australian law.

Choose a franchise model

There are three main franchise models for structuring your, depending on the goods or services you are selling:

(a)  Business format franchises;

(b)  Manufacturing or processing franchises; and

(c)  Product franchises

The business format model is perhaps the most popular structure for a franchise. This format generally gives the franchisee the right to use the franchisor’s intellectual property to market a service or product. The intellectual property may include the business name, logo and the systems for operating the business. A good example of this general structure is that of many fast food outlets.

Under the manufacturing or processing franchising model, the franchisor provides important information to the franchisee about how to create the business product. With this knowledge the franchisee can then create the business products and sell them under the business name. Companies who sell soft drinks usually use this format.

The product franchise model allows for the franchisee to sell the franchisor’s product from a retail outlet or from a warehouse. The franchisee’s rights to sell the product are usually limited to a specific territory or specific location to give the franchisee some exclusivity. An example of such a structure would be motor vehicle dealerships.

Develop a business structure

Once you have decided on a suitable franchising model, your next consideration should be which business structure to use for your franchise business. Ideally, you will want to structure your franchise business to protect the assets of the business and also your personal assets to the greatest extent possible. To lawfully operate a franchise business, it is always advisable to seek advice from an accountant on the tax implications of any business structure chosen.

There are a number of business structures to choose from for your franchise business including a sole trader, a partnership, a trust or a company. The most common structure is for the franchisor to be a company or unit trust. These structures will give added protection to the personal assets of the individuals establishing the franchise. A further consideration for protection of the franchise assets is to establish a separate corporate entity that owns the intellectual property of the franchise business, which it may then licence to the operating franchisor entity.

Prepare a Disclosure Document

In Australia, under the Franchising Code of Conduct (Code), the franchisor is required to provide the prospective franchisee with a disclosure document in the form prescribed by the Code. The purpose of the disclosure document is to give sufficient information to the franchisee so they can make an informed decision about whether to enter into your franchise agreement. This includes estimating all the expenses the franchisee will incur. The Code outlines in detail what must be disclosed in this document and it is advisable to seek legal assistance in the preparation of both the disclosure document and the franchise agreement to ensure you have not breached the Code.

You should note that the franchise agreement cannot be executed by a franchisee until 14 days after they have received the disclosure document, the franchise agreement and a copy of the Code. These are legal requirements to operate a franchise, so speak with a franchise lawyer whenever you’re in doubt.

Prepare a Franchise Agreement

The franchise agreement is the key document that summarises all the rights and obligations in relation to your franchise business.  The Code requires certain terms to be in the franchise agreement including but not limited to the cooling off rights of the franchisee, the franchisee’s rights to transfer the agreement and your termination rights, including circumstances where immediate termination is permissible.

The Code is regulated by the Australian Competition and Consumer Commission, which provides that a franchise agreement must contain the following 4 essential elements:

(a)  Evidence of an agreement between two parties (the franchisor and the franchisee);

(b)  The franchisor granting the franchisee the right to carry on the franchise;

(c)  Information regarding any intellectual property of the franchise business and a description of the rights and licences that the franchisee has in relation to these marks, advertising materials or commercial symbols; and

(d)  An agreement by the franchisee to pay the franchisor a specific amount in return for being granted rights to operate the franchise under the agreement.

Conclusion

Establishing a franchise model can be an exciting time in the development of your business. The key to ensuring that you operate a franchise lawfully in Australia is to comply with the Code. In this regard we highly recommend you engage a franchise lawyer to assist with creating the necessary compliant legal documentation.

You may also be interested in participating in a free pre-entry training course offered by the Asia-Pacific Centre for Franchising Excellence and sponsored by the Australian Competition and Consumer Commission. Information about this course can be accessed at: http://www.franchise.edu.au/home/education/for-franchisees/pre-entry-franchise-education