In Short
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A franchise agreement is a legally binding contract that defines the relationship between a franchisor and a franchisee, detailing rights, obligations, and operational guidelines.
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Franchise agreements must comply with the Australian Franchising Code of Conduct, which mandates transparency and fairness in the franchisor-franchisee relationship.
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Franchisors should be cautious of including unfair contract terms, as these can lead to legal disputes and financial penalties under Australian Consumer Law.
Tips for Businesses
Before entering into a franchise agreement, ensure that it clearly outlines both parties’ rights and obligations, including fee structures, performance standards, and territorial rights. Regularly review and update the agreement to comply with the Franchising Code of Conduct and avoid unfair contract terms. Seek legal advice to ensure the agreement is fair and transparent.
Franchising is a popular business model due to its scalability and proven track record in the market. Whether you are looking to establish a new franchise network from scratch or join an existing franchise system, it is important to grasp the basics of how franchise agreements work. This article will guide you through the fundamentals of franchise agreements, their operation, and key considerations before entering into them.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
How Do Franchise Agreements Work?
A franchise agreement is a legally binding contract that forms the foundation of the franchisor-franchisee relationship. It outlines the terms under which a franchisee can operate using the franchisor’s:
- established brand;
- business systems; and
- intellectual property.
This comprehensive document details the rights and obligations of both parties.
For franchisees, the agreement typically specifies:
- performance standards and targets;
- fee structures (including royalties, marketing contributions, and various operational fees);
- marketing and branding requirements;
- reporting obligations;
- training commitments;
- product and service supply arrangements; and
- territorial rights and limitations.
Conversely, the agreement often stipulates the franchisor’s responsibilities, such as:
- providing approved equipment products or supplier lists;
- coordinating advertising and marketing efforts;
- offering ongoing assistance and support; and
- managing client enquiries and leads.
In Australia, franchise agreements must adhere to the Franchising Code of Conduct. This establishes overarching rights and responsibilities for both parties. However, each agreement’s specific terms and conditions are unique to the franchise system.
What Are the Risks for Franchisors Entering Into Franchise Agreements?
Franchisors face several risks when establishing a franchise network. A significant concern is the inclusion of unfair contract terms (UCTs) in franchise agreements. UCTs are provisions that:
- create a substantial imbalance in parties’ rights and obligations;
- exceed what’s necessary to protect the advantaged party’s legitimate interests; and
- would be detrimental to the other party if enforced.
Another crucial risk is inadequate disclosure to franchisees as required by the Franchising Code of Conduct. The mandatory disclosure document must provide comprehensive details about the franchise, including:
- financial information, intellectual property owned by the franchisor;
- franchise associates;
- network size; and
- any ongoing or past legal proceedings and judgments.
A third significant risk for franchisors is reputational damage. The actions or failures of individual franchisees can have far-reaching consequences for the entire brand. If a franchisee:
- provides poor service;
- engages in unethical practices; or
- fails to maintain quality standards
it can negatively impact the reputation of the entire franchise system. This can lead to:
- decreased customer trust;
- reduced sales across the network; and
- difficulties in attracting new franchisees.
What Are the Risks for Franchisees Entering Into Franchise Agreements?
As a franchisee, entering into a franchise agreement carries several risks you should be aware of. Firstly, you face financial risks. This includes substantial initial investments and ongoing fees that may impact profitability. There is also the risk of market saturation or changes in consumer preferences affecting your business performance. You may encounter operational challenges if the franchisor’s systems or products do not meet expectations or local market needs.
Legal risks could include potential breaches of the agreement or disputes with your franchisor. You might face limitations on your business decisions due to strict franchise guidelines. There is also the risk of the franchisor’s reputation negatively impacting your business. Additionally, you may struggle with work-life balance due to the demands of running the franchise.
Just like with franchisors, if you are a franchisee, you should seek legal, accounting and financial advice to inform you of the risks that you may be exposed to. Quality independent legal advice is also important for informing you of your rights under Australian franchising law.
Key Takeaways
A franchise agreement is a contract that sets out the rules and responsibilities for both the business owner (franchisor) and the person buying the right to run a branch of that business (franchisee).
When you consider joining a franchise, you need to understand how franchise agreements work. These contracts spell out what you and the franchisor must do. You should know about the Franchising Code of Conduct and what it requires. If you are a franchisor, you might face problems with unfair terms or not sharing enough information. As a franchisee, you could lose money, have trouble running the business, or get into legal fights. Both sides need to think about the market and how people view the brand. Before you sign anything, you should talk to lawyers and money experts to know your rights and what could go wrong.
If you have any questions about marketing funds, 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 1300 544 755 or visit our membership page.
Frequently Asked Questions
How long does a typical franchise agreement last?
Most franchise agreements last between 3-5. You should carefully consider this long-term commitment before signing. The agreement may include options to renew, which can extend your franchise term. Remember, ending the agreement early can be difficult and costly, so make sure you are comfortable with the time frame.
Can I make changes to my franchise’s products or services?
As a franchisee, you usually have limited ability to change products or services. Your franchise agreement will likely require you to follow set guidelines. If you want to make changes, you must get approval from your franchisor first. This rule helps maintain consistency across all franchise locations. Always check your agreement before making any changes to your business.
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