Setting up a franchise – What is a franchise?

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• 1. Existence of an Oral, Implied or Written Contract
• 2. Existence of a System or Marketing Plan
• 3. Use of a Trade Mark or Commercial Symbol
• 4. Payment of a Fee
• Conclusion

Australian franchises are governed by the Franchising Code of Conduct. This is a mandatory industry code which is regulated by the Australian Consumer and Competition Commission (ACCC). Setting up a franchise will require a business owner to comply with the Franchising Code of Conduct, and will generally increase your business costs. It’s important that business owners be able to work out if a business structure they are considering setting up will actually be considered to be a franchise under the relevant legislation. Fortunately, the Franchising Code of Conduct sets out a four point test for determining whether a business structure will be deemed to be a franchise. This article explains the four points of this test.

1. Existence of an Oral, Implied or Written Contract

This element of the test is obviously going to be satisfied by practically any business arrangement. Whether you are entering into a distribution agreement, a service agreement or of course a franchise agreement, a contract will be formed.

2. Existence of a System or Marketing Plan

In order to be deemed a franchise, the business structure in question must be structured so that one entity (the franchisor) grants to another entity (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan that is substantially determined, controlled or suggested by the franchisor or its associates. Clearly this element of the test has a much higher threshold than the first element.

3. Use of a Trade Mark or Commercial Symbol

The third leg of the franchise test is whether the agreement is associated with a trade mark or commercial symbol owned, used, licensed or specified by the franchisor or an associate of the franchisor.

4. Payment of a Fee

Finally, an arrangement will be deemed a franchise if there is a payment of an amount or fee by the franchisee to the franchisor or its associate (subject to certain exclusions). Obviously in nearly all commercial arrangements there will be a payment of any amount or a fee from one party to the other, so it’s likely that this test will be triggered.

Conclusion

In summary, the two big issues to look at, to determine whether an arrangement will be deemed a franchise under the Franchise Code of Conduct are (i) whether the arrangement involves the “franchisee” operating under a system or marketing plan and (ii) whether the arrangement involves the use of a trademark or commercial symbol owned, used, licensed or specified by the franchisor. To speak with one of our experienced franchise attorney today, contact LegalVision on 1300 544 755.