In Short
- Franchisors must comply with the Franchising Code of Conduct, Australian Consumer Law, and other industry regulations while providing key documents like the Franchise Agreement and Disclosure Document.
- Choosing the right business structure and protecting intellectual property are critical to long-term franchise success.
- Marketing funds can benefit franchise networks, but compliance with financial reporting requirements is essential.
Tips for Businesses
Before franchising, ensure you have a clear legal structure, registered intellectual property, and compliant documentation. Consider whether a marketing fund suits your franchise model and comply with all legal and financial obligations. Seeking expert legal and financial advice will help you avoid costly mistakes and create a strong foundation for your franchise.
Franchising involves more than you might expect! When franchising your business, the law requires you to fulfil certain obligations as a franchisor. Moreover, numerous factors must be examined before determining if franchising is the right choice for your business. This article will highlight five key legal considerations for establishing a franchise.
The ultimate guide to setting up a franchise.
1. What Laws Do I Need to Comply With?
When starting a franchise, there are various pieces of legislation and regulations that you need to adhere to, such as:
- Franchising Code of Conduct (the Code): This Code governs multiple aspects of the relationship between franchisors and franchisees. The Code specifies their mutual rights and responsibilities while outlining particular terms to include or exclude in franchise agreements.
- Australian Consumer Law (ACL): This legislation protects consumer rights and regulates how businesses interact with customers.
- Fair Work Act 2009 (Fair Work): Fair Work safeguards employee rights and influences how you manage your staff. Notably, the Fair Work Act now includes provisions for vicarious liability, imposing additional responsibilities on franchisors. This means that franchisors can be held accountable for their franchisees’ breaches of employment laws.
- Privacy Act 1988: Privacy laws establish specific procedures for handling personal information, such as customer data. If you collect personal information in the course of your franchised business, you may need to comply with these privacy regulations.
In addition to these laws, franchisors must be aware of and comply with industry-specific regulations. Depending on the sector, you may need to adhere to regulations such as:
- food safety standards;
- fire safety regulations; and
- construction or building codes.
2. What Documents Do I Need to Give to a Franchisee?
There is a lot of documentation that you, as a franchisor, need to prepare. These documents include the following:
Franchise Agreement
The franchise agreement is a legally binding contract between the franchisor and franchisee. The agreement will include the franchisee’s obligations regarding payment of fees, marketing, training and supply of products. The agreement will set out topics such as termination and transfer and required documentation.
Disclosure Document
The disclosure document is a requirement of the Code and provides prospective franchisees with essential information. This enables them to make an informed decision about entering the franchise agreement. The disclosure document covers:
- setup and operational costs;
- the franchisor’s financial status;
- key personnel and network details;
- intellectual property rights; and
- critical terms and conditions of the franchised business.
Key Fact Sheet
This document summarises the key information from the disclosure document. It is a snapshot of the disclosure document.
Franchising Code of Conduct
A copy of the Code must be provided to a Franchisee. This can be obtained through the Federal Register of Legislation website.
Information Statement
The information statement is not a document you need to prepare. However, you are required to give this to franchisees. This statement is made available by the Australian Competition and Consumer Commission.
Operations Manual
The Operations Manual records the daily procedures of the business as well as the system and processes of the franchise. The Franchisor is not required to provide the Operations Manual to the franchisee up front. Typically, it is only provided during the initial training and after the franchise agreement has been signed.
Continue reading this article below the form3. What Is My Business Structure?
You will need to determine and establish your business structure to run your franchise system. Generally, it is preferable to keep your key assets separate from the operational and franchising branches of the business. It is essential to explore which structure best safeguards your interests.
Choosing the appropriate business structure for your franchise is essential. You might consider establishing an intellectual property holding entity (often as a parent company) to safeguard your core assets and create an operational entity to oversee day-to-day franchise operations. You might find it advantageous to set up a separate leasing entity if you have substantial property holdings.
Consider:
- the tax implications;
- plan for future expansion; and
- ensure management is efficient.
Design your structure to accommodate potential future subdivision or partial sale of the network.
4. Should I Set Up a Marketing Fund?
Often, franchises have a central marketing fund that pools each franchisee’s financial contributions to marketing initiatives. This fund allows for large-scale advertising and promotions for the whole brand. The Code mandates requirements for these marketing funds. For example, you must:
- establish a separate bank account;
- use the marketing fees appropriately; and
- prepare and audit your annual financial statement.
A franchisor may establish a marketing fund to ensure consistent brand messaging and reduce costs for national advertising campaigns. This strategy can enhance overall brand recognition and provide professional marketing resources to all franchisees. Conversely, a franchisor might opt not to create a marketing fund. This allows franchisees greater flexibility in tailoring promotions to local markets. This choice can decrease administrative overhead and potential conflicts over fund management. It enables franchisees to respond more directly to local consumer needs and competition.
5. Have I Protected My Intellectual Property?
When establishing a franchise, you typically grant franchisees the right to use your intellectual property (IP) in their franchise business. Registering all relevant IP, including trademarks, patents, and design rights, is crucial. This process protects your brand identity, secures exclusive rights to your innovations, and prevents unauthorised use by competitors.
Conducting a comprehensive audit of all of your IP assets is essential. This ensures proper IP licensing for your franchisees and allows for regular review and updating of IP.
Key Takeaways
There are many legal considerations to take into account when franchising your business. Franchising offers an exciting opportunity to expand your business. It brings with it a range of strategic decisions, such as:
- drafting legal documents;
- setting up a marketing fund;
- registering intellectual property; and
- selecting a business structure.
If you need assistance in franchising your business, our experienced franchise 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
What key documents do franchisors need to prepare?
Franchisors must prepare key documents, including a Franchise Agreement, Disclosure Document, and Key Fact Sheet.
What key legislation do franchisors commonly need to follow?
They must comply with relevant legislation, such as the Franchising Code of Conduct, Australian Consumer Law, Fair Work Act, and Privacy Act, along with any industry-specific regulations.
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