- There are different types of franchises, and as such, there are different types of franchise agreements. However, every franchise will require a franchise agreement and a disclosure document.
- Franchisors and Franchisees are required to comply with the mandatory industry code, the Franchising Code of Conduct.
- There is no standard franchise agreement or template. Each agreement is unique to the parties entering into them.
A franchise agreement grants a franchisee the exclusive right to operate a single franchise business for a fee, pursuant to the terms of the franchise agreement. Each franchise business requires a franchise agreement specifically for the franchise.
Franchise agreements are sometimes heavily weighted in the franchisor’s favour. You should have a franchise lawyer read over your franchise agreement before you sign. There are some obligations owing to franchisors including:
- Conducting the operations of the franchise;
- Payment of royalties; and
- Protection of the franchisor’s intellectual property.
Master Franchise Agreement
This type of franchise agreement is where a franchisor grants a master franchisee the right to grant franchises to others in a designated geographical territory. A Master Franchise Agreement will contain clauses relating to the terms and conditions of the granted rights of a master franchise, including performance criteria, compliance with the Franchising Code of Conduct and the parties’ other responsibilities under the master franchise agreement.
Area Franchise Agreement
An area franchise agreement is one where the party contracting with the franchisor has similar rights and duties to those of a master franchisee, but with less responsibility. An area franchise agreement, also known as an area director agreement or area representative, does not have the right to grant franchises or sign franchise agreements. The benefits of an Area Franchise or Area Development Agreement is that it is a business with low overhead and fee employees are needed.
Area Development Agreement
This type of option agreement is where an area developer agrees to operate franchises in a designated area and pay a development fee in return for exclusive rights to develop units in that area.
- Before signing a franchise agreement, you should ensure a franchise lawyer reviews the contract and ancillary documents before signing.
- You should carefully read and understand the Franchising Code of Conduct. It includes disclosure of the pertinent information regarding the Franchisor; conditions contained within the Franchise Agreement and complaint handling and dispute resolution procedures.
- When you formally apply to become a franchisee, you should receive an information statement. This document is a short document that sets out some of the risks and rewards of franchising.
Franchising Code of Conduct
The Franchising Code (Franchising Code of Conduct) regulates the actions of all Australian franchisors and franchisees. It ensures potential franchisees are properly informed before entering into a franchise agreement. The Code also contains dispute resolution mechanisms for franchisees and franchisors. The Code is enforced by the Australian Competition and Consumer Commission (ACCC).
From 1 January 2015, the Franchising Code of Conduct was updated. The changes include a requirement for parties to act in good faith, new fines and penalties for serious breaches of the Code and simplified disclosure requirements.
The Franchising Code of Conduct requires a disclosure document to be given to potential and current franchisees by the franchisor. This document discloses information including expected annual turnover. The Franchise Disclosure Document must be updated manually within four months of the end of the financial year.
Frequently Asked Questions about Types of Franchise Agreements
Q: Do I need a licence to become a franchisee?
A: While there is no specific licence required to become a franchisee, some franchises require special licences or permits.
Q: What are franchise fees and royalties?
A: A franchise fee can include the up-front amount paid to the franchisor for the use of their name, know-how, operating systems, etc. Ongoing fees (or royalties) are usually paid to the franchisor for providing ongoing business, management and technical support, etc. This fee may be fixed as a percentage of the franchisee’s turnover, which may vary as trading conditions change.
Q: When do franchisors have to update their Franchise Disclosure documents?
A: Franchisors have until 31 October 2015 to update their disclosure document to comply with the new Code.
Q: I am a master franchisor. Do I need to provide disclosure documents to subfranchisees?
A: Master Franchisors are not required to provide a disclosure document to a subfranchisee. However, if the master franchisor is a party to the subfranchise agreement, the master franchisor will have to provide a disclosure document to the franchisee.
Q: I am a franchisor. What documents am I required to keep under the new Code?
A: You will be required to keep any documents or written things that the Code requires or allows a franchisee or prospective franchisee to provide to you. This includes:
- confirmation of the receipt of disclosure document (cl 10(1))
- professional advice statement (cl 10(2))
- marketing fund audit votes (cl 15(2))
- request to transfer the franchise to a third party (and any additional information provided
- regarding the transfer) (cl 24(1) and (2))
- request for a disclosure document (cl 16)
- notice of dispute (cl 38(1) or 40(1))
- request not to disclose former franchisee’s details (cl 32)
How can LegalVision help me?
LegalVision assists businesses and individuals with tailored online legal advice for a fixed-fee, including drafting and reviewing franchise documents. Call LegalVision today on 1300 544 755.