In Short
- Franchise agreements are legally binding and must comply with the Franchising Code of Conduct, ensuring transparency and good faith.
- Key standard terms include intellectual property protection, royalty fees, term and renewal conditions, and performance criteria.
- Ensure proper execution of the agreement, including required documents, to avoid enforceability issues in future disputes.
Tips for Businesses
When creating a franchise agreement, make sure it clearly outlines your expectations and protects your intellectual property. Include terms on royalties, marketing, and performance criteria. Also, ensure proper execution with all required legal steps, such as obtaining franchisee acknowledgments and independent advice certificates. Regular audits and training will help maintain franchisee compliance.
The franchise agreement is the legally binding contract entered into between a franchisee and a franchisor. Thus, it formalises the franchisor-franchisee relationship and creates legal obligations for both parties. However, it differs from other commercial contracts. For example, franchise agreements must comply with the Franchising Code of Conduct (the Code). Furthermore, many elements of a franchise agreement are common across most franchise networks. Therefore, it is possible to anticipate which ‘standard terms’ your franchise agreement should include. This article will outline the standard terms in more depth. It will also explain the role of the franchisee and guarantor, and how to execute a franchise agreement correctly.
How Does a Franchise Agreement Differ from Other Legally Binding Agreements?
A contract at law should have the basic elements of an:
- offer;
- acceptance; and
- consideration.
Both parties typically intend to create a legally binding contract in commercial agreements, such as franchises.
When offering a franchise opportunity, you provide the franchisee access to your established brand, intellectual property, and business systems. In exchange, the franchisee agrees to specific payment terms and operational requirements outlined in the franchise agreement.
Additionally, be mindful that pre-contractual representations can potentially be considered misleading or deceptive conduct. Therefore, exercise caution regarding any promises or statements made to prospective franchisees before finalising the agreement.
What Are the Standard Terms of a Franchise Agreement?
Franchise models share certain key features across different networks, though they may be adjusted to fit each specific franchise. As a result, you can typically expect your franchise agreement to include standard terms covering the following areas:
| Intellectual property | Your franchise agreement should include terms that enable you to protect your intellectual property. As a minimum, the franchise’s intellectual property should include all of your registered and unregistered copyright, trade marks and confidential information. |
| Royalty fees | You are entitled to charge a royalty fee during the franchise agreement term. You expect to receive this recurring payment from the franchisee each week, fortnight, or month. Moreover, the royalty fee may be expressed as a fixed monetary amount or a percentage of the franchisee’s gross income. |
| Term and renewal | Be explicit from the beginning about how long the franchisee will have rights to operate in a specific territory. Consider whether you will offer the option to renew the franchise agreement for an additional term. This renewal right can be an attractive incentive for potential franchisees. If you decide to offer renewal options, clearly outline the conditions the franchisee must meet to qualify for renewal. |
| Occupation of the premises (applicable for premises-based businesses) | You can specify in the agreement whether the franchisee must find their business premises, what requirements these premises must meet, and if the franchisee should hold the lease directly. If you prefer to hold the lease yourself, include terms in the franchise agreement that require the franchisee to:1. Enter into a license to occupy the premises2. Agree to fulfil your obligations under the lease3. Pay all rental fees, security deposits, or bank guarantees |
| Marketing and social media | You can specify any guidelines on the franchisee’s responsibility to promote the business actively. You should also clarify how much you allow a franchisee to manage their social media accounts. |
| Approved products and/or services | You can require the franchisee to supply your range of goods and services, in whole or in part. Likewise, you can restrict their ability to provide goods or services that you do not approve. |
| Approved suppliers | You can require the franchisee to source any products or supplies exclusively from a list of suppliers you have nominated. |
| Minimum performance criteria | You can specify your expectations for the franchisee regarding revenue, reviews or other performance indicators. This enables you to manage your franchise network more effectively and ensure all franchisees are incentivised to conduct the business consistently. |
| Manuals | You should include clear provisions stating that business operation manuals and similar guidance materials are your intellectual property. Specify that franchisees:1. May only use these materials for operating the franchised business2. Are not permitted to copy or reproduce these materials.This helps protect your proprietary information and ensures proper use of your business resources. |
| Termination | The Code prescribes many specific processes for managing the cooling-off period, a franchisee’s request to terminate the agreement early, and non-compliance with the agreement. All of this should be clearly stated in the franchise agreement. |
The Franchisee and Guarantors of a Franchise Agreement
A prospective franchisee can enter into a franchise agreement with you in three key ways. They may choose to do so in the capacity of one of the following:
- sole trader;
- corporate franchisee; or
- corporate trustee.
Sole Trader
At the simplest level, a franchisee may enter into a franchise agreement in their personal capacity. This is either as a sole trader or in partnership with another individual, with a corresponding ABN.
Corporate Franchisee
A company is a legal entity in its own right, separate and distinct from its shareholders and officeholders. Accordingly, a company can enter into contracts, commence legal proceedings or otherwise be party to a legal proceeding. Depending on their accountant or business advisor’s advice, a franchisee will often choose to enter into the franchise agreement as a corporate franchisee. Furthermore, they may also incorporate a company for this purpose, to limit their personal liability.
Corporate Trustee
A franchisee may also elect to create a more sophisticated business structure. For example, this is where the company enters into the franchise agreement as trustee of a family, unit or trading trust. These arrangements are beneficial to the franchisee from an asset protection and tax structuring perspective.
Guarantor(s)
In circumstances where the franchisee decides to enter into the franchise agreement as a corporate franchisee, there is a risk that the company defaults on their obligations under the franchise agreement. In that case, you are limited from pursuing the directors and shareholders without a direct contractual relationship with these individuals.
For this reason, the directors of the franchisee’s company will generally be the most suitable individuals to offer a personal guarantee of this nature. They are already responsible for managing the company in the best interests of all its shareholders.
On the other hand, family members without direct involvement in the business are often reluctant to provide personal guarantees. Similarly, while shareholders have a financial interest in the business, they typically are not involved in daily operations. As a result, they may be uncomfortable taking on the personal risk associated with such guarantees.
Franchising your business? This free guide will guide you through key strategies, legal essentials, and tips for successful growth.
Execution of the Franchise Agreement
Where a prospective franchisee has elected to enter into a franchise agreement in their individual capacity, they must sign the agreement next to their full legal name before a witness.
On the other hand, if a franchisee intends to enter into a franchise agreement as a corporate franchisee or corporate trustee, it is important to execute the franchise agreement as follows:
- companies with a sole director require the signature of the sole director; and
- companies with more than one director require the signature of one of the directors, alongside the signature of another director or the company secretary.
These rules also apply when executing the franchise agreement in your capacity as the franchisor.
As part of the process of executing the franchise agreement, the franchisee must complete the following steps before commencing the franchise:
- sign and return a ‘franchisee’s statement’ to acknowledge they have had a reasonable opportunity to read and understand the franchise documents at least 14 days before executing the franchise agreement;
- complete and return the receipt page in the disclosure document;
- complete and return an ASIC Business Name Authority. This ensures you can organise the business registration of a particular franchise if the franchisee fails to do this; and
- complete and return a legal advice certificate and accountant’s certificate. This will acknowledge that you have encouraged the franchisee to seek independent advice.
Key Takeaways
As a franchisor, there are many procedural rules and obligations to be mindful of. Therefore, your franchise agreement should contain a comprehensive list of operative provisions that protect your intellectual property and business interests. This is because if the agreement is not properly executed, you will be at risk of not being able to enforce the whole or part of the agreement if a future dispute arises with the franchisee.
If you have any questions about your franchise agreement, our franchise lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Yes, you need to have franchisees sign a franchise agreement. Your franchise agreement is fundamental in establishing both your and your franchisee’s rights and obligations towards each other.
Your franchise agreement should contain several key terms, centred around protecting your intellectual property and business interests. You should also include terms regarding royalty fees, product or service standards, marketing policies and more.
We appreciate your feedback – your submission has been successfully received.
