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The franchise agreement is the legally binding contract entered into between a franchisee and franchisor. Thus, it formalises the franchisor-franchisee relationship and creates legal obligations on 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. Additionally, 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.

Within the context of commercial transactions, such as a franchise agreement, you can reasonably infer that both parties enter into the contract with the intent that the agreement should be legally binding. 

When you offer a franchisee the right to operate a business within your franchise network, you also offer them the opportunity to leverage your established intellectual property and systems to operate a profitable business. In exchange, a franchisee must agree to the payment terms and other expectations prescribed within the franchise agreement. 

The Australian Consumer Law principles that apply to a general commercial contract also apply to a franchise agreement. For example, you must be exceedingly cautious not to engage in unconscionable conduct. In a franchisor-franchisee relationship, by nature, the franchisee generally has less bargaining power. Therefore, you need to be transparent and act in good faith in all interactions with franchisees. Similarly, any representations made before parties enter into the contract can be considered misleading and deceptive conduct. Therefore, you should be vigilant about any promises you make to the other party in a franchise agreement.

What Are The Standard Terms to a Franchise Agreement?

Some of the distinguishing features of a franchise model are common to all franchise networks, albeit with slight variations to suit the particular franchise. Accordingly, you can generally expect your franchise agreement to include standard terms which deal with the following:

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 term of the franchise agreement. This is the recurring payment you expect to receive 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 

You should be clear from the outset about the period over which a franchisee will have the franchise rights for a particular territory. For instance, you should consider whether or not they will have a right to renew the franchise agreement for an additional term. The right to renew the franchise often provides a good incentive for the prospective franchisee. You can set out the pre-conditions they must satisfy before agreeing to the renewal.

Occupation of the premises (applicable for premises-based businesses)

You can nominate whether you require the franchisee to locate the business premises themselves, any criteria the premises must meet, and whether the franchisee must hold the lease directly. 

Alternatively, suppose you prefer to hold the lease directly. In that case, the franchise agreement should include terms that require the franchisee to enter into a licence to occupy the premises. They should also agree to fulfil your obligations under the lease and pay all rental fees, security deposits or bank guarantees.
Marketing and social media

You can specify any guidelines on the franchisee’s responsibility to actively promote the business. You should also clarify the extent to which you allow a franchisee to manage their own 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 not approved by you.

Approved suppliers 

You can require the franchisee to exclusively source any products or supplies from a list of suppliers nominated by you.

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 operative provisions which make it clear that any business operation manuals, or similar guidance material, are your intellectual property. Franchisees must only use them for the specific purpose of operating the business, and should not be able to copy them.

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 set out clearly in the franchise agreement.

The Franchisee and Guarantors to a Franchise Agreement

There are three key ways a prospective franchisee can enter into a franchise agreement with you. They may choose to do so in the capacity as 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 trust. These arrangements are beneficial to the franchisee from an asset protection perspective.

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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. 

Thus, you can best manage this risk by requiring directors to be party to the agreement in the capacity of a guarantor. When a guarantor is party to the franchise agreement, you create a direct contractual relationship with an individual who personally guarantees to you they will fulfil the franchisee’s obligations if the franchisee cannot do so. Furthermore, if you have received a personal guarantee, you will have greater certainty that any debts or other liabilities accrued on the part of the franchisee are more likely to be met. 

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 already have the responsibility of managing the company in the best interests of all of its shareholders.

By contrast, a family member without a direct interest in the business is likely to be cautious against providing a personal guarantee of this nature. Similarly, a shareholder may have a personal interest in the business. However, they are not generally responsible for the day-to-day management of the business and therefore may not be comfortable opening themselves up to the risk. 

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 you are 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 accountants 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, this will open up the risk that you cannot 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 specialist 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

Do my franchisees need to sign a franchise agreement?

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.

What should my franchise agreement include?

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.

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