Franchising is complex and highly regulated.
There are many legal requirements that need to be complied with in order to successfully franchise your business. We consider these requirements in more detail below.
Guide to Franchising Your Business
1 - register a company
While there are a number of business structures that are commonly used in Australia, it is recommended that you register a company to act as the franchisor for the franchise network.
A company is a separate legal entity which is registered with the Australian Securities and Investments Commission.
A company's business operations are controlled by its directors and owned by its shareholders. The company constitution sets out the rules applicable to the company and its directors. In addition, a shareholders agreement sets out the arrangement between the shareholders.
2 - Register a Trademark
While it is not a strict legal requirement that you register a trademark before you franchise your business, if you register your trade mark, you will have exclusive use to that trade mark in the classes in which it is registered.
Additionally, before you franchise your business you want to ensure that your business name or logo is not similar to a business name or logo that is already protected or owned by someone else.
Our blog Trademarking a Business Name provides more information about registering a trademark.
3 - Prepare a Franchise Agreement
A franchise agreement is a legally binding contract that outlines the rights and obligations of both the franchisor and the franchisee. It is important to draft a comprehensive and clear franchise agreement that covers all essential aspects of the franchise relationship. This includes details about the term of the agreement (and any renewal term), the fees and royalties to be paid, the territory in which the franchisee can operate, and any restrictions or limitations imposed by the franchisor (such as restrictions on supply arrangements) [What is a franchise agreement?].
A franchise agreement must comply with the requirements of the Franchising Code of Conduct (the Franchising Code) [What is the Franchising Code of Conduct?] and the Australian Consumer Law.
The Franchising Code contains requirements that are directly applicable to franchise agreements, such as the cooling off period, restrictions on legal costs, restrictions on releases and dispute resolution requirements.
In addition, the Australian Consumer Law provides that small business standard form contracts must not contain provisions that are "unfair" [Unfair Contract Terms].
Both the Franchising Code and the Australian Consumer Law include significant penalty provisions, if they are not complied with.
4 - prepare a disclosure document
Under the terms of the Franchising Code a franchisor is also required to create and maintain a disclosure document [What is a disclosure document?].
A disclosure document is prescriptive and must contain the information required by the Franchising Code.
The disclosure document must be provided to a prospective franchisee (together with other documents including the franchise agreement in the form in which it is to be executed) 14 clear days before a franchisee enters into a franchise agreement.
5 - Prepare a Key Facts Sheet
In addition to a disclosure document the Franchising Code requires a franchisor to create and maintain a Key Facts Sheet.
A Key Facts Sheet contains a summary of the information provided in the disclosure document and must be in the current form prescribed by the ACCC [What is a Key Facts Sheet?].
The Key Facts Sheet must be provided to a prospective franchisee 14 clear days before a franchisee enters into a franchise agreement.
5 - register as a franchisor on the franchise disclosure register
Prior to the entry into a franchise agreement with a franchisee, the Franchising Code requires that a franchisor be registered on the Franchise Disclosure Register [What is the Franchise Disclosure Register?].
As with the disclosure document and the Key Facts Sheet, the Franchise Disclosure Register must be updated each year.
6 - Open an account for the marketing fund
If you propose to operate a marketing fund for the franchise network, there are additional legal obligations set out in the Franchising Code that apply.
Initially you will need to open a separate account with a financial institution for payments to the marketing fund by franchisees.
You will also need to prepare marketing fund statements annually and have the marketing fund audited (unless 75% of franchisees agree not to audit the marketing fund).
There are significant penalties if you do not comply with marketing fund obligations. Our blog Franchise Marketing Funds deals with this topic in more detail.
Takeaways
Franchising in Australia is highly regulated.
There are a number of legal requirements that must be complied with before you grant a franchise.
While seeking the assistance of an experienced franchise lawyer will help ensure that you start your franchise journey on the right foot, it is also important that you understand your obligations as a franchisor.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.
