What is a Franchise Agreement?

A franchise agreement is an agreement between the franchisor and the franchisee which sets out the commercial terms agreed by the parties. 

Franchise agreements are regulated in Australia by the Franchising Code of Coduct (the Code). The Code provides that a franchise agreement:

  • must not contain, or require a franchisee to sign a statement that releases the franchisor from general liability towards the franchisor,
  • must not contain, or require a franchisee to sign, a waiver of any verbal or written representation made by the franchisor.

 

Some of the main terms that are commonly found in a franchise agreement include:

 

Rights granted to the Franchisee

The franchisee is normally granted the right to use the franchisor’s

  • name,
  • intellectual property including trade secrets,
  • trademark, and
  • system.

 

Franchisor’s Obligations

These terms set out what is required by the franchisor, for example

  • what training is to be provided,
  • what advertising and promotion is to be undertaken,
  • what support is to be given.

 

Franchisee’s Obligations

These terms set out what is required by the franchisee, for example

  • the services to be provided,
  • the methods to be used,
  • the manuals to be followed,
  • the standards to be maintained, and
  • the way that the business is to be promoted.

The franchise agreement should be read together with the operations manual. The operations manual usually sets out the detail involved in operating the franchise business.

Most franchise agreements provide that the franchisee must comply with the operations manual. If the franchisee does not comply with the operations manual that will be considered a breach of the franchise agreement.

 

Costs and Fees

Payment Provisions

These set out initial and ongoing fees, such as

  • the initial franchise fee,
  • the initial training fee,
  • fixed lead fee,
  • licence fee royalties,
  • POS or software fees, and
  • advertising contributions.

Royalties are ongoing fees paid by the franchisee to the franchisor for the use of the brand and intellectual property. Royalties vary but are generally between 4% and 6% of gross turnover for retail franchises and 6% and 10% of gross turnover for service franchises. A royalty can also be a fixed fee.

Advertising contributions are ongoing fees paid by the franchisee to the franchisor for group advertising and related expenses. Advertising contributions vary but are generally between 2% and 4% of gross turnover. An advertising contribution can also be a fixed fee.

 

Terms and Termination

These terms deal with

  • how long the franchise relationship will last,
  • how it will come to an end,
  • whether the franchise agreement can be renewed by the franchisee, and
  • what happens on termination.

If the franchise agreement includes an option to renew or extend, it will also set out the time frames in which a franchisee must advise the franchisor that the franchisee wishes to renew the franchise agreement.

The franchise agreement may contain obligations which the franchisee must comply with in order the renew the franchise agreement, including an obligation to pay a renewal fee.

 

Restrictions

These restrictions include things such as

  • restrictions with suppliers,
  • prohibitions against operating a competing business, and
  • restrictions on the recruitment of employees after termination.

 

Resale Rights

These terms set out the method by which a franchisee may sell the franchise business. Some franchise systems allow their franchisees to sell the franchise business, while other franchise systems write in buy back or right of first refusal clauses.

If the franchisee sells the franchise business to a third party it is likely that the franchisee will have to pay a transfer fee to the franchisor.

If you want to franchise your business and need a franchise agreement drafted or if you already have a standard franchise agreement which you want reviewed contact us so that we can assist you to ensure that you franchise agreement is a usable and enforceable document which reflects your franchise system.

 

Further Information

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