What is a Franchise Agreement?
A franchise agreement is a legally binding contract between a franchisor and a franchisee that sets out the terms on which the franchisee can operate a business using the franchisor's brand, systems and intellectual property. In Australia, franchise agreements are regulated by the Franchising Code of Conduct (the Franchising Code).
In simple terms, a franchise agreement is the contract that sets the rules for the franchise relationship. It explains what the franchisee is allowed and required to do, what the franchisor must provide, the fees payable, how long the franchise lasts and what happens when the relationship ends.
What is a Franchise Agreement under the Franchising Code?
The Franchising Code uses 3 criteria/features to determine whether an agreement is a franchise agreement or another form of arrangement:
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the business, which is the subject of the agreement, is operated under a system or marketing plan;
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the business, which is the subject of the agreement, is associated with a trade mark;
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there are payments to be made to the franchisor under the agreement.
Even if an agreement is called a licence agreement or a sub-contractor agreement, if the agreement has all three features described by the Franchising Code it will be deemed to be a franchise agreement and the obligations set out in the Franchising Code will apply, (for more detailed information about the difference between licence agreements and franchise agreements, read our article Licence vs Franchise.)
A new Franchising Code commenced on 1 April 2025 and imposes requirements on both the terms of franchise agreements and the franchise relationship.
The business is operated under a system or marketing plan
A right has been granted under the agreement to operate a business of offering, supplying or distributing goods in Australia under a system or marketing plan which must be followed.
It is likely that there is a system or marketing plan if some or all of the following apply
- there are suggestions for retail prices to be charged for products or services;
- there are products that must be produced;
- there are recipes that must be followed;
- there are specific methods for providing services;
- there is a detailed advertising programme;
- there are restrictions on the sale of products.
The business is associated with a trade mark
The operation of the business will be substantially or materially associated with a trade mark, advertising or commercial symbol owned or specified by the franchisor.
One of the main rights that a franchisee is given by the franchisor is the right to use the franchisor's brand, name and logo.
There are payments to be made under the agreement
Amounts have been or will be paid to the franchisor or an associate of the franchisor under the agreement.
Payments include royalty payments, up front licence fees, advertising payments, commissions and training fees.
What does a franchise agreement include?
We have set out below some of the main terms that are commonly found in a franchise agreement.
Rights granted to the Franchisee
Under a franchise agreement, the franchisee is normally granted the right (licence) to use the franchisor's:
- name,
- intellectual property, including trade secrets,
- trade mark, and
- system.
The licence is typically limited to a territory or site and may be exclusive or non-exclusive within that territory or site.
If the licence is non-exclusive, the franchisor may operate or grant franchises to other franchisees to operate in the territory.
If the licence is exclusive, while the franchisor will not operate or grant franchises to other franchisees to operate in the territory, the franchisor is likely to reserve rights, for example the right to sell goods and services online.
Franchisor's Obligations
The franchise agreement will 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
The franchise agreement will also 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.
Payment Provisions
The payment provisions in a franchise agreement include initial and ongoing fees, such as
- the initial franchise fee,
- the initial training fee,
- ongoing royalties,
- advertising contributions, and
- POS or software fees.
The initial franchise fee and the initial training fee are usually payable on the signing of the franchise agreement. The amount of the initial fee will vary considerably depending on the type of franchise being offered.
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 fees 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.
There are specific obligations under the Franchising Code for specific purpose fund payments, and advertising fees must be paid into a separate specific purpose fund.
Term and Termination
A franchise agreement will set out:
- how long the franchise relationship will last (the term),
- 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.
For more detailed information about what happens after a franchise agreement expires or is terminated, see our article Understanding franchise agreement termination.
Site
If the franchise business is to be operated from a site, the franchise agreement will contain terms applicable to the site or the premises.
The franchisor will generally have to approve the location of the site, although the franchisor will not necessarily choose the site.
The franchisor may enter into the lease itself and then licence the franchisee to use the premises, or the franchisee may enter into the lease directly with the landlord. If the franchisee enters into the lease directly with the landlord, the franchisor will generally require the lease to contain provisions which allow the franchisor to "step-in" to the lease.
The look of the site will need to be consistent with the franchisor's brand image and the franchise agreement will contain terms about the construction or fit-out of the site.
Restrictions
The restrictions contained in a franchise agreement include things such as
- restrictions with suppliers,
- prohibitions against operating a competing business, and
- restrictions on the recruitment of employees after termination.
The franchise agreement will generally require the franchisee to buy all of their products and services from the franchisor or from a supplier nominated by the franchisor.
The franchisor may receive a rebate for the purchase of goods or services from a nominated supplier. Rebates are disclosed in the disclosure document, although they are not necessarily shared with franchisees.
If a franchisee wishes to purchase products or services from alternate suppliers, the franchisor will generally need to approve the alternate supplier and the franchise agreement will set out the approval process.
Resale Rights
The franchise agreement will 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 obtain the consent of the franchisor and will have to pay a transfer fee to the franchisor.
While the franchisor cannot unreasonably withhold consent to the transfer of a franchise agreement, the franchisor may withhold consent in the circumstances set out in section 49 of the Franchising Code of Conduct, including if the transferee does not meet the selection criteria of the franchisor.
What are the differences between a franchise agreement and a disclosure document?
While the franchise agreement sets out the commercial terms agreed between the parties, the disclosure document sets out the information that a prospective franchisee should be aware of before the franchisee enters into the franchise agreement.
A disclosure document must be in the exact form prescribed by the Franchising Code, with the required information provided by the franchisor.
The disclosure document will set out the fees that are required to be paid under the franchise agreement. The disclosure document will also set out an estimate of the ongoing expenses to operate the franchise business. These expenses are a guide only and will not be included in the franchise agreement.
In addition, the disclosure document should include detailed information about approved suppliers and the rebates received by the franchisor from those suppliers.
While a franchise agreement will normally include a term that requires the franchisee to buy approved products from the franchisor or an approved supplier, the franchise agreement will not specify who the approved supplier is, or what products or services are to be purchased from the approved supplier. This information should be contained in the disclosure document.
The disclosure document will also include more detailed information about any specific purpose funds, including the franchise marketing fund.
Using a marketing fund as an example, while the franchise agreement will contain the provisions that require the franchisee to pay the marketing fund fee and should also include the types of expenses that can be paid from the marketing fund, the disclosure document will include information about how the funds were distributed in the previous financial year.
In addition, the Franchising Code provides that expenses that are not for the specific purpose of the specific purpose fund can only be paid from the specific purpose fund if those expenses have been agreed to by a majority of franchisees, or those expenses are listed in the disclosure document.
The disclosure document will also set out what happens at the end of the term of the franchise agreement. While end of term provisions will be included in the franchise agreement itself, the disclosure document will set out information in a way that should be easy to understand.
For example, if the franchise agreement does not have a right of renewal the disclosure document will clearly state that the franchise agreement does not have a right of renewal.
The franchise agreement itself on the other hand may contain renewal provisions but also include a renewal period of "nil", which effectively means that there is no right to renew.
While a franchise agreement and a disclosure document have different functions, the disclosure document may provide more context to the clauses set out in a franchise agreement.
What should you check before signing a franchise agreement?
Term and Renewal
You should make sure that the term of the franchise agreement reflects your understanding, and that the franchise agreement contains rights of renewal.
Under the current Franchising Code, a franchisor must not enter into a franchise agreement that does not give a franchisee a reasonable opportunity to make a return on investment.
A significant indicator of whether a franchisee has a reasonable opportunity to make a return on investment is the length of the franchise agreement.
Total Fees
The total fees payable under the franchise agreement are often not in one place, but can be included in different clauses.
Sometimes fees are not obvious, so it is important to have the franchise agreement reviewed by a franchise lawyer who can point out the fees.
Also check whether the fees can be increased during the term of the franchise agreement.
Territory/exclusivity
If you have been told that your territory will be exclusive, check that the franchise agreement provides exclusivity.
Often exclusivity is subject to conditions (particularly in respect to the referral of leads). If exclusivity is conditional, you should check the conditions so that you can ensure that they are attainable.
Supplier Restrictions
Check whether the franchise agreement contains supplier restrictions.
While it is normal (and expected) for a franchise agreement to contain certain supplier restrictions, the franchise agreement may also include supplier restrictions that you do not expect (such as restrictions on your mobile telephone supplier).
Minimum Performance Requirements
Franchise agreements often contain an obligation for a franchisee to achive minimum performance requirements.
The minimum performance requirements may be set out in the franchise agreement (eg sales figures which must be met). The minimum performance requirements may also be set out in the manual.
Regardless of whether the minimum performance requirements are set out in the franchise agreement or the manual you should be aware of the minimum performance requirements and the consequences of a failure to achieve the minimum performance requirements.
You should also speak to other franchisees to ensure that the minimum performance requirements can be met.
Franchisor Obligations
While franchise agreements generally contain limited franchisor obligations, if you have been told that the franchisor will do something (such as provide you with a guaranteed income or provide you with leads), you should ensure that the franchise agreement reflects your understanding.
Sale/transfer rights
Most franchise agreements contain the right for you to sell or transfer your franchise business subject to the consent of the franchisor.
The transferee will need to enter into a new franchise agreement with the franchisor.
Termination Rights
Check the termination rights in the franchise agreement. Most franchise agreements contain termination rights for the franchisor, but apart from the right to cool off, no termination rights for the franchisee.
Check that the termination rights of the franchisor are not unreasonable or unfair. For example prior to the introduction of the current unfair contract terms regime, franchise agreements would sometimes contain a term that the franchisor could simply terminate on notice (for example 90 days' notice). This is likely to be an unfair term and consequently such a term is rarely included in a franchise agreement now.
Post Termination Restraints
Make sure that the post termination restraints are not too broad, and don't include unreasonable restrictions.
Restraints of trade are oftern drafted broadly to encompass different circumstances, but can become unreasonable and unenforceable.
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.