Focus on franchising

What issues should a franchisee consider?

Franchise Agreements are regulated by the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (the Code). Before entering into a franchise agreements, franchisees should consider the following:

1. Franchisors must give franchisees a disclosure statement, along with a copy of the proposed franchise agreement, before entering into a franchise agreement. It is essential that you read the franchise agreement and obtain legal advice before you sign it.
2. A franchisee is entitled to a seven day cooling-off period after entering into a new franchise agreement. However, this right does not apply to the renewal, extension or transfer of an existing franchise agreement.
3. Franchisees should consider whether their rights are limited to a specific territory. If so, is the territory adequately defined? Has a territory plan been attached? Do reciprocal referrals apply? For example, is the franchisee required to refer customer contacts made from outside their territory to other franchisees, and vice versa? Is a commission paid for these referrals?
4. Franchisees should understand and consider whether they have exclusive rights within the territory. Are the franchisor or other franchisees allowed to compete with the franchisee in the territory?
5. The Code requires that both franchisors and franchisees act in good faith. This means that the parties must act reasonably during pre-contractual negotiations, the performance of the franchise agreement, dispute resolution, and the termination of the franchise agreement.
6. You should consider where you will conduct the business from (i.e.. from a site owned, controlled, or leased by the franchisor or a site to be leased from a third party). Careful consideration should be given to the lease provisions. In particular, the term of the lease should coincide with the franchise agreement, and you should ensure that the lease can be terminated if the franchise agreement ends. You should also consider if, and how often, a new fit-out will be required and whether the landlord will permit such modifications.
7. You should consider where you will source stock or ingredients from. Is the franchisor required to provide the products, or will you engage a third party supplier? If a third party is engaged, any agreement with the third party should be on similar terms to those of the franchise agreement. Ideally, the third party supply agreement would allow for termination if the franchise agreement ends.
8. Who owns the intellectual property related to the franchise? If it is not owned by the franchisor, you should investigate their rights to use that intellectual property and review the Head Licence to ensure that the franchisor’s right to use intellectual property rights will last for the duration of the franchise. Is the intellectual property unique, or can the franchise be easily replicated or duplicated by others? What are the benefits of the proposed franchise model?
9. What royalties, fees and charges will be payable during the term of the franchise agreement? Are they reasonable? Are they subject to variation? How will marketing fees be applied - locally or to national campaigns?
10. Is the franchise agreement transferable? If so, what steps or payments are required to transfer or assign the franchise?
11. Is ongoing training and support offered or expected? Are there fees attached to additional training? Will training be offered locally? Is there support for dealing with customer warranties, disputes or refunds?
12. Will you be subject to a restraint of trade upon ceasing the franchise? Do the terms of the restraint comply with the Code?

Before you enter into a franchise, speak to one of our experienced lawyers. Call 03 5560 2000 or request a call back.