Buying a franchise is a big decision. When you have taken the time to make such a big decision the last thing you want to do is regret it later on due to a poorly drafted franchise agreement that does not give you the protection it should.
This is a short guide which discusses what franchise agreements are, and covers some of the essentials which need to be included in a franchise agreement.
If you are thinking of franchising or buying a franchise, you should seek legal advice to ensure that your rights are protected in the event of a dispute.
At AANDI Lawyers we are committed to finding simple solutions to complex franchise dispute problems. If you have a franchise dispute contact us today for swift and fair resolution.
How does a franchise operate?
A franchise is a business agreement which gives one party (the franchisee) the right to sell the branded products and/or services of another party (the franchisor).
- A franchise is governed by a franchise agreement which sets out certain behaviours and modes of operation.
- All franchising participants must abide by the ACCC's Franchising Code which sets out certain requirements for disclosure, good faith, and provides mechanisms for resolving disputes.
Both the franchisee and the franchisor have certain obligations for how they must operate their business. There are also additional legislative provisions which provide operation standard, such as taxation laws and Fair Work laws.
What is a franchise agreement?
A franchise is a model for doing business. When a party chooses to operate a franchise they enter into a franchise agreement with the franchisor.
A franchise agreement is a legally binding document that sets out how the franchisor retains control over the franchise name, brand, and how the franchisee may operate their business.
Franchise agreements define a specific period of operation, but a franchise agreement may end earlier than this set period due to termination for a breach of contract, sale of a franchise, insolvency, or renewal/extension of a franchise.
What should be contained in a franchise agreement?
A franchise agreement will contain specific components relevant to a particular business, but at a minimum every franchise agreement should contain:
- A grant of franchise — which permits the franchisee the right to use the franchisor brand;
- Key dates and specific information about operating under the franchise brand;
- Limitations on operating territory, if any;
- Fees and costs associated with purchasing the franchise;
- Advertising and branding obligations under the franchise;
- Franchise terms and any relevant renewal information;
- Services offered by the franchisor (for example, pre-opening and post-opening support and services);
- Protections of intellectual property;
- Training and up-skilling information;
- Methods for quality control and relevant minimum requirements;
- Relevant information about transferring interests;
- Obligations upon expiration of the franchise;
- Relationship between the parties;
- Indemnity information;
- Restrictions on trade and non-compete clauses;
- Insurance information; and
- Dispute resolution information.
A franchise agreement will also contain a range of additional or miscellaneous clauses and provisions.
Common problems in franchise agreements
The purpose of a franchise agreement in Australia is to ensure that the rights and interests of both parties are protected.
For example, it is in the best interests of the franchisor to protect their brand, while it is in the best interests of the franchisee to be provided with sufficient support to operate. However, if the franchise agreement does not provide for this, a dispute can arise.
Common problems arise when:
- Either party is unclear about the level of support provided under the franchise agreement;
- Payments or obligations are worded in a way that is confusing, resulting in disputes over money;
- Unrealistic standards are communicated, either in negotiations or as part of the franchise agreement;
- A standard franchise agreement is used which is not specific enough for the business being franchised.
Standard franchise agreements may not provide sufficient protection for your rights and interests, which is why it is important to speak to a lawyer when undertaking a franchise business.
Resolving franchise agreement disputes
When you have issues with franchise agreements in Australia the dispute resolution process is governed by the Franchising Code of Conduct. The Code outlines that every franchisor must outline an internal procedure for handling complaints between parties. The procedure for resolving disputes must be outlined in all franchise agreements.
- The first step in resolving a dispute is to make contact with the other party and outlining what the dispute is about, and how you think you can settle the issue.
- If the parties cannot settle the dispute within three weeks, the matter may proceed to mediation.
If you can, it is far better to take preventative action and make sure the franchise agreement is precise and accurate for your business operation. That way, disputes may be managed before they become an issue. However, in the event that there is a dispute, help is available to manage a dispute respectfully and swiftly.