Franchise Agreements – What to consider?

Entering into a franchise agreement should be undertaken with careful consideration. Franchises offer an opportunity for everyday business people to enter into and operate under a well known brand and image. A franchise is an agreement in which a franchisor grants to a franchisee the right to sell, supply or distribute goods or services in manner which is pre-determined by the Franchisor. For example, the franchisee is often required by the franchisor to offer the goods or services under an established system or marketing plan – prices, products and even recipes are dictated. Therefore, the freedom of operating your own business is somewhat restricted when entering into this type of regime.

A franchise is usually in the form of a written franchise agreement. However, franchises are regulated under the Franchising Code of Conduct (the Code), which is given the force of law under the Competitions and Consumer Act 2010 (Cth). The Code specifies both the franchisors and franchisees rights and responsibilities and it serves to regulate such agreements.

Advice for franchisees

If you are considering becoming a franchisee, before entering into any franchise agreement it is vital that you seek legal advice. Advice should be sought for the following reasons:

You need to ensure that the franchisor has complied with the Code in supplying the appropriate disclosure documentation to you.
You should be aware of all costs that you will face with the setting up and the day to day running of the franchise.
A franchisee should check any other licence or distribution agreement relevant to a franchise in your area to ensure that previous agreements entered into will not prohibit you from entering into the franchise.
If you already have existing commercial leased premises, you need to ensure that the lease permits you to operate the franchise business. Further, the franchise agreement may require you to make alterations to the premises, which your lease may not allow for.
To establish if there are any onerous requirements that must be complied with or undertaken.

In addition, a prospective franchisee should obtain financial advice in relation to the financial viability of the venture. Potential franchisees should also ensure that they have the business skills and acumen required to operate the franchise.

Advice to franchisors

Not only do franchisees need to be wary of provisions contained within franchise agreements, but franchisors also need to be careful in any dealings. As a franchisor, you should consider and seek legal advice in relation to:

Compliance with franchisor obligations under the Code at all times, including the supply of a disclosure document to the franchisee.
Termination or renewal of an existing franchise agreement.
Ensuring that you do not engage in conduct which would be likely to mislead or deceive. Not only will a franchisor risk being prosecuted by the Australian Competition Consumer Commission, but legislation allows for a franchisee or other affected party to seek relief.
Legislative changes which may affect past or current agreements.

At elringtons we can assist both franchisees and franchisors in relation to compliance with legislation, providing advice, negotiating, drafting and reviewing agreements.