07 4724 2969
(Townsville)
07 3667 8850
(Brisbane)

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Townsville Office

Address

Sarinas Legal

673 Flinders Street
Townsville Qld 4810

Phone

07 4724 2969

Fax

07 4724 4940

Email

legal@sarinaslegal.com.au

Brisbane Office

Level 8, 757 Ann Street
Fortitude Valley Qld 4006

Email:

legal@sarinaslegal.com.au

Phone:

07 3667 8850

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Franchising Law

What is Franchising?

In its simplest form, franchising is the right granted to the Franchisee to operate or use the business model and intellectual property of the Franchisor for a fee and on certain terms and conditions.

Franchising can result in the successful operation of a business using the experience and security of the Franchisor’s system. However there is no guarantee of success when purchasing a franchise.

There are advantages and disadvantages of operating a franchise.

The advantages include:

  • Being part of a business network of like-minded business people.
  • The benefit of the Franchisor’s business, marketing and management skills.
  • Fit out advice and business location.
  • Training and support.
  • Product supply and pre-negotiated product supply costs.

  • The disadvantages include:

  • Restrictions on your method of operation including the products and services you are able to deliver, marketing and advertising, geographic location and pricing.
  • The payment of franchise fees, royalties, start-up costs.
  • Future upgrade costs and image standardisation.
  • Restrictions on the sourcing of goods.
  • Risk of termination in the event of breach.
  • Complex and or expensive exit arrangements.
  • Restrictions preventing you from responding to changes in the market and in business.
  • Franchisors

    Looking to take your business to the next level?

    We can assist you with:

  • Preparation and drafting of all the relevant complex legal documents necessary to franchise your business.
  • Legal compliance.
  • Negotiation with Franchisees.
  • Litigating and dispute resolution.
  • Recalcitrant and underperforming franchisees.
  • Breach of agreement issues.
  • Contract renewal and termination.

  • Future Proofing

    Business is evolving. The systems and methods you develop now will probably be obsolete in 5 years. Franchisors need the flexibility to move forward with their new ideas and marketing concepts.

    We prefer to journey into your business to better appreciate not only your current requirements, but to anticipate as best we can what they may be in the future. Our Agreements are designed with the future in mind.

    A Franchisor will want to ensure:

  • Protection of their:
  • That their business system. Intellectual property. Reputation.
  • The Franchise Agreement has the flexibility to change and improve their systems and regulate the conduct of the Franchisee.
  • That their practices, Agreements, Disclosures and legal documentation comply with all legislative requirements.
  • Uniformity and standardisation of its arrangements with Franchisees.
  • Franchisees

    Franchising can be a marvellous business opportunity for the right people. It can also be a disaster for others irrespective of the amount of effort put into the undertaking. Like all businesses there is an element of risk.

    A Franchisee will want to ensure:

  • That the Agreement properly reflects their understanding of the undertaking and their obligations.
  • They understand all of the costs associated with operation of the business including the right of the Franchisor to increase those costs and or demand upgrades.
  • They are aware of the risks in the Franchise Agreement and if not satisfied, seek to negotiate more favourable terms.
  • They understand the business risks involved including the taking of independent financial and accounting advice as well as consideration of the best tax structure.
  • They are aware of the level of training and support provided.
  • They have an exit strategy. We advise our clients that before they start the business they should also have planned their exit. The terms of sale or transfer of franchise in any agreement is important to understand.
  • The Franchise Agreement

    Central to the relationship between the Franchisee and the Franchisor is the Franchise Agreement which could endure for many years once executed.

    Franchisors are reluctant to make any changes to their standard agreements.

    Franchise agreements are known as “adhesion contracts”. Adhesion contracts favour the Franchisor because it is more efficient to deal with multiple franchisees without the individual tailoring of changes. A Franchisee may consider some of the terms unfair and one-sided but it is a point of view depending upon which side of the fence you sit on.

    Generally however the clauses should not be unconscionable. Determining whether a clause is unconscionable involves complex principles of law.

    It may be difficult to get a Franchisor to move from what might perceived to be an unconscionable term in the Franchise Agreement.

    Many Franchisor’s will adopt a “take it or leave it” approach and not compromise on its position whatsoever.

    The Franchisee will then need to make a commercial decision as to whether it wishes to pursue the undertaking knowing the risks or walk away.

    There is no such thing as a standard franchise agreement. Unlike the common REIQ contract for the purchase of house and land, it is not a document that has been settled upon by a regulatory body. Consequently the Franchisor is in a position of power to craft terms that favour it to the detriment of the Franchisee.

    So What is Negotiable?

    Generally in our experience provided the changes don’t affect the “system” that the Franchisor requires each of its Franchisees to work within and comply with, there should always be room for negotiation of terms.

    If a Franchisor is unwilling to negotiate on any terms then it may be better to withdraw from the deal then be bound by a document riddled with unknown risks and unconscionable terms. Franchise agreements are easy to get into but hard to get out of.

    Franchisees may have a greater chance of success in negotiating terms if the franchisee brings something to the deal for example:

  • The franchisee’s own business experience and reputation.
  • The number of locations/stores/franchises that are to be granted

  • We would certainly recommend that negotiations on the following issues be undertaken by any prospective Franchise:

  • Grand opening support.
  • Additional monies towards promotion.
  • Additional Franchisor personnel to assist with training.
  • Time in which to secure at a location and commence trade.
  • Size of your territory and the granting of an exclusive territory.
  • The amount of the transfer fee for when you sell the business.
  • Payment of the initial franchise fee by instalments and/or a reduced franchise fee and ongoing royalties.
  • Time for the curing of defaults.
  • Amendments to the first right of refusal usually granted to the Franchisor to buy the business should you choose to sell.
  • Limitation of your liability under a personal guarantee.
  • The Documents

    There will be numerous documents that a prospective Franchisee will be expected to sign which together are called the “Franchise Documents”. At all stages during the process we recommend legal advice be sought on all documents before signing.

    The document bundle may include:

  • Franchise Application– this is an application to the Franchisor to assist in determining the Franchisees suitability. A deposit may be required which may or may not be refundable if the application does not proceed. The application may consist of a questionnaire to determine your previous experience and financial status.
  • In response to the Franchise Application the Franchisor will send a Disclosure Folder which should contain:

  • A draft of the Proposed Franchise Agreement.
  • Disclosure Documents as required by law and legislation.

  • The Disclosure Document which contains some (but not all of) that information a Franchisee may need in order to make an informed decision about whether to enter into the Franchise Agreement.

    The Disclosure Document must contain the required information as required by the Franchising Code of Conduct set out in Annexure 1 prescribed under section 51AE of the Competition and Consumer Act 2010 (Code).

    The required information in a Disclosure Document should include (amongst other things):

  • If there are representations about turnover.
  • Factors affecting turnover and profitability.
  • The Franchisor’s details.
  • A description of the kind of business.
  • Other businesses associated with the Franchisor.
  • Office holders of the Franchisor and their experience.
  • A summary of the relevant business experience of the Franchisor.
  • Details of any relevant litigation.
  • Details in relation to existing franchisees.
  • Intellectual property owned by the Franchisor.
  • A summary of the franchisee’s rights and obligations in connection with the use of the intellectual property.
  • Whether the franchise is exclusive limited to a particular site.
  • Restrictions on the acquisition of goods or services to a Franchisee.
  • The Franchisor’s obligation to supply goods or services.
  • Site selection policy.
  • Marketing fund contributions.
  • Establishment costs and payments.
  • Financing arrangements.
  • A summary of the Franchisor’s obligations.
  • A summary of the Franchisee’s obligations.
  • Whether the franchise agreement can be unilaterally varied.
  • Confidentiality obligations
  • Arrangements to be apply at the end of the franchise agreement.
  • Whether there is a Renewal Term
  • Whether an exit payment at the end of the franchise agreement is payable on how it is determined.
  • Whether there is a right to sell the business at the end of the Franchise Agreement.
  • Obligations to sign related agreements. These may include:
  • Lease sublease or license agreement. Security Agreements and guarantees. Confidentiality Agreements. Employee confidentiality deeds. Form requests for debiting amounts by a direct debit system. Deeds of covenant. Training deeds. Franchisee Certificate setting out the extent of any representations made.

    The Disclosure Document can run into hundreds of pages and requires careful scrutiny.

    The Franchise Agreement is contained within the Disclosure Document.

    Cooling Off - If it is a new Franchise Agreement (not a renewal, extension, extension of the scope or transfer of an agreement) the Franchisee is entitled to a seven day “cooling off” period after signing the agreement, during which the agreement may be terminated. "If the agreement is terminated during that period, the Franchisor must within 14 days return all payments made by the Franchisee to the Franchisor under the Agreement." However the Franchisor may deduct from that amount the Franchisor’s reasonable expenses, if the expenses for the method of calculation have been set out in the agreement.

    It is absolutely essential that independent legal, accounting and business advice be sought before signing the franchise agreement. Franchises are easy to get into but hard to get out of.