From 1 January 2015, franchisors and franchisees will be required to comply with a new Franchising Code of Conduct. The Code will apply to conduct occurring on or after 1 January 2015 in relation to all franchise agreements entered into, transferred, renewed or extended on or after 1 October 1998.
A franchise agreement is an agreement (written, verbal or implied) under which:
- one party (the franchisor) grants another party (the franchisee) the right to carry on a business supplying goods or services under a specific system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor
- the business is associated with a particular trademark, advertising or a commercial symbol owned, used, licensed or specified by the franchisor or its associate
- the franchisee is required to pay, or agree to pay an amount to the franchisor before starting or continuing the business (there are some exceptions).
Note: A motor vehicle dealership agreement (including a motor boat dealership agreement) is taken to be a franchise agreement even if the above definition has not been met.
There are some key steps you should be aware of when considering a franchise opportunity:
- From 1 January 2015, the franchisor must give you an information statement when your formally apply, or express an interest in, buying a franchised business. The information statement is a short document which sets out some of the risks and rewards of franchising. Make sure you receive and read the information statement.
- The franchisor must give you a disclosure document, the franchise agreement (in its final form), and a copy of the Franchising Code at least 14 days before you sign an agreement or make a non-refundable payment. Make sure you receive and read each of these documents.
- You should seek advice from a lawyer, accountant and business adviser with franchising expertise.
- You should undertake some franchising education
Free franchise education is available to help you assess business opportunities before buying a franchise.
Warning signs that a franchise may be a scam include when the franchisor:
- claims you can make large amounts of money quickly and with little effort or experience—i.e. ‘get rich quick’ schemes
- is reluctant to provide you with the contact details of the other franchisees in the system
- requires you to make a payment upfront before any information is released
- claims that you must act immediately to avoid losing the ‘amazing opportunity’.
The ACCC strongly recommends that you take steps to identify it is a genuine business and reconsider a business opportunity if you see any warning signs. If you ignore them and accept the offer, you could fall victim to a costly scam.
Franchisees are responsible for setting their own prices. While a franchisor may provide franchisees with a recommended price list, it cannot impose a particular price on franchisees, or a minimum price below which goods or services may not be sold. A franchisor is permitted to set a maximum price for goods or services.
A franchisor that requires franchisees to purchase goods or services only from a particular supplier or a list of nominated suppliers may be engaging in ‘third line forcing’.
This conduct is a type of exclusive dealing that is prohibited under the Competition and Consumer Act 2010. However, a franchisor can seek protection from legal action by lodging a notification with the ACCC.
A franchisor may require franchisees to purchase goods or services from the franchisor or a related company. These supplier arrangements will only raise concerns if they have the purpose or likely effect of substantially lessening competition.
Read the Competition issues in franchising supplier arrangements guide for further information.
Churning is the repeated selling of a franchise site by a franchisor in circumstances where the franchisor would be reasonably aware that the site is unlikely to be successful, regardless of the individual skills and efforts of the franchisee. Such conduct may raise concerns about misleading and deceptive conduct or unconscionable conduct. If you suspect churning, you should contact the ACCC.