Buying a franchise

Buying a franchise is a big decision. It is important you understand what you are getting into before you make the final decision.

Franchising in Australia

There are laws that must be followed when franchising in Australia, including the Franchise Code of Conduct and the Australian Consumer Law. However, these laws cannot ensure the success of the business or that your money is always protected. A franchise business can fail, just like any other business.

If you buy a franchise business and it goes badly, you could lose all your money and any assets, such as your house, that you have borrowed against.

Some prospective franchisees in Australia speak languages other than English. We have translated a number of resources into Hindi, Chinese simplified and Chinese traditional. 

What is franchising?

Franchising is a model for doing business. When you enter a franchise agreement, the franchisor controls the name, brand and business system you are going to use. The franchisor grants you the right to operate a business in line with its system, usually for a set period of time. Your franchise agreement will tell you what will happen at the end of this period, and in some instances you might not able to keep your franchise business.

  • Franchisor: allows another business to use their brand or system to sell something
  • Franchisee: is the business allowed to use the franchisor’s brand and system to sell something
  • Franchise agreement: when you buy a franchise you will have a franchise agreement, which is a contract between a franchisor and a franchisee that says what you can and can’t do when you are running the franchise. You would usually 'enter' a franchise agreement by signing a written agreement, but a franchise agreement can be written, oral or implied.

Before buying a franchise

It is very important to check for yourself whether the franchise is a good deal or not. It is against the law for a franchisor to give you information that is false or misleading. However, there is no legal protection for someone who doesn’t do independent checking and research and signs up to a bad deal.

  • Don’t be rushed into signing a franchise agreement and make sure you understand what you are agreeing to.
  • Read your disclosure document and take the time to understand the information in it.
  • Speak to current and former franchisees. They can help you understand the strengths and the weaknesses of a franchise and what it is like in real life. The disclosure document should include contact details for current and former franchisees.
  • Don’t rely on what a franchise salesperson tells you. Ensure all claims are written down or preferably have them included in the franchise agreement.

  • Get independent legal, accounting and business advice about the franchise. One type of advice may not be enough to properly inform you.
  • Imagine yourself as a franchisee. There will be rules set by your franchisor that can tell you what you can and can’t do. Think about whether franchising suits you.

Useful resources

  • Check out our online resources for prospective franchisees at: Buying a franchise? Know the risks.
  • There is useful guidance about preparing yourself for business at: Business.gov.au
  • Do some online training such as the free pre-entry franchise education program offered by FranchiseED. Franchising education can help you assess business opportunities and decide whether franchising is right for you.
  • Read the ACCC’s Franchisee Manual. It can help you understand your rights and responsibilities under the law. It will also give you more detailed tips on how to research and check information about a franchise.

What a franchisor must give you before you enter a franchise agreement

There are certain documents a franchisor must give you before you enter a franchise agreement.

As soon as you show a genuine interest in a franchise, franchisors must tell you about the risks and rewards of franchising by giving you as soon as practicable an Information Statement (in the form set out in the Code). The ACCC has translated this into Hindi, Chinese simplified and Chinese traditional.

The franchisor must also give you the documents listed below at least 14 days before you sign an agreement or make a non-refundable payment. This means you have at least 14 days to read them, you can take more time if you need it.

  • The Franchising Code of Conduct is an industry code that all franchisors and franchisees have to follow. The franchisor has to give you a copy of the Code.
  • A disclosure document is a document with information about the franchise. It should include information from the franchisor to help the franchisee make a reasonably informed decision about whether to buy the franchise. Certain information must be included even if it might make someone decide not to buy the franchise.
  • The franchise agreement (in its final form).

When reading these documents and getting independent advice look out for:

  • any supply restrictions on where you can buy essential goods for your franchise, for example, coffee beans for a café franchise.
  • the purchase price of the franchise (the franchise fee) and what it costs you to run the franchise (wages, electricity, rent and others).

Can I change my mind after I enter a franchise agreement?

Sometimes after making a big decision to buy a franchise, you might change your mind. You can do this within seven days after signing or paying money under the agreement (whichever comes first). This is often referred to as your right to ‘cool off’. If you buy a franchise but change your mind a year later, it might cost you a lot of money to end the franchise agreement early.

If you have paid some money to the franchisor and you change your mind within seven days, the franchisor can keep some of your money but only if:

  • this is included in your franchise agreement; and
  • if the money is for reasonable expenses.

For example, if they gave you some training about the franchise, the franchisor may be able to keep all or some of your money to pay for this. 

The franchisor has to give you back the rest of your money within 14 days.

However, before you make any payments always check what reasonable expenses the franchisor will be keeping.

This right to terminate in the ‘cooling off’ period only applies to new franchise agreements and not renewals, transfers or extensions of term or scope of an existing franchise agreement.

How do I know if it is a franchise?

If an agreement meets the definition of a franchise agreement it will be covered by the Code even if someone doesn’t call it a ‘franchise’.

In the Code, a franchise agreement is where:

  1. one person (the franchisor) grants another person (the franchisee) the right to carry on a business in Australia supplying goods or services under a specific system or marketing plan substantially determined, controlled or suggested by the franchisor or its associate
  2. the business is associated with a particular trademark, advertising or a commercial symbol owned, used, licensed or specified by the franchisor or its associate
  3. the franchisee is required to pay, or agree to pay an amount to the franchisor or its associate before starting or continuing the business (this excludes certain payments).

You can also take steps to identify whether it’s a genuine business and reconsider a business opportunity if you see warning signs.

Questions

You should talk to your legal advisor about your legal rights or get more information from government agencies about other laws. For example, if you have questions about wages contact the Fair Work Ombudsman.

You can also contact the ACCC for information about the Code or the Australian Consumer Law.

If English is not your first language, you can call the ACCC through our translating and interpreting service on 131 450 and ask for 1300 302 021.

See also: What we can & can't do for small business

More Information

Franchising: what you need to know factsheet

Buying a franchise? Know the risks

The Franchisee manual checklist

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