Buying a franchise can be an exciting experience. However, before you commit to a franchise opportunity, it’s important that you understand your rights and obligations under the Code.
A franchise agreement is a contract (written, verbal or implied) under which:
- one party (the franchisor) grants another party (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
- 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 or its associate before starting or continuing the business (this excludes certain payments).
If an agreement meets this definition, it will be covered by the Code regardless of whether it’s referred to as a ‘franchise’ or not.
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.
The Code requires franchisors to provide you with certain information, including:
- a short document setting out some of the risks and rewards of franchising.
The Information statement for prospective franchisees ( PDF 102.79 KB | DOCX 53.38 KB ) must be given to you when you formally apply, or express interest in, buying a franchised business.
If you decide to proceed with the franchise, the franchisor must also provide you with:
- a disclosure document
- the franchise agreement (in its final form); and
- a copy of the Code.
You must receive these documents at least 14 days before you sign an agreement or make a non-refundable payment.
Note: Make sure you receive, read and have a reasonable opportunity to understand each of these documents.
When considering a franchise opportunity you should also:
- seek advice from a lawyer, accountant and business adviser with franchising expertise
- speak to current and former franchisees about the system and their relationship with the franchisor
- take steps to identify it’s a genuine business and reconsider a business opportunity if you see warning signs
- undertake some franchising education to help you assess business opportunities and decide whether franchising is right for you. For example, FranchiseED offer a Free franchising education program.
You are entitled to terminate a new franchise agreement (not a renewal, extension or transfer) within seven days of:
- entering into the agreement (or an agreement to enter into a franchise agreement); or
- making a payment under the agreement.
Note: The cooling-off period will commence from whichever of the above occurs first.
If you choose to exercise this right, you are entitled to a refund of the payments you have made. The franchisor must provide this refund within 14 days, although they may keep an amount to cover their reasonable expenses if the franchise agreement allows this.
Marketing fund income must be kept in a separate bank account from other money held by the franchisor. Under the Code, the marketing fund can only be used to meet expenses that:
- have been disclosed in your disclosure document
- are legitimate marketing or advertising expenses
- have been agreed to by a majority of franchisees; or
- reflect the reasonable costs of administering and auditing the fund.
The marketing fund financial statement must be prepared, and audited, within four months of the end of your financial year. Copies of these documents must be provided to contributing franchisees within 30 days of their preparation.
Note: It’s the franchisor’s responsibility to provide these documents. A franchisee shouldn’t have to request this information.
The marketing fund doesn’t have to be audited if 75 per cent of franchisees who contribute to the fund vote against undertaking an audit.
In franchising, it’s common for franchisers to request that franchisees purchase products or services from either the franchisor, a related entity or a specified third party.
Such arrangements are illegal if they have the purpose, effect or likely effect of substantially lessening competition in a market.
In most situations, franchisor-imposed limitations are unlikely to raise competition concerns.
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. Although churning is not prohibited under the Code or the Competition and Consumer Act, a franchisor’s conduct may raise concerns if it is false, misleading, or unconscionable. If you suspect churning, you should contact the ACCC.