Franchise agreements

The ACCC defines franchise agreements as being agreements (written, verbal or implied) under which:

  1. 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
  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 before starting or continuing the business (there are some exceptions).

Many franchise agreements can be quite large and overwhelming documents with ambiguous wording. It is always best to seek professional advice from a solicitor prior to entering into any such agreement.

The ACC has noted to be cautious in relation to any franchise scheme that promises you will “get rich quick”. It is also important not to rush in headfirst just because the franchisor tells you you might miss out on an amazing opportunity. It may seem important to push things through quickly however further down the track you may discover hidden conditions which you have agreed to be bound by under the contract which you may not have signed had you known of their existence.

There is also the issue of “churning” which the ACCC defines as being: “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.”

This kind of conduct may leave the franchisor liable in regards to misleading or deceptive or unconscionable contact.

There are as many disadvantages to franchisors as there are to franchisees.

Franchisee:

  • Can be expense, not only initially but also with a percentage of the earnings sometimes going towards royalties.
  • Have to comply with company direction. This can include anything from being required to have a specific uniform, specific equipment & set-out dictated by the company, be required to sell or up-sell certain items as the company dictates etc.
  • Franchisors who are interested only in profit, and are disinterested in helping franchisees. There may be a complete lack of support on behalf of the franchisor and, particularly if the franchisee is new to business, this may become problematic, resulting in the business failing.
  • Hidden conditions within franchise agreements which if breached could result in heavy penalties. Once the document  is signed it will form a legally binding contract. Make sure you seek independent legal advice prior to signing anything.

 

Franchisor:

  • Difficulty in controlling actions of franchisees. This can be problematic particularly because the actions of the franchisee can reflect poorly upon the company itself.
  • Slow to produce results. Setting up multiple franchise businesses can be difficult and your franchisee may take a significant amount of time to get the business up and running and producing profit. This is not as fast to produce results as a merger or an acquisition of another company would be, where you would typically see expansion quite rapidly.
  • Can cause additional work for the franchisor in terms of training and development of franchisees and their staff and ongoing regular compliance checks to ensure that the franchisee is meeting their obligations.

If you are thinking of franchising your company, or if you are thinking of entering into a franchise agreement with a franchisor, you should seek independent legal advice about your contracts and the pros and cons of your proposal prior to proceeding.