Franchising

One of the most common forms of business in Australia today and continuously growing is a franchise. The popularity of a franchise is its established goodwill and possibly captive market within a territory.

The Franchising Model

Franchising is often seen by both the franchisor and franchisee as a preferred business participation model. As for the franchisor it is less capital intensive and provides them with the opportunity to develop a widespread distribution base with the ability to harvest profits readily and efficiently. As for the franchisee it is perceived as providing them with access to a preferred business model at acceptable cost and lower risk than going out on their own.

Despite this, problems manifest where the franchisor fails to keep their end of the bargain. This may occur for any number of reasons but one of the biggest traps for would be franchisees is where they are being invited to take up a greenfield franchise based on an untried or unproven business model with little or no financial track record. Problems are compounded where aspiring franchisees decide to save fees and do not engage advisors to assist or rely on their accountant without obtaining legal advice.

Franchising is an area where both accounting and legal due diligence is required. Accountants need to address financial due diligence and lawyers need to be retained to carry out legal due diligence. The accountant addresses the figures and the lawyer the law. Accountants are not lawyers and should not be consulted on matters regarding the application or interpretation of the law. They are not entitled to charge for legal advice at law. Often we see clients who have relied upon the advice of an accountant only to find they are vulnerable to litigation based on the advice given. A three-way partnership is required to properly address the legal and accounting issues to protect the client against litigation.

Although there are many good franchises there are a number which fail to perform due to the inexperience of the franchisor or insufficient time being spent on developing the franchise system or just greed. Often franchisees get trapped because there is insufficient scrutiny of the preferred business model by either the franchisee or their accountants. It is this lack of scrutiny which often leads to litigation which could have been avoided by proper due diligence at the beginning at a fraction of the cost. Why would anyone want to spend money on a business which will not perform, was never going to perform and had no real basis upon which it would perform? Most franchising disputes arise in this area and are increasing due to a lack of proper advice.

Franchising Code of Conduct

The code has the force of law and must be abided by. It applies to franchise agreements entered into, renewed or extended on or after 1/10/1998. There 4 basic elements which distinguish a franchise agreement from any other like agreement. There are 3 notable exceptions: the franchisor must give the franchisee a disclosure document at least 14 days before they enter into, renew or extend the franchise agreement or pay a non-refundable deposit. Details of the franchise territory should also be provided apart from a long list of other relevant information.

Short form disclosure may be given by franchisors together with details of the financial viability of the franchise; however, franchisees may still request full disclosure. That is there is a difference between short form and long form disclosure. Many well recognised franchisors provide long form franchise agreements. Short form agreements run to approximately 40 pages and long form to 300 pages. Whether new or old any aspiring franchisees should ensure proper due diligence of the business is carried out. The devil is in the detail. All incoming franchisees should obtain a disclosure document from franchisors as soon as possible. If you become involved in a franchise dispute, whether franchisor or franchisee, consult a franchise lawyer. We are listed on the official directory website of the Franchise Council of Australia.

Franchisee

Before deciding to buy or enter into a franchise agreement, you should consult your:

solicitor to advise you on the following:
- whether the franchisor has provided all the necessary information about the franchise business
- whether the franchisor has provided information in respect of other franchisees in the system
- assist with due diligence diligence as necessary
financial and/or business advisor on the following:
- the financial aspects of the business
- whether the franchise is suitable or viable for you

Franchise Documents

When you receive documents from a franchisor, they should contain:

disclosure document which has all the necessary information in respect of the franchise system, as required by the franchise code; and
a copy of the franchise code;

You should receive the above documents at least 14 days prior to signing the franchise agreement.

The franchise agreement should not contain anything that has not previously been disclosed to you in the disclosure documents

You should have your solicitor:

read the disclosure document and franchise agreement carefully;
advise you on the contents of the disclosure document and franchise agreement;
explain to you anything you do not understand in respect of the disclosure document and franchise agreement;
advise you on a business structure for the franchise business; and
advise on any other issues, such as, leasing, licensing, etc.

After you have signed the franchise agreement, you have 7 days ("cooling-off" period) to decide whether you wish to proceed with it.

Franchisor

You must consult your solicitor in respect of the following:

advise you on a business structure or assist in restructuring your current business
whether or not your business is currently infringing any law
advise you on the applicable law when franchising
whether your business will infringe any law by franchising
whether or not you have appropriate trademarks registered and on any other intellectual property issue
whether you have an existing lease and are able to sublease or grant a license to occupy
draft the franchise agreement
put together a disclosure document to provide to prospective franchisee as required by the franchise code

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