UNDERSTANDING THE DOCUMENTATION
In the wake of the Covid 19 pandemic, it has been reported that many people are re-assessing their lives, where they live and their sources of livelihood.
In the wake of the Covid 19 pandemic, it has been reported that many people are re-assessing their lives, where they live and their sources of livelihood. Historically, whenever there has been an economic shock such as we have witnessed over the past two years, franchising as a sector has significantly grown as people change careers or otherwise seek new business opportunities.
Franchising, as a business model, has proven to be enormously successful across the globe and particularly in Australia. With an estimated 79,000 franchise units, an annual turnover in the order of $128 billion dollars and employing more than 500,000 people there is no doubt that franchising makes up a significant portion of Australia’s economy.
Some might argue that one of the factors for the continuing success of franchising in Australia is the enactment of specific and compulsory legislation that governs the relationship between Franchisors and Franchisees.
In Australia, franchising is governed by the Franchising Code of Conduct (Code). Under this legislation, a Franchisor must give certain documentation to a prospective Franchisee to provide all the information required to make a reasonably informed decision to purchase the franchise business. Inevitably, this means that Franchisees are provided with rafts of documents prior to entering into the franchise relationship. While the volume of the documentation can be daunting, it is manageable with the right specialist advice to help you understand the documents and the process.
What are the essential documents a Franchisor must give a Franchisee?
The Code stipulates that Franchisors must provide the following documents to any prospective Franchisee to effect proper disclosure:
- Its current Disclosure Document;
- A Key Facts Sheet;
- The Information Statement;
- The Franchise Agreement in the form it is to be signed;
- A copy of the Code; and
- Any other document pertaining to the franchise business, including any premises lease or licence (if applicable).
The above documents must be given to the prospective Franchisee at least 14 days before the Franchise Agreement is signed. This is a mandatory disclosure period prescribed by the Code to give the Franchisee sufficient time to complete its due diligence on the Franchisor and to satisfy itself as to the viability of the franchise business. The Information Statement must be provided to you as soon as practicable after you formally apply or express an interest in acquiring a franchised business.
What is a Disclosure Document?
A Disclosure Document is essentially a snapshot of the franchise network and is designed to give the prospective Franchisee key information about the franchise system and the running of the franchise. The Code sets out the format of the Disclosure Document and the information that is required, including:
- Details of the directors of the Franchisor;
- Details of any legal proceedings against the Franchisor or its directors;
- Details pertaining to the territory granted to the Franchisee, including whether the Franchisee is provided with any exclusivity in relation to the franchise business;
- Contact details of current as well as former Franchisees;
- The costs to establish and operate the franchised business and any other payments or fees that the Franchisee may be required to make;
- Details of any capital expenditure likely to be incurred throughout the term;
- Disclosure of any rebates received by the Franchisor and details of whether those rebates are shared with the franchisees or not; and
- Franchisor’s financial statements.
What is the Key Facts Sheet?
The recent amendment to the Code mandates that Franchisors must provide each prospective Franchisee with a Key Facts Sheet which essentially summarises the key terms of the Disclosure Document.
What is the Information Statement
The Information Statement is a proforma statement prescribed by the Code setting out the risks and benefits of entering into a franchise relationship. It is designed to ensure that prospective franchisees conduct their due diligence and are fully aware of their obligations to the Franchisor before signing a franchise agreement.
What is a Franchise Agreement?
The Franchise Agreement is the agreement that governs the relationship between the Franchisor and Franchisee. It is the legal document that grants the Franchisee the right to operate the franchise business and sets out the rights and responsibilities of each party.
Once the Franchise Agreement has been signed the parties are legally bound by its terms and conditions, subject to a 14 day cooling off period. If the Franchisee decides not to proceed with the franchise opportunity during the cooling off period, the Franchisor is required to refund all monies paid by the Franchisee less the Franchisor’s “reasonable expenses”.
What is the Code?
The Code is a mandatory industry code that applies to all parties to a Franchise Agreement. The Code is law and is binding on the parties.
The Code was first introduced in 1998 with the purpose of “regulat[ing] the conduct of participants in franchising towards other participants in franchising.” The Code has undergone several revisions since that time and a new Code was enacted in 2021 which seeks to rebalance the power between Franchisors and Franchisees.
It is important that you engage a franchise specialist lawyer to review the Disclosure Document and Franchise Agreement to ensure that the documentation complies with the Code.
Additional Documents a Franchisor should provide to a franchise buyer (if applicable)
Franchisors must provide prospective Franchisees with all of the documents relevant to the franchise business. Some of these documents might be:
- Copy of lease and any licence agreement (including details of any incentive or financial benefit that the Franchisor, or its related entity, may be entitled to as a result of that agreement);
- A lease or hire purchase agreement for goods;
- A security agreement, including a guarantee, mortgage, security deposit, indemnity, loan agreement or obligation to provide a bank guarantee to a third party; and
- A confidentiality agreement.
The above documents must be provided to the prospective Franchisee at least 14 days before the signing the Franchise Agreement or as soon as they become available. A copy of the lease must be given within 1 month after the lease or agreement to lease is signed by all parties.
Daunting but manageable
For many Franchisees the decision to buy a franchise business will be one of the biggest decisions that they make in life. No doubt, the reams of documentation required to enter the network will seem intimidating and difficult to navigate.
The right specialist advice will help you to understand the documents and the process of buying a franchise business. As with any business, it is important that you undertake proper due diligence to ensure that you are comfortable with your obligations once you sign the documentation and are satisfied that the Franchisor and the network will assist you in achieving your business goals and aspirations.
Bianca Sevastos is a Partner at Baybridge Lawyers where she specialises in franchising and licensing. Bianca advises on all aspects of franchising compliance with the Code, day-to-day management of franchise systems and relationships with suppliers and franchisees.
Baybridge Lawyers is a corporate and commercial law firm with a strong focus on franchising, support for real estate agencies and dispute resolution and litigation. They provide interconnected legal, strategic and advisory services to a range of commercial and private clients both nationally and abroad.