Franchising can be an opportunity for you to operate a business while benefiting from the experience of the franchisor and its established brand. However, before you make your mark in the franchising world there are a few basics you need to know about the Franchising Code of Conduct (Code). We’ve also set out some tips we’ve picked up to assist you to avoid disappointment.
The Code regulates the conduct of franchising participants towards each other and is mandatory in Australia. It requires franchisors to disclose specific information to potential and existing franchisees and it also sets out the rights of both parties under a franchise agreement and provides a way for franchisees and franchisors to resolve disputes. The ACCC’s role is to investigate alleged breaches of the Code and to provide information and education to make the franchise experience work better for franchisees and franchisors.
Buying a franchise
Committing to a franchise is a big financial decision.
Prospective franchisees often use their life savings to buy into the system. The stakes are also high on the other side of the fence, as franchisors put their reputation and business model on the line. With this major commitment in mind, the Code requires franchisors to disclose certain information to enable prospective franchisees to make an informed decision. Disclosure also allows the franchisor to put the key requirements and rules of the franchise system on the table.
Under the Code, prospective franchisees are entitled to receive four key documents when they are considering buying a franchise:
an information statement
a disclosure document
a copy of the franchise agreement, and
a copy of the Code.
An information statement is a two-page document highlighting some of the risks and rewards of franchising. You should receive this document when you apply, or express an interest, in buying a franchise.
A disclosure document contains key financial information and details about the system. You should read this closely as it covers things like the franchise territory, online sales, site selection, payments and what will happen when the agreement comes to an end. It will also have contact details for current and former franchisees who can tell you about being part of the franchise.
The franchisor must allow you at least 14 days to review the disclosure document, franchise agreement and Code before you enter into the agreement or make a non-refundable payment.
The franchise agreement is the contract that underpins each party’s rights and responsibilities. When signed, the agreement becomes a legally binding contract between the franchisee and the franchisor. It is crucial that you seek independent advice from a lawyer, business adviser and accountant about the opportunity before you commit. In fact, the Code requires you to provide a statement that you have sought this advice. Although you also have the option to waive this, the ACCC strongly urges you to obtain professional advice before entering a franchise.
The Code also provides new franchisees with a ‘cooling off’ period. This means that if you change your mind, you can terminate the franchise agreement within seven days of entering into or making a payment under the agreement. If you terminate the agreement, you are entitled to a refund of the payments you have made. Your franchisor has to provide your refund within 14 days; however, the franchisor may deduct its reasonable expenses from the refund if the franchise agreement allows.
During the agreement
Your franchisor’s disclosure obligations don’t end when you become a franchisee. The franchisor must continue to disclose certain ‘materially relevant facts’. These are key pieces of information about the franchisor or the franchise system that could affect your franchised business, such as a change in the majority ownership or control of the franchise system. The franchisor must let you know, in writing, about a materially relevant fact within 14 days of becoming aware of it.
The Code also sets out rules around marketing funds. If you contribute money to a marketing or cooperative fund, the franchisor must give you an annual financial statement, which shows who contributes to the fund and how the money is spent. The franchisor must have the statement audited, unless 75 per cent of franchisees who contribute to the fund vote that an audit is not required.
The franchisor must contribute to the marketing fund for each of its corporate stores. The franchisor can only spend the marketing fund money on:
expenses that were set out in the disclosure document
legitimate marketing or advertising expenses
expenses that have been agreed to by a majority of franchisees, or
administering and auditing the fund providing such costs are reasonable.
The Code also has a dispute resolution procedure. Parties should first try to resolve their dispute with each other.
If you can’t reach an outcome within three weeks, the Code provides for mediation. Mediation involves an informal negotiation between the parties facilitated by an independent third party. Either party may refer a dispute to mediation. If one party requests mediation, both sides must attend and genuinely try to resolve the dispute. Under the Code, the Office of the Franchising Mediation Adviser (www.franchisingcode.com.au) exists to refer the parties to trained mediators that can help resolve disputes without having to go to court. Small Business Commissioners in several states may also be able to help you with your dispute.
Ending of agreements
A franchise contract can end in a number of ways when the current contract expires. The most common way is to expire after a set period (say, five years). A franchisor doesn’t have to extend your agreement or enter into a new agreement. However, it must let you know whether they intend to extend your agreement or enter into a new agreement with you at least six months before it ends (unless your franchise term is for less than six months, in which case only one month notice is required).
If you do seek to extend your agreement at the end of your franchise term but the franchisor chooses not to grant the extension, the Code may provide some protection if the franchisor then tries to enforce a ‘restraint of trade’ against you. A restraint of trade is a limit on your ability to operate a similar business to the franchise after your agreement has ended. This will, however, depend on a number of factors including that you are not in breach of the agreement or any related agreement.
If you propose to transfer your franchised business to another party, you must request the franchisor’s consent in writing. When making the request, you should provide the franchisor with all of the information they need to make an informed decision. The franchisor may request further information to assist in making a decision to allow the transfer, but it cannot unreasonably withhold its consent.
The Code also spells out conditions around termination of the agreement. For instance, if a franchisor wishes to terminate the franchise early because of a breach, they must give reasonable notice (no more than 30 days), say what you need to do to fix it and allow a reasonable time for this to occur. If you fix the problem within this time, the franchisor will be unable to terminate you for that breach.
Good faith
All parties to a franchise agreement must act in good faith toward each other. Good faith requires that parties exercise their power reasonably and not arbitrarily or for some irrelevant purpose. However, it doesn’t require the other party to act in your best interest. Conduct may lack good faith if a party acts dishonestly, for an ulterior motive or in a way that undermines or denies the other party the benefits of the franchise agreement. Examples of a lack of good faith may include:
a franchisor treating a franchisee differently because the franchisee has raised concerns about the system;
a franchisor raising numerous minor and immaterial breaches with a franchisee in an aggressive and intimidating manner, designed to extract concessions or to stop them complaining;
franchisees using confidential information provided by the franchisor to compete with the franchisor; and
franchisees using social media to post negative comments about their franchisor or their dispute with their franchisor.
The obligation to act in good faith also applies when the parties are negotiating the proposed franchise agreement.
Enforcing the Code
The ACCC is responsible for enforcing the Code and has the power to investigate and prosecute breaches. Failure to comply with certain provisions of the Code could result in the ACCC taking court action seeking a financial penalty of up to $63,000, or issuing an infringement notice for the breach ($10,500 for a body corporate and $2,100 for an individual or other entities).
All of this can get very complicated, so make sure you get independent professional advice. For more general information sign up to the ACCC’s Franchising Information Network at www.accc.gov.au/media/subscriptions/franchising-information-network or follow the ACCC on LinkedIn.
The information in this article is for guidance purposes only and does not constitute or substitute for legal advice. When considering a franchise opportunity, seek advice from a lawyer, accountant and business advisor with franchising expertise.
Ten steps before committing
Assess your business skills, and personal strengths and weaknesses. Are you the right fit for a franchise?
Complete a pre-entry franchise education program at www.franchise.edu.au.
Get advice from an accountant, lawyer and business expert.
Make sure you receive an information statement, disclosure document, franchise agreement and a copy of the Code. Read these documents carefully.
Take comprehensive notes of your meetings with the franchisor. Insist that the franchisor confirms any claims they make about the franchise in writing.
Speak to current and previous franchisees.
Research the franchise and try to verify the information provided to you, such as earnings representations.
If you will occupy premises as part of your franchise, make sure you understand your rights and obligations under the lease or occupancy agreement.
Check clauses on termination, renewal, end of term and transfer of the franchise, and make sure you are willing to accept them.
If you aren’t happy with the offer, try to negotiate something better, or look for a better deal elsewhere.
