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Starting a franchise is not as simple as hanging out your shingle. But when it’s all set up correctly, you’re well on the road to franchising success. To discuss the legal aspects of franchising a business, Dynamic Business sat down with Corinne Whelan, Senior Lawyer at LegalVision.
Australian franchises must comply with the Franchise Code of Conduct. To do so, they need to thoroughly understand their related legal obligations.
“There are four main legal documents that business owners will need when franchising their business,” explains Corinne.
These are as follows:
1. Franchise Agreement
“This is the contract that joins the franchisee and the franchisor,” says Corinne. It sets out each party’s rights and obligations under the franchise arrangement and varies in length depending on the business’ complexity.
2. Mandatory Disclosure Document
Corinne says one of the biggest areas of dispute between franchisees and franchisors is misrepresentation. The mandatory disclosure document improves transparency and helps the franchisee to make an informed decision. Under the Code, the disclosure document follows a specific format and contains set questions that the franchisor is required to answer. The document summarises how the franchise works in a practical sense.
3. If applicable, a Licence to Occupy or Step-In-Deed
“Where the franchise requires a premises to operate from, franchisors will need specific documentation to cover the leasing arrangements with their franchisees. Typically, franchisors use one of three leasing options and with each lease option comes different documentation” Corinne says. She outlines the three options as:
- Option 1: the franchisee locates the premises, negotiates the lease and holds the lease.
- Option 2: the franchisor finds the premises, negotiates the lease, enters into the lease and then transfers the lease to the franchisee.
- Option 3: the franchisor locates the premises, negotiates and enters into the lease, and licenses occupation to the franchisee.
4. Confidentiality Agreement / Non Disclosure Agreement
This document protects a Franchisor’s confidential information during negotiations.
Corinne says that every franchise is different in its structure, operation and scale. Therefore, business owners establishing a franchise need to work closely with lawyers who are experienced in franchising to ensure their legal documents are an accurate and fair reflection of the offer being made to franchisees.
Are You Selling a Licence or a Franchise?
Some businesses unwittingly fall under the Code, so it is essential to understand whether you are selling a licence or a franchise.
“Licences give the licensee the right to use the brand for a fee with little guidance and compliance requirements regarding how the business should operate under the brand,” says Corinne. “A franchisor, however, exercises significantly more control over franchisees than a licensor.
“The Code sets out specific elements that must exist for an arrangement to be considered a franchise. If those elements exist, you will have a franchise agreement, even if that is not what you intended.
“You should speak to a lawyer to understand whether your arrangement is a franchise or a licence, as each differs in terms of legal obligations and level of control.”
The Right Business Structure
Your business structure is the foundation of your franchise. Corinne recommends establishing a dual company structure with a holding company, which holds your business’ trade marks and other intellectual property (IP), and a separate operating company. She recommends franchisors also consider setting up a franchising entity that issues franchise agreements and collects franchise fees. This structure separates your operations from the franchising arm and separates leasing from other activities.
Intellectual Property Protection
“Like all businesses, franchises must protect the IP associated with their brand, systems and goodwill,” says Corinne.
She recommends that IP protection is adequately covered throughout all your documentation and systems by:
- setting up trade marks for your logos, slogans, brand names and the like;
- protecting know-how and trade secrets through an Operations Manual and other franchise documents; and
- ensuring all copyright and business expectations are clear in your Operations Manual, training manuals, marketing materials, and documents recording the business systems.
The Franchise Code of Conduct is the primary source of a franchisor’s legal obligations, but it does not exist in isolation.
Franchisors must also comply with:
- the Fair Work Act and National Employment Standards, which are the primary sources of employee rights in Australia;
- the Australian Consumer Law (ACL). The ACL governs consumer rights relating to statutory warranties, advertising and promotion, and anti-competitive practices.
Creating franchise documentation and maintaining ongoing compliance with your legal obligations requires precision, Corinne recommends seeking advice from a legal firm such as LegalVision that specialise in franchising to help you do it right.
“The franchising journey is also a commercial one, so we can also refer our clients to franchise consultants who provide commercial and operational advice that supports our legal services,” she says.
Additional resources for new franchisors
The Franchisor Handbook
The Code was implemented on July 1, 1998, but it is continuously updated, so franchisors need to meet their ongoing compliance requirements. They also need to continually improve their systems and support of franchisees.
LegalVision published the Franchisor Handbook to assist franchisors in managing legal and operational issues.
Free Franchising Webinar
If you own or operate a successful business and are looking for an avenue for rapid growth, franchising is a great option. Australia and New Zealand are estimated to have more franchised businesses per capita than anywhere else in the world. This form of business expansion has been key to the economic success of both countries over the last 20 years. So what is the secret to franchising success?
LegalVision hosted a free webinar on 18 March 2021 to help business owners looking to expand into a franchise network. Corinne Whelan (Senior Lawyer at LegalVision) and Jacquie Fearnley (Head of Growth) spoke about everything you need to know about how to successfully set up and run a franchise system.
You will learn about:
- how franchising works and the differences between licensing and franchising;
- choosing the right business structure for franchise growth;
- managing your intellectual property, brand and marketing fund; and
- compliance requirements.