Becoming a franchisee can be a complex process to navigate independently. Franchise agreements can span many years, and the documentation is heavy and extensive, often including confusing terms and clauses. There are a range of different laws applicable to these business structures, including the Franchising Code of Conduct, the Australian Consumer Law and the Competition and Consumer Act 2010. The franchisor often retain significant control over workplace operations, creating potential challenges for franchisees. Engaging legal advice early in the process can save franchisees substantial expenses, prevent unnecessary conflicts, and reduce the stress associated with disputes.
Power imbalances between the franchisor and franchisee are not uncommon. Recent national scandals involving companies like 7-Eleven, Laser Clinics, Pizza Hut, and Domino’s have highlighted issues such as wage theft, employee abuse, and franchisees being financially exploited. Consequently, many franchisees have faced significant personal hardship due to insufficient understanding of their commitments when entering into an agreement.
Wanting to become a franchisee? Here are 10 essential factors to understand before entering into a franchise agreement:
Ensure a Disclosure Document is in Place
A disclosure document is a critical resource designed to provide potential franchisees with detailed information about the franchisor and the franchise system. It typically includes key details such as the franchisor's business history, litigation or insolvency history, fees payable by the franchisee, training and support offered, and any restrictions on operations. The document also outlines potential risks, earning projections (if provided), and the terms of the franchise agreement. This transparency ensures that prospective franchisees have a clear understanding of their obligations and the overall business model before making a binding commitment or financial investment. This document must be provided to the prospective franchisee at least 14 days before the prospective franchisee enters into the agreement or makes a non-refundable payment.
Pre-agreement Documents
Prior to any agreement, a potential franchisee must receive from the franchisor an information statement explaining franchising, a copy of the franchise agreement, a disclosure document, a key facts sheet explaining the disclosure document and a copy of the Franchising Code of Conduct.
Franchisees Must Abide by Workplace Laws
Franchisee owners employing staff must abide by the same workplace laws and regulations as other employers. Like with any other company or business, meticulous financial record-keeping and pay slips are a must.
Financial Risk
The financial risk of the business rests solely with the franchisee. If the business is unsuccessful, the franchisee not only risks earning no income but may also struggle to cover the basic operating costs of the business. If a franchisor becomes insolvent, the franchisee may lose the right to the brand, products and the premises.
Upfront Costs
Franchisors need to be aware there are significant upfront costs incurred to establish the business. Many are not aware of the hidden fees and payments involved. Engaging a lawyer early in the process can empower potential franchisees by providing them with a clear understanding of what to expect from the outset.
Supplier and Product Restrictions
A franchise agreement will restrict the suppliers a franchisee can use. Uniformity with logos and products is also another requirement. A franchisee cannot amend the business’s look and design as it goes against the franchise’s image and brand. Owning a franchise is not a space for creativity or design innovation as the various businesses part of the chain take on the legacy of the brand.
Marketing Funds
Franchisees will often have to pay fees towards the marketing fund operated by the franchisor. Franchise businesses run strong advertising and brand awareness campaigns with their logos well-recognised by consumers. Despite a franchisee paying a marketing fund, it does not necessarily mean that an individual’s business will be promoted through the funding. The onus is on the franchisor to comply with the Franchising Code of Conduct rules which oversee who pays into the fund, how the money is used and notifying franchisees about how the money was collected and spent every financial year. Franchisees must also be provided with an annual marketing fund statement.
Lease Contracts
Running a bricks and mortar franchise store, gym, retail space or food outlet requires a lease agreement. The lease arrangement may either be with the franchisor or a separate landlord. Importantly, the lease term should align with the initial term of the franchise agreement to avoid potential conflicts or disruptions. The lease contract is a separate document to the franchise agreement so a professional legal review of the lease is strongly advised.
Breach of Franchise Agreement
If a franchisee breaches an agreement for example by not using the required supplier or failing to pay the franchisor, the franchisor can issue a formal breach notice. Clause 27 of the Franchising Code of Conduct provides that franchisors must give reasonable written notice to the franchisee about proposed agreement termination due to the breach, offer a remedy and allow reasonable time for the franchisee to remedy the breach. Â
No Obligation to Renew Franchise
The agreement between the franchisor and franchisee operates for a set period as outlined in the franchise agreement. However, regardless of the loyalty, goodwill, or clientele relationships built by the franchisee during this period, the franchisor is under no legal obligation to renew or extend the agreement once the tenure concludes. This lack of guaranteed renewal can leave franchisees in a vulnerable position, especially if their business has become deeply embedded in the community or if they have made significant financial or personal investments in the franchise.
Additionally, franchisees may suffer financial loss if the agreement ends sooner than anticipated, whether due to non-renewal, termination, or unforeseen circumstances such as a breach of contract or franchisor insolvency. This could result in the franchisee losing not only their income source but also any unrecovered investment in equipment, marketing, or lease agreements tied to the franchise. For this reason, it is crucial for franchisees to fully understand the terms of their agreement, including renewal rights and termination clauses, and seek legal advice to mitigate the risks associated with the end of the contract.
Conclusion
Franchise agreements are complex and often favor the franchisor, making it essential for potential franchisees to proceed with caution. Understanding the terms, risks, and obligations of these agreements is critical to making an informed decision. At BlackBay Lawyers, we specialise in guiding franchisees through the legal intricacies to protect their investments and ensure a strong foundation for success. If you’re considering entering into a franchise agreement, reach out to us for expert advice tailored to your needs.
ABOUT THE AUTHOR
Naomi Shivaraman has been an award winning journalist and producer for 25 years. She joined BlackBay as the team’s Legal Affairs Strategist, a role created to utilise her combined legal and media strategy skills, helping clients and stakeholders navigate the court of public opinion.
Not only does she assist the team in a paralegal capacity on complex litigation matters, but she also provides reputational, media and communications counsel. For the past few years, Naomi has combined her law studies with a full-time career. Naomi will finish her Bachelor of Laws degree at Macquarie University next year.
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