Inside Franchise Business - - Contents - JANE GARBER-ROSENWZEIG Lawyer, Gable Lawyers

Be wary of com­pa­nies try­ing to side­step the re­quire­ments of the Fran­chis­ing Code of Con­duct.

Be wary of com­pa­nies try­ing to side­step the re­quire­ments of the Fran­chis­ing Code of Con­duct. Fran­chisors have spe­cific steps they must take, and this in­cludes a range of doc­u­men­ta­tion they need to fur­nish to prospec­tive fran­chisees.

Many brands are proud to be part of the fran­chise in­dus­try, but there are oth­ers that while legally de­fined as fran­chises present to be some other type of ar­range­ment and try to by­pass the re­quire­ments of the Fran­chis­ing Code of Con­duct.

The Code clearly de­fines what de­fines a fran­chise busi­ness. If the four limbs of the Code def­i­ni­tion of a fran­chise agree­ment are sat­is­fied, then the busi­ness you are con­sid­er­ing buy­ing is a fran­chise re­gard­less of what it has been la­belled.

Sim­ply put, the limbs of the def­i­ni­tion are that:

1. There is an agree­ment be­tween you and the owners of the brand (which can be writ­ten, oral or im­plied);

2. You are granted the right to work

un­der a trade­mark or a brand name; 3. You have the right to carry on the busi­ness of of­fer­ing, sup­ply­ing or distribut­ing goods or ser­vices in Aus­tralia un­der a s ys­tem or mar­ket­ing plan that is sub­stan­tially de­ter­mined, con­trolled or sug­gested by the brand owner; and

4. Be­fore start­ing or con­tin­u­ing the busi­ness, you must pay or agree to pay to the brand owner or their as­so­ciate an agreed amount.

At this point, you may well ask whether it re­ally mat­ters if the busi­ness you are con­sid­er­ing in­vest­ing in is de­scribed in all doc­u­ments as a li­cence or a dis­tri­bu­tion ar­range­ment rather than a f ran­chise. Ac­tu­ally, it mat­ters greatly. If an ar­range­ment is con­sid­ered a fran­chise, then the Code ap­plies, im­pos­ing oner­ous obli­ga­tions on the re­luc­tant fran­chisor rel­a­tive to the doc­u­men­ta­tion they must pro­vide to prospec­tive fran­chisees.


These re­quire­ments of the Code do not need to be met for li­cens­ing or dis­tri­bu­tion ar­range­ments. How­ever, the Code re­quires, among other things, eight spe­cific re­quire­ments:

1. Pro­vi­sion of dis­clo­sure doc­u­ment, in the form and or­der as well as us­ing head­ings and num­ber­ing of An­nex­ure 1 of the Code. The pur­pose of the dis­clo­sure doc­u­ment is to pro­vide ma­te­rial in­for­ma­tion to po­ten­tial fran­chisees to help them eval­u­ate the fran­chise op­por­tu­nity. It must be main­tained and up­dated at least an­nu­ally.

2. Pro­vi­sion of a copy of the cur­rent Code, an up-to-date dis­clo­sure doc­u­ment and a copy of the fran­chise agree­ment (in the form to be ex­e­cuted) at least 14 days be­fore

a prospec­tive fran­chisee signs a fran­chise agree­ment or makes a non-re­fund­able pay­ment to the fran­chisor or an as­so­ciate in con­nec­tion with the pro­posed fran­chise agree­ment. The Code in­cludes these re­quire­ments to al­low each po­ten­tial fran­chisee time to read the doc­u­ments and ob­tain re­lated le­gal, fi­nan­cial and busi­ness ad­vice. 3. Pro­vi­sion of a copy of the in­for­ma­tion state­ment to a prospec­tive fran­chisee as soon as prac­ti­ca­ble after the prospec­tive fran­chisee for­mally ap­plies or ex­presses an in­ter­est in ac­quir­ing a fran­chised busi­ness. An in­for­ma­tion state­ment must be in the form set out in An­nex­ure 2 of the Code. It warns the po­ten­tial fran­chisees of risks when in­vest­ing into a fran­chise.

4. Re­ceipt of state­ment from the fran­chisee re­gard­ing the fran­chise doc­u­ments and re­ceipt of ad­vice cer­tifi­cates from a solic­i­tor, an ac­coun­tant and a busi­ness ad­viser. The fran­chisor must not en­ter into or re­new a fran­chise agree­ment or ex­tend the term or scope of the fran­chise agree­ment un­til re­ceiv­ing from the fran­chisee or prospec­tive fran­chisee a writ­ten state­ment of hav­ing re­ceived, read and had a rea­son­able op­por­tu­nity to un­der­stand the dis­clo­sure doc­u­ment and the Code. The fran­chisor must also ob­tain signed state­ments that the prospec­tive fran­chisee has been given ad­vice about the pro­posed fran­chise doc­u­ments and busi­ness by an in­de­pen­dent le­gal ad­viser, an in­de­pen­dent ac­coun­tant and in­de­pen­dent busi­ness ad­viser. This re­quire­ment does not ap­ply upon re­newal, ex­ten­sion of term or scope of the fran­chise.

5. Pro­vi­sion of copy of the lease and other agree­ments with the po­ten­tial fran­chisee. The fran­chisor must pro­vide a copy of the lease, an agree­ment to lease and all lease-re­lated doc­u­men­ta­tion to the po­ten­tial fran­chisee as soon as prac­ti­ca­ble. If there are other rel­e­vant agree­ments, then the fran­chisor must pro­vide those to the po­ten­tial fran­chisee at least 14 days be­fore the day on which the fran­chise agree­ment is to be signed. Other agree­ments in­clude lease of equip­ment agree­ment, se­cu­rity agree­ment such as mort­gage and con­fi­den­tial­ity agree­ments. 6. Pro­vi­sion of fi­nan­cials or an au­dit re­port. Each fran­chisor must pro­vide all po­ten­tial fran­chisees with ei­ther the pre­vi­ous two fi­nan­cial years’ worth of fi­nan­cial state­ments or an in­de­pen­dent au­dit re­port as to the sol­vency of the fran­chisor. 7. Dis­clo­sure of all ma­te­rial facts. The fran­chisor is ob­li­gated to dis­close all ma­te­rial facts that have oc­curred after the pre­vi­ous up­date of the dis­clo­sure doc­u­ment.

8. The fran­chise agree­ment be­ing com­pli­ant with the re­quire­ments of the Code as to items pro­hib­ited from be­ing in­cluded. For ex­am­ple, a fran­chise agree­ment can­not con­tain a gen­eral re­lease of the fran­chisor from li­a­bil­ity to­ward the fran­chisee or a waiver of any ver­bal or writ­ten rep­re­sen­ta­tion made by the fran­chisor.

When look­ing at any busi­ness op­por­tu­nity, you need to re­mem­ber that if some­thing ap­pears to be some­thing else (like a fran­chise in­stead of a li­cence), then it is likely to be so. Eval­u­ate the op­por­tu­nity, as­sess all its as­pects and doc­u­men­ta­tion, and seek proper le­gal and ac­count­ing ad­vice so as not to buy a cat in a bag.

If an ar­range­ment is con­sid­ered a fran­chise,

then the code ap­plies, im­pos­ing oner­ous obli­ga­tions on the re­luc­tant fran­chisor rel­a­tive to the doc­u­men­ta­tion they must pro­vide to

prospec­tive fran­chisees.

Jane's prac­tice fo­cuses on com­mer­cial law, fran­chis­ing, dis­tri­bu­tion and li­cens­ing on a do­mes­tic and in­ter­na­tional ba­sis, leas­ing, and the pro­tec­tion of in­tel­lec­tual prop­erty.

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