WHAT FRANCHISORS CAN AND CAN’T DO
Code rules that govern franchising.
How the Franchising Code governs franchisor behaviour.
In Australia, franchisors and franchisees are bound by the mandatory Franchising Code of Conduct. The Australian Competition and Consumer Commission is responsible for regulating compliance with this code. The Franchising Code gives prospective and current franchisees certain protections and promotes standards of behaviour in their dealings with a franchisor.
However, each franchise system also comes with its own individual contract that sets out the franchisor’s rules about the operation of the business. This is called the ‘franchise agreement’. Like any contract, the franchise agreement can be lengthy and complex, but it’s important that you dedicate the time and resources to understand what it means for you. Knowing what each party can and can’t do will help you to assess whether a particular business venture is right for you .
he ACCCT is often contacted by franchisees who are concerned about whether their franchisor has the power to act in a certain way. We have compiled a list of key things a franchise buyer should be aware of before putting pen to paper.
THE FRANCHISOR DOESN’T HAVE TO PROVIDE YOU WITH AN EXCLUSIVE TERRITORY
Some prospective franchisees are under the impression that they will automatically have an exclusive territory and won’t have to worry about competing with other franchisees.
However, the franchisor is not required to provide you with an exclusive territory. Your franchise could be limited to the particular site you will occupy or you could have a non-exclusive territory that other franchisees may operate within. The franchise agreement might also allow the franchisor or its associate to operate within this territory.
Check the disclosure document provided by the franchisor to see: whether you have a territory and if it’s exclusive. It’s also important to consider how current and future competitors in your market may affect the viability of the business venture.
T HE FRANCHISOR CAN GENERALLY REQUIRE YOU TO PURCHASE GOODS OR SERVICES FROM SPECIFIC SUPPLIERS1
The goods and services that your franchisor requires you to purchase may be cheaper than what you could independently
acquire – but they may not.
In addition to making your own enquiries, you should speak to other franchisees to ask whether they are happy with the cost, quality and functionality of the goods or services provided. The franchisor’s disclosure document will set out whether there are restrictions on who you can source goods or services from, and will include contact details for current and former franchisees.
THE FRANCHISOR DOESN’T HAVE TO SPEND MARKETING MONEY ON YOUR
SPECIFIC SITE OR TERRITORY
Your franchise agreement may require you to pay a fee to cover marketing or advertising activities undertaken for the franchise system. Although the Franchising Code places some important limits on how the franchisor may spend this money, it doesn’t require the franchisor to spend it on activities that will directly benefit your business.
Read the disclosure document to find out what types of activities the franchisor can use marketing funds for.
THE FRANCHISOR CAN’T MAKE YOU PAY
SIGNIFICANT CAPITAL EXPENDITURE
The Franchising Code prohibits franchisors from requiring franchisees to undertake significant capital expenditure, unless it meets the requirements of the Code. What qualifies as ‘significant’ will vary depending on the circumstances but could include new equipment, store upgrades or a new vehicle.
If you agree to incur this expense, then this prohibition won’t apply. It also will not apply if this expenditure:
• was disclosed in your disclosure document • will be incurred by all or a majority of franchisees and a majority of those franchisees approve the expense • is required in order to comply with legal obligations, or • is considered necessary by the franchisor as a justified capital investment in the franchised business.
Check the disclosure document to find out about ongoing and one-off expenses that you will be expected to incur as part of the franchise. You should speak to an accountant and a business advisor to prepare financial modelling to help you work out whether the business is viable in the short and long term.
THE FRANCHISOR CAN’T KEEP ALL OF YOUR DEPOSIT IF YOU EXERCISE YOUR COOLING
OFF RIGHTS
Did you know that you’re entitled to terminate a new franchise agreement (but not a renewal, extension or transfer) within seven days of entering into the agreement or making a payment under the agreement (whichever happens first)?
If you change your mind and exercise this cooling-off right, the franchisor must provide you with a refund of the payments you have made within 14 days. However, the franchisor can deduct its reasonable expenses (as set out in the agreement) from this refund.
THE FRANCHISOR CAN TERMINATE YOUR AGREEMENT IN CERTAIN CIRCUMSTANCES
The fact that you may have been granted the right to operate your franchised business for a set period of time is not a guarantee that your franchise can’t come to an early end. Franchisors commonly include terms in their agreements that allow them to terminate franchise agreements in certain circumstances. You should check the termination clauses in the agreement provided to you to make sure you’re willing to accept them.
Under the Franchising Code, a franchisor must generally follow certain processes if they propose to terminate your agreement. These processes will usually require the franchisor to provide you with reasonable written notice of its intention to terminate.
You should be aware that special circumstances might be listed in the franchise agreement which allow a franchisor to terminate your agreement with immediate effect. For example, if you no longer hold a licence needed to carry on your business; you abandon the franchise; or you’re fraudulent in operating the business.
THE FRANCHISOR CAN’T MAKE YOU SIGN A WAIVER OF PROMISES MADE TO YOU
A prospective franchisor might make certain claims when speaking to you about: • how much money you will earn
• how much other franchisees have
earned, or
• the level or type of support the franchisor will provide to you.
Under the Franchising Code, the franchisor cannot require you to sign a waiver regarding any verbal or written claims made by them. If certain promises are made to you when speaking to the franchisor, ask them to confirm it in writing.
BEFORE BUYING A FRANCHISE
It’s important to know what you’re signing up for.
Before deciding whether or not to purchase a franchise, invest time into assessing whether that business venture is right for you. If you don’t understand something in the documents that you’ve been provided – ask the franchisor or your professional advisor for more information. If you’re dissatisfied about particular parts of the agreement, consider whether this really is the business for you.
FranchiseED delivers a free pre-entry franchise education program to help you assess franchise business opportunities.
You can also visit the ACCC’s website at www.accc.gov.au for a range of educational resources on franchisors’ responsibilities under the Franchising Code.
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 or business advisor with franchising expertise.
The fact that you may have been granted the right to operate your franchised business for a set period of time is not a guarantee that your franchise can’t
come to an early end.