Many of our clients run businesses in Australia, and once their businesses have grown, many owners look to expand. If you also want to expand a business that has already proven successful, franchising may be a good option.
Franchising, also known as chain operation, refers to granting a franchisee the right to sell and distribute goods and services under your brand. In this sense, franchising can open up new markets for your business. There is no specific franchise registration or approval process. However, establishing a franchise is a legal process that requires particular documents.
Today let’s talk about what documents are required for a franchise business.
Franchise Agreement
Franchise Agreement
A franchise agreement is a contract that sets out the legal rights and obligations of the franchisor and its franchisees. The Franchising Code of Conduct requires every franchisor to provide a franchise agreement to prospective franchisees. Without a franchise agreement, franchisees cannot use these processes and marketing strategies to run the business.
In addition, while the Code requires the franchisor to have a franchise agreement, it does not explicitly set out what must be included. Accordingly, franchisors have the flexibility to include terms specific to their franchise model.
However, a franchise agreement should typically cover several areas, including:
The term of the Franchise Agreement and the rights to renew the agreement;
The territory in which the franchisee will operate the franchise business;
A list of fees the franchisee must pay, such as marketing fees;
Confidentiality clauses to protect the business’s intellectual property;
Rights of termination, and obligations arising from termination;
A dispute resolution procedure that complies with the Code;
The franchisee’s obligations, such as the obligation to meet performance standards and reporting requirements;
The marketing assistance, training and support provided by the franchisor.
The Code also requires the franchisor to provide the agreement to prospective franchisees at least 14 days before signing. Therefore, it is essential to draft the franchise agreement early.
Disclosure Document
Disclosure Document
The disclosure document sets out certain information about the business so that prospective franchisees can decide whether they wish to enter the franchise network.
In addition, the disclosure document also helps existing franchisees decide how to operate the business.
As a franchisor, you have an important obligation to disclose materially relevant facts to prospective and existing franchisees. Furthermore, this obligation involves ongoing disclosure of the following information:
Changes of ownership;
Litigation;
Insolvency;
Other significant events.
If you fail to comply with disclosure obligations under the Code, the franchisor will incur severe financial penalties, and franchisees will also take remedial action to recover losses.
Generally, the disclosure document should include:
Past business experience;
Disputes with former franchisees, and alleged breaches of the Franchise Agreement or unlawful activities connected with operating the franchise;
Details of existing franchisees;
How franchisees’ contributions to the marketing fund are used (if applicable);
Details of the costs franchisees may face before opening, such as expenses associated with purchasing new equipment;
Descriptions of the different franchise territories;
Suppliers from which franchisees are expected to source particular products (if applicable);
What rights the franchisee has to the franchise brand and other intellectual property (IP).
Key Facts Sheet
Key Facts Sheet
The franchisor must also provide the franchisee with a Key Facts Sheet at least 14 days before signing the Franchise Agreement. This document highlights the key information in the disclosure document. The disclosure document is typically quite lengthy. Accordingly, the Key Facts Sheet helps franchisees navigate the disclosure document and understand its contents.
In addition, the franchisor must ensure the Key Facts Sheet is drafted in the approved format. Furthermore, the Key Facts Sheet and the disclosure document must be updated in sync within four months of the end of the financial year.
Information Statement
Information Statement
Finally, the Information Statement is a standard document prepared by the Australian Competition and Consumer Commission (ACCC). As a franchisor, you must also provide the Information Statement to franchisees. Ultimately, this document highlights some of the issues they should consider before becoming a franchisee.
Typically, these issues include:
The risks of franchising;
The due diligence they should undertake;
The questions franchisees should ask when considering purchasing a franchise.
The franchisor must provide the Information Statement to a prospective franchisee no later than 7 days after they have expressed interest in joining.
Ultimately, the Code provides that the franchisor has a duty to act in good faith before, during and after the Franchise Agreement. This duty requires the franchisor to act reasonably. To be clear, the franchisor cannot exercise your powers arbitrarily or for extraneous purposes.
By providing the Information Statement and documents described above, the franchisor can properly balance the power between themselves and the franchisee.
Conclusion
When franchising your business, the Franchising Code of Conduct sets out the specific documents you must provide to franchisees.
These documents include:
The Franchise Agreement;
The Disclosure Document;
The Key Facts Sheet;
The Information Statement.
If you have any questions about the documents required for franchising, our experienced franchising lawyers can assist you, answer your questions, and draft and review your documents.
