A Legal Guide for Prospective Franchisees
Franchising offers an attractive business model for entrepreneurs looking to invest in a well-established brand with an existing customer base. However, the recent voluntary administration of Carl’s Jr.’s Australian franchisee, CJ’s Group, serves as a reminder of the potential risks involved. Since its launch in Australia in 2016, Carl’s Jr. aimed for rapid expansion, planning up to 300 new stores. Unfortunately, economic challenges and funding shortfalls caused a significant setback, leaving many franchisees in precarious situations. This case highlights how vital it is for franchisees to fully understand the franchise landscape, including financial obligations and operational challenges, to safeguard their investments.
Our latest article explores the advantages and disadvantages of investing in a franchise and highlights the role a franchise lawyer can play in safeguarding interests and navigating the complexities of franchise agreements.
The Pros and Cons of Buying a Franchise
Purchasing a franchise offers a structured path to business ownership that can be appealing to many. Unlike starting a new business from scratch, a franchise comes with a proven model and established ractices. In Australia, there are more franchise systems per head of population than in the United States. This provides a significant advantage of working within a framework that has already shown success across various sectors.
One of the main advantages of franchising is the collective buying power of the franchise
network. Franchises often purchase inventory and equipment in bulk, which can result in cost
savings for individual franchisees. Additionally, the comprehensive training provided by
franchisors helps new employees quickly understand the business operations, ensuring
consistency and efficiency across all locations.
However, it is important to understand that buying a franchise does not guarantee success.
The belief that franchises are inherently less likely to fail is a myth. While franchising offers
a structured system, it does not eliminate the risks associated with business ownership.
In Australia’s competitive market, even well-known franchises like Carl’s Jr. can face
difficulties in establishing a strong presence. The challenge of achieving critical mass is
significant, and success often hinges on the brand’s commitment and the effectiveness of
local partners. The high costs associated with labour and real estate can be particularly
overwhelming. Careful financial planning and thorough market research are essential for
navigating these challenges.
While a franchise provides a solid foundation and valuable support, it requires dedication and
hard work. Franchisees must adapt to the established system and address market-specific
challenges to achieve success. The structure and resources offered by a franchise are
beneficial, but they come with their own set of demands and responsibilities.
Regulation in Australia
The Franchising Code of Conduct (the ‘Code’) was introduced under the Competition and
Consumer Act 2010 (Cth) (‘CCA’) to ensure a fair and transparent environment for both
franchisors and franchisees.
The primary aim of the Code is to provide a clear framework for franchise agreements and to
assist franchisees in making well-informed decisions before committing to a franchise. It also
sets out a process for resolving disputes that may arise between parties. Essentially, the Code
is designed to protect franchisees and promote fairness in the industry.
A breach of the Code constitutes a breach of the CCA, entitling the affected party to seek
compensation. Courts have significant powers to address violations, including granting
injunctions, declaring agreements void (in whole or in part), or varying contracts. Breaches of
key provisions can result in substantial penalties, up to 600 penalty units (approximately
AU$187,800). The Australian Competition and Consumer Commission (ACCC) actively
monitors compliance and can initiate investigations. If necessary, the ACCC may issue
Infringement Notices of up to $18,780 per breach, along with additional costs and potential
negative publicity.
For serious violations, courts can impose additional sanctions, such as fines up to $10
million, three times the benefit gained from the breach, or 10% of annual turnover.
Individuals knowingly involved in breaches can face fines of up to $500,000.
The Code’s broad definition of a ‘franchise agreement’ encompasses various forms of
agreements—written, oral, or implied—covering franchises, master franchises, licenses, and
distribution agreements. This wide scope ensures that most franchise arrangements are
covered under the Code, providing a comprehensive regulatory framework for the industry.
Disclosure
In Australia, franchisors are obligated to provide a comprehensive disclosure document that
adheres to the strict requirements set out in Annexure 1 of the Code. This document must be
given to a prospective franchisee or to a franchisee seeking to renew or extend their
agreement.
For prospective franchisees, the Code mandates that this disclosure document be delivered at
least 14 days before they enter into a franchise agreement, commit to an agreement to enter
into a franchise, or make any non-refundable payments related to the franchise. This ensures
that potential franchisees have ample time to review and consider the details before making a
commitment.
Alongside the disclosure document, franchisors must also provide a copy of the franchise
agreement in its final form. This means the agreement must include all commercial terms and
be ready for signature, giving prospective franchisees a clear and complete picture of what
they are agreeing to. These requirements are designed to promote transparency and help
prospective franchisees make informed decisions by ensuring they have all necessary
information before entering into a franchise arrangement.
The Role of a Franchise Lawyer in Your Franchise Purchase
Under the Code, a franchisor must not proceed with, renew, or extend a franchise agreement
without a written statement confirming that they have received, read, and understood the
disclosure document and the Code. Before finalising the agreement, the franchisor must also
receive confirmation that the prospective franchisee has sought or been advised to seek
independent legal advice.
Navigating the world of franchising involves complex legal and commercial issues, making
the guidance of a skilled solicitor invaluable. OpenLegal’s experienced solicitors act as both
legal experts and business consultants throughout the franchise purchase process.
Our team plays a crucial role in negotiating franchise agreements and reviewing disclosure
documents. We help clarify these intricate documents, outline the rights and responsibilities
of both parties, and negotiate better terms to protect your interests. We also ensure that
disclosure documents are accurate and comprehensive.
Additionally, our solicitors assist with lease negotiations to secure favourable terms and
avoid costly mistakes. We help franchisees navigate complex employment laws, including
hiring, training, and managing staff. Our services cover compliance with workplace
regulations, employment contracts, employee rights, and workplace policies. We also offer
guidance on handling disputes and ensuring that your business adheres to all legal
requirements related to employment.
To conclude, Open Legal provides experienced solicitors who can assist with franchise
agreements, disclosure documents, and regulatory compliance. For professional support in
navigating your franchise purchase, contact us at enquiries@openlegal.com.au or 1300 337
997.
BY ELLIE RISTEVSKI, Intern at OpenLegal.
