When buying a franchise the purchaser (franchisee) pays for all the normal aspects of a business and also the right to use the name, trademark or logo used by the businesses in that franchise group for a certain period.
The franchise rights usually cost several thousand dollars. In addition, a portion of every months takings are paid to the franchisor as a royalty or commission. The franchisor may require all orders and customer payments be directed to the franchisor who will then deduct the agreed royalty and pay the balance to the franchisee. The franchisee may be required to conform to stringent rules on how to keep records, clothing, shop layout, vehicle displays, opening hours, personal appearance, price control, choice of suppliers and giving the franchisor monthly financial statements. Franchisors strictly enforce these rules and it is no excuse to say that they are petty.
If the franchise runs down from lack of promotion by the franchisor it may be difficult to sue for neglect. Usually the franchise agreement does not obligate a franchisor to maintain the standards and market share of the franchise. It is arguable that the franchisor may implicitly owe the franchisee a duty of care although a court is yet to decide this. Therefore a purchaser should consider that a franchisor may neglect the franchise after the purchaser's money has been received and there may be no claim.
To help avoid problems a purchaser may be able to insist on the franchisor accepting some obligations. A purchaser should ensure that the franchisor promises not to sell excessive numbers of franchises and maintains a specific market area for each franchise business purchased. Sometimes a franchisor will guarantee a minimum income for say the first six months and agree to pay the franchisee any shortfall of income. The franchisor does not have to provide this guarantee but may if asked. It is a good idea to obtain a guarantee for protection from exaggerated promises of the value of the franchise.
The franchisor should agree to continually ensure that other franchisees comply with their obligations and to provide regular training and assistance to franchisees. The franchisor should state what promotions will be undertaken and for what period, especially if the franchisee is paying a promotional levy.
A franchisee can assign the balance of the term of a franchise agreement to a new franchisee. The franchisor must consent to the new franchisee in much the same way as a landlord must consent to a new lessee. However a franchisor does not have to give reasonable grounds for refusing an assignment unless the franchise agreement states the franchisor must.
The main source of regulation for franchises is the Franchising Code of Conduct, which regulates the conduct of franchisors. The new Code which commenced on 1 January 2015, applies to all franchises renewed extended or transferred after that date, as well as new franchises. The Code is regulated by the Australian Competition and Consumer Commission. For further detailed information regarding franchises visit the Franchising page on the ACCC website.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.