A franchise is a business agreement where a business owner (the franchisor) gives permission to someone else (the franchisee) to operate a branch of their business under the same name.
The franchisee can sell the same products or services as the original business for a set period. It’s like renting a proven business model.
The franchisor supports the franchisee with training, marketing assistance, and ongoing guidance to ensure the success of the new branch.
A franchise agreement is a contract between the franchisor and the franchisee. It sets out the terms and conditions for the operation of the franchise business.
In Australia, franchise agreements are regulated by the Franchising Code of Conduct. The Franchising Code looks at four main criteria to determine whether an agreement is a franchise agreement:
- the presence of an agreement between the parties,
- the franchisee’s right to operate a business according to a set system or plan,
- the close connection to a trademark, advertisement, or symbol owned by the franchisor, and
- the payment of money from the franchisee to the franchisor or a person associated with the franchisor.
Examples of a Franchise
- Kentucky Fried Chicken (KFC)
- Body Fit Training
Franchisor vs Franchisee
The distinction between a franchisor and a franchisee is crucial. A franchisor is the original owner of the business model, trademarks, and brand. A franchisee, on the other hand, is an individual or entity that purchases the right to operate a business using the franchisor’s brand and methods.
Roles and Responsibilities of Franchisor and Franchisee
Responsibilities of the franchisor
In a franchise agreement, the franchisor — the original owner of the business — has duties to help the franchisee succeed. These duties include:
Training: The franchisor must train the franchisee. This involves learning how to run the business, how to serve customers well, and how to apply the special methods unique to the franchise.
Advertising and sales promotion: The franchisor takes care of advertising and promoting the brand. This can include large campaigns to make more people aware of the franchise.
Support: The franchisor also offers ongoing support to the franchisee. They offer advice, guidance, and help with any problems that arise during the day-to-day running of the business.
Put simply, the franchisor’s role is to make sure that the franchisee has all the tools they need to run their business successfully.
Responsibilities of the Franchisee: On the other side of the agreement, the franchisee, who runs the business under the franchisor’s brand, also has responsibilities:
Services: The franchisee must provide the services listed in the agreement. This means that it must deliver products, services, or experiences in accordance with the franchisor’s standards.
Methods: Following the methods specified by the franchisor is important. The franchisee must run the business according to these specified methods to keep things consistent across all franchise locations.
Manuals: Franchise manuals act as a guide for the franchisee. The agreement states that the franchisee must follow the instructions and guidelines in these manuals. These manuals cover different parts of business management.
Standards: Maintaining certain standards is a big task. Whether it’s the quality of the products, how customers are treated or how clean the place is, the franchisee has to meet the standards set by the franchisor.
Business Promotion: The franchisee helps to promote the business in their area. This may mean doing local marketing to attract more customers and publicise the business in the community.
Simply put, the franchisee’s job is to run the business well according to the franchisor’s rules and standards.
What are the Key Components of a Franchise Agreement
A franchise agreement is made up of specific parts that are important for running a particular business. Besides other clauses and details, a franchise agreement should include these basic things:
- Permission to Use the Brand: It gives the franchisee the right to use the franchisor’s name and logo.
- Important Dates and Operating Information: Includes dates and details about running the business under the franchise name.
- Geographic Limits: Any rules about where franchisee can operate your business.
- Fees and Costs: What franchisee need to pay to buy and run the franchise.
- Advertising and Branding: Franchisee’s responsibilities for promoting the franchise.
- Protecting Ideas: Keeping the company’s ideas and designs safe.
- Franchise Terms and Renewal Info: Details about how long the franchise lasts and how the franchisee can renew it.
- Support from the Company: Services and help franchisees get from the company.
- Training: Information about how franchisee will be trained to run the business.
- Quality Control: Rules to make sure the business meets certain standards.
- Transferring Ownership: How franchisee can sell or transfer the business.
- What Happens When the Agreement Ends: Obligations after the franchise term finishes.
- Relationship between Parties: How the franchisor and franchisee will work together.
- Who’s Responsible for What: Who takes care of different risks, like accidents or mistakes.
- No Competition: Rules about not starting a similar business nearby.
- Insurance Needs: What kind of insurance does the franchisee need for the business.
- Solving Problems: How disagreements or issues will be resolved.
Frequently Asked Questions
Is a franchise agreement a legal requirement?
Yes, every franchisor must provide a franchise agreement to potential franchisees. The franchisor and you have a contract, which the Franchising Code of Conduct regulates.
What are the different types of franchise agreements in Australia?
There are a few types:
- Business format franchise: You run a business under the franchisor’s brand.
- Product distribution franchise: You sell the franchisor’s products using your own brand.
- Management franchise: You manage the franchisor’s business.
- Area development franchise: You have exclusive rights to open franchises in a specific area.
Can you break a franchise agreement?
Yes, technically, but it’s not easy. There are consequences:
- Termination Clauses: The agreement usually has rules for ending it. Breaking these rules could lead to legal trouble.
- Compensation: Even if you end it right, you might still have to pay fees or lose future profits.
- Legal Problems: Breaking the agreement without good reason could lead to lawsuits and harm your reputation.
- Alternatives: You can talk to the franchisor about ending the agreement in a way that works for both of you. Or, you can get advice from a franchise lawyer.
Do franchise agreements expire?
Yes, most have a set time, usually 5 to 15 years. When it ends, you can:
- Renew: Negotiate new terms to keep running the franchise.
- Not renew: Stop running the franchise and return anything you need to.
Do franchises need to be registered?
Yes, franchisors must create a profile and share info about their franchise on the Franchise Disclosure Register. It’s part of following the Franchising Code of Conduct.