What is franchising?

Franchising is a business model, that allows a business to operate under the brand of another business.

  • A franchisee is a sole trader, partnership or company who enters into an agreement with a franchisor to sell their products or services for a specified period in return for payment to the franchisor.
  • A franchisor sells the rights and enters into an agreement with a franchisee for a set period of time. The franchisor controls the name, brand, intellectual property and business system.

The Franchising Code

All franchise participants, including franchisors and franchisees, must comply with the Franchising Code of Conduct.

The Franchising Code:

  • sets out the minimum conduct of participants in franchising
  • aims to have franchisors tell you certain things about a franchise agreement before you sign it
  • aims to provide a cost-effective dispute resolution scheme for franchisees and franchisors
  • outlines penalties for non-compliance.

While the Franchising Code determines minimum standards of disclosure and conduct, it's not intended to replace independent legal, business or accounting advice before entering into a franchise agreement. If something goes wrong after you’ve signed the agreement, you may need to take your own private action to enforce your rights.

Seek advice from a professional business adviser, accountant and lawyer with franchising experience before entering into a franchise agreement. They will see risks you can't and will help you in your decision making.

Documents a person must be given before they enter a franchise agreement

The franchisor must provide specific documents to the potential franchisee upfront to help the franchisee make an informed decision to continue. These documents can be provided in an electronic or printed form.

The 5 documents the franchisor must provide are:

  • an information statement
  • a copy of the Franchising Code
  • a disclosure document
  • key fact sheet
  • a copy of the franchise agreement
  • a copy of the lease and relevant lease disclosure statements if appropriate.

Good faith

Both the franchisor and franchisee must act in good faith, which applies to any matter arising in relation to a franchise agreement or the Franchising Code, including:

  • pre-contractual negotiations
  • performance of the contract
  • dispute resolution
  • the end of the franchising agreement.

Having to act in good faith doesn’t mean that the franchisor can’t act in its own commercial interests.

Franchise agreement

A franchise agreement is a contract between a franchisor and a franchisee. It sets out your rights and responsibilities and states what you can and can't do when you are running the franchise. You must be given the franchise agreement in advance.

You then have a minimum of 14 days to review the franchise agreement. You can take longer than 14 days to decide whether to buy the franchise or not. In this time you should get legal, accounting and business advice about the franchise offer.