The Key Documents for Franchise Success
Operating a franchise is a remarkable endeavour that offers entrepreneurs the chance to tap into a proven business model and established brand identity. However, the path to franchise success is lined with important legal considerations, and one of the most critical aspects is compliance with the Franchising Code of Conduct. At Rise Legal, we specialise in guiding franchisees through the intricate landscape of franchising regulations, ensuring that you not only understand but also adhere to the Code’s requirements. In this blog, we’ll delve into key information every potential franchisee should know about the Franchising Code of Conduct and the essential documents you’ll encounter on your journey toward successful franchise ownership.
Unveiling the Franchising Code of Conduct: Why It Matters
The Franchising Code of Conduct stands as a comprehensive set of regulations that govern the relationship between franchisors and franchisees in Australia. Designed to promote transparency, fairness, and accountability, the Code outlines the obligations of both parties, ensuring a level playing field in the franchising industry.
At Rise Legal, our commitment lies in helping you navigate this complex legal framework with confidence. Our expertise allows you to focus on what truly matters – the growth and prosperity of your franchise.
Crucial Documents for Potential Franchisees: A Roadmap to Informed Decisions
As a potential franchisee, it’s vital to equip yourself with the right knowledge before embarking on your franchise journey. To facilitate informed decisions, franchisors are obligated to provide potential franchisees with a range of key documents:
The information statement is a 4-page guide that a franchisor must provide to anyone interested in buying a franchise.
The information statement must be provided As soon as a potential franchisee shows a genuine interest in a franchise, the franchisor must give them the information statement before giving them any other documents
The copy of the information statement must be given:
(a) as soon as practicable, and not later than 7 days, after the prospective franchisee formally applies or expresses an interest in acquiring a franchised business; and
(b) before the franchisor gives the prospective franchisee any of the documents described in clause 9 (the disclosure documents and franchise agreement etc).
So, What does the information statement include?
The information statement highlights issues to think about before becoming a franchisee including:
- the risks of franchising
- doing research and due diligence
- questions a person should ask if they are thinking about buying a franchise.
2. Disclosure Document: A cornerstone of franchise information, the disclosure document is a comprehensive resource that sheds light on various aspects of the franchisor-franchisee relationship. It encompasses crucial details about the franchisor’s background, business model, financial performance, and ongoing support, helping potential franchisees evaluate the opportunity thoroughly.
The disclosure document is supposed to help potential franchisees make a reasonably informed decision about the franchise by giving them important and relevant details about the franchise. It also gives franchisees current information about the franchise that they need to know for the running of their business.
The disclosure document must give useful and reliable information about the franchise. A disclosure document must be in the same format and contain the information listed in Annexure 1 of the code.
Information you are required to disclose includes:
- details of certain types of legal proceedings against the franchisor or its directors
- contact details of current as well as former franchisees (unless the former franchisee has requested in writing that their details not be disclosed)
- the franchisee’s costs to start operating the franchised business and other payments or fees they may be required to make
- details of the arrangements that will apply when the franchise agreement comes to an end (including whether the franchisee will have an option to renew or extend the agreement or enter into a new agreement).
When does a franchisor have to give the disclosure document to its franchisees?
A franchisor must give a potential franchisee a copy of its disclosure document at least 14 days before entering into the franchise agreement, or before the franchisee makes a non-refundable payment.
Note that: An existing franchisee can ask the franchisor for a copy of the disclosure document once every 12 months.
3. Franchise Agreement: This foundational key legal document outlines the legal rights, responsibilities, and obligations of both the franchisor and the franchisee. It serves as the governing contract that dictates how the franchise relationship will function.
The franchise agreement is the contract between you and your franchisee. It sets out each party’s rights and responsibilities in relation to the franchised business, as well as each other.
In compliance with the Code, the franchise agreement you provide during the pre-entry disclosure period must be in the form in which it is to be executed. This means that you cannot simply give a draft copy of the agreement.
So, what we do is to get YOUR franchise agreement drafted up for YOU and YOUR franchise business, then when you send us a completed Expression of Interest (setting out the terms offered to a certain Franchisee) we will prepare a franchise Agreement for THAT franchisee using YOUR franchise agreement.
This draft franchise agreement is then sent to the franchisee (with the disclosure document and the Code) at least 14 days before they sign, this gives them chance to take advice (business, legal and financial)
There are Cooling-off rights for a new franchise agreement:
A franchisee has a cooling off period after they enter into a new franchise agreement. Franchisees are entitled to terminate a new franchise agreement within 14 days after entering into the franchise agreement. If a franchisee cools off, they can get some or all their money back.
If a franchisee pays money to the franchisor and then changes their mind about a franchise agreement during the cooling off period, the franchisor must give them back their money within 14 days of being notified by the franchisee.
However, the franchisor can keep the franchisee’s money if:
- this is included in the franchise agreement, and
- the money is for reasonable expenses.
4. Key Facts Sheet: To aid potential franchisees in comprehending the disclosure document, a key facts sheet provides a concise overview of essential information. This condensed version helps you grasp the key points more efficiently.
So, what does the key facts sheet include?
- highlights information that is in the disclosure document
- and helps franchisees navigate and understand the disclosure document.
The disclosure document is usually packed with information about the franchise. Reading the key facts sheet alongside the disclosure document can help potential franchisees to better understand information in their disclosure document.
The franchisor must ensure the key facts sheet reflects the information in the franchisor’s disclosure document.
When must the key facts sheet be given?
Franchisors must give the key facts sheet to potential franchisees, at least 14 days before the franchisee enters into a franchise agreement or pays non-refundable money to the franchisor or the franchisor’s associate.
If a franchisee asks in writing for the disclosure document, the franchisor must give them an up-to-date copy of the key facts sheet as well.
5. Franchising Code of Conduct: As a legal cornerstone, this document sets out the regulations that all franchisors and franchisees must adhere to. Its comprehensive guidelines address a vast range of critical aspects, from pre-contractual disclosures to ongoing operational dynamics. This ensures that franchisees have access to vital information and that franchisors uphold a consistent standard of conduct.
At its core, the Franchising Code of Conduct serves to maintain a level playing field within the franchising landscape. Its comprehensive guidelines address a myriad of critical aspects, ranging from pre-contractual disclosures to ongoing operational dynamics. This ensures that franchisees have access to vital information and that franchisors uphold a consistent standard of conduct.
Key Aspects Encompassed by the Code:
- Pre-Contractual Disclosures: The Code mandates that franchisors provide a detailed disclosure document to potential franchisees, offering insights into the franchisor’s financial standing, business history, and operational expectations. This empowers potential franchisees to make informed decisions based on a comprehensive understanding of the opportunity.
- Dispute Resolution Mechanisms: The Franchising Code of Conduct outlines mechanisms for resolving disputes in a fair and efficient manner. This can include mandatory mediation or alternative dispute resolution methods, ensuring that conflicts are addressed without undue delay or expense.
- Cooling-Off Periods: These allow potential franchisees a specified window to reflect on their commitment after signing the franchise agreement. During this period, franchisees can assess the agreement’s terms, seek advice, and withdraw without incurring undue penalties.
- Ongoing Disclosure Requirements: The Code stipulates that franchisors must provide regular updates and disclosures to franchisees, ensuring that they remain informed about any changes that may impact their business operations.
The Franchising Code of Conduct represents a delicate balance between the interests of franchisors and franchisees. It acknowledges the distinct roles and contributions of both parties, establishing guidelines that promote mutual respect and cooperation. By addressing areas of potential conflict, the Code fosters an environment where disputes are minimised, and solutions are sought collaboratively.
The Rise Legal Advantage: Your Partner in Franchise Compliance
At Rise Legal, we’re not just legal experts – we’re your partners in franchise success. Our team is dedicated to simplifying the intricacies of the Franchising Code of Conduct, ensuring that you not only meet its requirements but also make informed decisions that align with your business aspirations.
With our guidance, you can confidently navigate the world of franchising, secure in the knowledge that you’re equipped with the legal insights needed to flourish. Reach out to us today to embark on a journey that paves the way for a prosperous and compliant franchise future.
Ready to dive into the world of franchising with confidence? Book in for a free exploratory call with Rise Legal for expert guidance tailored to your franchise aspirations.
Disclaimer: This blog post is intended for informational purposes only and should not be considered legal advice. Consult with a qualified commercial lawyer for personalised advice related to your specific circumstances.
Related article: Structuring Your Franchise Business for Success
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