For the past 40 years franchising, as an approach to retailing of products and services, has been growing in Australia.
It has had a major impact in allowing the “little people” of the business world to compete with the large corporates of retailing in this country. There are about 65,000 franchises in Australia employing over half a million people, increasingly holding permanent positions. It is estimated that franchising represents $125 billion in the Australian economy.
Franchising – what is it?
Franchising has been described by the Franchise Council of Australia (FCA) as “a way of doing business”. It is largely about marketing products and services. It is described by the International Franchise Association as “a continuing relationship in which the Franchisor provides a licensed privilege to do business, plus assistance in organising training, merchandising and management, in return for a consideration from the Franchisee”.
As the FCA describes the relationship between Franchisor and Franchisee: “It provides small business … with the tools of big business”. It is a way for someone who has developed a successful small business to expand it considerably as a Franchisor by incorporating the human and financial capital of individuals and small companies who take on the role of Franchisee. By design, it is a win-win situation with both parties benefiting from each other. However it is not a commercial marriage of equals. The Franchisor remains dominant so as to keep control over key areas of business activity and the standards of delivery.
Some advantages and disadvantages
For the Franchisor, the advantages include a financial injection plus the drive and energy of a Franchisee seeking success. The Franchisee gets access to a proven business and business model as well as training, central management support, advertising, bulk buying and more favourable finance rates.
The Franchisor may be disadvantaged if there is a bad Franchisee, not adhering to the Franchise Agreement, who can threaten the business.
The major disadvantages fall to the Franchisee. Probably the major issue is the limited ability of the Franchisee to judge the quality of the Franchisor prior to signing up for multiple years. It could be, as Champion Legal discovered in a recent matter, that the Franchisor has professional documentation and little else as the basis for selling franchises. The Franchisee is going to be disappointed on an ongoing basis. Yet the legal document may make any comeback extremely difficult. It may be nearly impossible to discern from the document just what the Franchisee can demand. Meanwhile, fees and royalties are payable, the Franchisee can become frustrated and want to just walk away from the franchise.
Added to this, as Champion has been informed, is that the Franchisor may engage in tactics to frustrate the sale and transfer of a franchise, lessening its market value and diminishing the opportunity to sell it on.
These and other disadvantages are covered on the FCA website. The risk of having these problems is reduced through a careful due diligence of the potential franchise and by getting good legal advice.
Legal Regulation of Franchising
Regulation of the vast franchising industry in Australia is ensured through the Commonwealth Trade Practices Act, the Franchising Code of Conduct as well as the common law. The relationship between the law and the industry is evolving.
In July 2007 the NSW Court of Appeal reinforced Franchisees’ rights in Ketchell v Master Education Services where it held that where a Franchchisor does not have written acknowledgement that a Franchisee has received, read and had an opportunity to understand the Disclosure Document, the franchise agreement is unlawful and unenforceable. This decision is on appeal to the High Court in 2008. It puts the onus squarely on the Franchisor to ensure that a potential Franchisee knows what he or she is taking on.
The best investment for any prospective Franchisee is in professional help before entering the franchise. Talk to an accountant with a specialist knowledge of the industry. Retain a lawyer to check out your Franchise Agreement and disclosure documentation.
Champion Legal handles franchise matters regularly and can assist to protect your legal interests as Franchisor or Franchisee upholding the genuine win-win nature of franchising.
DR BERNARD CAREY
Special Counsel
