Definition of a franchise


We do lots of work for franchised businesses, including acting for people who want to buy, sell or start up a franchised business. This is not surprising considering the number of businesses in Australia that are franchised businesses. In fact, Australia has been coined the ‘franchise capital of the world’ because it has over three times the number of franchise systems per capita than the United States. With so many franchised businesses contributing hundreds of billions of dollars to the Australian economy it is sometimes surprising how often people do not know what a franchised business is.

We have had clients come to us with plans to expand their business, not fully realizing that the way they are intending to grow their business will create a franchised business system. Other clients have come to us with plans to purchase a business that is not being marketed as a franchised business, but which on examination, clearly falls within the definition of a franchised business contained in the Franchising Code of Conduct. These clients are then usually quite stunned by the significant legal and compliance ramification that result from being classified as a franchise business.
So what exactly is a franchised business? The main things that determines the existence of a franchised business is the existence of a “franchise agreement”.
Generally, the Franchising Code of Conduct defines a franchise agreement as an agreement whereby the “franchisor” grants to the “franchisee” the right to carry on the business of offering, supplying or distributing goods or services under a system or marketing plan substantially determined, controlled or suggested by the franchisor, AND under which the business will be associated with a trade mark or commercial symbol owned or specified by the franchisor, AND under which the franchisee pays or agrees to pay the franchisor an amount of money, whether as a licence fee, royalty, or for goods or services.
You might consider the above description of a franchise agreement to be quite specific. You may think that it should be easy to determine the existence of a franchise agreement or a franchised business. However, some agreements people enter into may not be so clear cut.
For instance, the agreement does not even have to be in writing – it can be an oral agreement or an implied agreement.  Also, the agreement does not necessarily have to refer to a franchisor or a franchisee, or even a franchise. Many people think of royalty payments when they think of a franchised business. However, the money to be paid by the franchisee to the franchisor can be referred to as many different things in a franchise agreement. It may be referred to as a “training fee”, a License fee” or a “service fee”.
All franchised business must comply with the Franchising Code of Conduct. If you are the franchisor you will have serious disclosure obligations to comply with. These obligations will apply even if you did not realize that you were a franchisor. So, if you “license” another person to operate a business, or have accepted a license or other contract to operate a business, and you use a trade mark, logo or commercial symbol, you should definitely check to see if what you are really doing is operating a franchised business.
If you would like more information, please do not hesitate to contact Townsends Business & Corporate Lawyers on (02) 8296 6222.