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FRANCHISOR

FRANCHISOR

ASSESSING WHETHER YOUR BUSINESS IS SUITABLE FOR FRANCHISING

Before leaping into franchising your business, it is important to ascertain whether it is the type of business or concept suitable for franchising. Alternatively, while it may be the right type of business, it may not yet be at a stage where franchising is appropriate. As franchising essentially involves the marketing of a name or particular product, it is crucial that the name or product has some recognition in the market place.

In determining whether your business is suitable for franchising you should consider the following issues:

  • Does the product or service you offer have a unique advantage over other products or services in the marketplace?
  • Has the product or service been proved in the marketplace?
  • Will your product or service be distributed by businesses using a uniform format and marketing arrangement which you wish to substantially control? Alternatively distribution can be by way of agency where you have no say in the way they are sold. This is unlikely to constitute a franchise.
  • Will the product or service have some longevity in the marketplace or will it become obsolete?
  • Is the product or service in a growth area?
  • Is there is a stable source of supply of the product or service (if applicable)?
  • Is the product or service related to some identifiable trade mark or logo that will have some longevity?
  • Are you prepared to provide significant training and support to franchisees?

You should also consider setting up a pilot program for testing the product and marketing system. This may even include setting up a pilot company-owned store. This is particularly the case where the product may have had some success overseas and is being newly introduced to the Australian market. Overseas success does not guarantee success in Australia.  

THE FRANCHISING CODE OF CONDUCT

The Franchising Code of Conduct (the Code) came into force on 1 July 1998 and applies to all "franchise agreements". The definition is very wide and covers most common franchising arrangements.

The Code requires the following:

Disclosure

A franchisor must provide a disclosure document to a prospective franchisee at least 14 days before they enter into the franchise agreement or pay non‑fundable money under the agreement.  The disclosure document must be updated annually and within 60 days of a franchisor becoming aware of a materially relevant fact.

A franchisor must provide an updated copy of the disclosure document within 14 days to a franchisee if the franchisee makes a written request.

The franchisee must also provide a shorter form of disclosure document to a potential purchaser of its franchise.

The information required to be included in the disclosure document is set out in the Code.

You should ensure that any potential franchisee is provided with a copy of the disclosure document and the franchise agreement as well as a copy of the Code well before entering into the franchise agreement (the Code stipulates it must be at least 14 days before).

Terms of the agreement

The Code sets out certain conditions which govern the terms of the agreement including a procedure for assignment, termination and dispute resolution. It also requires the franchisor to provide a seven day cooling off period so that if the franchisee changes its mind within seven days of signing the franchise agreement, it can get out of the agreement.

Accounting requirements

The Code requires the provision of advertising and marketing accounts if advertising levies are payable by the franchisee. In addition, the disclosure document must contain either a statement of solvency from the directors or the franchisor's accounts for the last two years. 

HOW TO PROTECT YOUR INTELLECTUAL PROPERTY RIGHTS

Intellectual property means the right to use certain intangible items such as the business name, trade marks, logos, colour schemes, packaging, computer software, patents, designs and trade secrets. In any franchise agreement you should ensure that the franchisor's ownership of these rights is protected so that franchisees cannot use them in an unauthorised way. Some intellectual property rights are capable of specific legal protection by registration. Trade marks, business names, patents and designs can all be registered.

Trade Marks

A trade mark is a distinctive sign that is associated with your business. It can be a name, logo, sound or smell. It can incorporate particular colours. In order to be protected it should be registered at the Trade Mark Registry.

For a trade mark to be registered a number of conditions need to be fulfilled. The types of marks that can be registered as trade marks are very broad. There are certain types of marks which are not registrable.

In order to register a trade mark, an application must be made to the Office of Trade Marks, a division of IP Australia. When applying, the applicant must provide certain information as well as a registration fee. The registration period is 10 years and may be renewed indefinitely.

Once a trade mark is registered, the person or business in whose name the trade mark is registered has exclusive right to use the trade mark. The trade mark owner may permit other people to use the trade mark with their consent and may set conditions on this use. Franchisees are an example of people that you would wish to authorise to use your trade mark. You should ensure that any authorisation is clearly set out in the franchise agreement or some other agreement in writing.

Business Names

A business name is the name under which your business operates. Although a business operator is required to register its business name on a State by State basis, the registration of a business name does not give you ownership of that name. If you wish to protect a particular name the best way is by registering it as a trade mark.

The Australian Securities and Investments Commission (ASIC) maintains a national business names register. However, business names are administered by each state and territory government under state or territory law. It is necessary to register the business name in each State or Territory in which the business is to be. For a business name to be registrable certain conditions need to be fulfilled such as the uniqueness of the name.

If you wish to register a business name your first step is to reserve the name with the ASIC. During the reservation period an application will then need to be lodged. The application for registration of a business name must provide details of the name to be registered, the nature of the business and the owner of the business name. A fee is also payable. The registration will last for a number of years depending on which state it is registered in. If you wish to carry on business throughout Australia you should ensure your business name is registered in each state and territory of Australia.

Patents

A patent is the right conferred by letters patent of the exclusive use and benefit of a new invention or process. A process or invention can only be patented if it is not already in the public domain. In order to ensure that the person who first developed the patent has the right to register the patent, he or she must have adequate documentation to show the research and development done and must be able to produce the specifications.

In order to register a patent there must be a provisional application lodged with the Patents Office. Details must be provided of the type of invention and its inventiveness. Registration of patents is generally done by specially qualified patent attorneys.

Designs

Designs developed by a person may be registered if they are distinctive or capable of becoming distinctive and have not been registered by another party. The method of registration is the same as for trade marks.

For a design to be registrable the features of the design must serve a functional purpose. This means that an item's design refers to its structure and how that structure affects the way it works and does not refer to mere decoration on an item.

Furthermore, a design must be new or original which means that it cannot simply be an adaptation of an existing design but must have new creative elements.

In order for a design to be registered, an application must be lodged with the appropriate government authority. For further information regarding registration and the use of designs, please see the designs section of AussieLegal.

Other intellectual property rights such as copyright or trade secrets should be protected by specific reference in the franchise agreement. In addition, confidential information should also be protected by the franchise agreement. 

QUESTIONS TO ASK YOUR SOLICITOR, ACCOUNTANT AND BUSINESS ADVISER WHEN SETTING UP A FRANCHISE SYSTEM

The following are a number of issues that should be contemplated when setting up your franchise system and drafting documentation. You should address these issues with your solicitor, accountant or business adviser to ensure you are adequately protected.

Is my intellectual property adequately protected? Is everything registered that needs to be and are they all covered in the franchise agreement ?

What sort of structure should I use to set up my franchise? Should I have master franchisees to grant franchises in each State of Australia and internationally?

Do I need to seek ACCC authorisation or notification in relation to obligations of the franchisee to obtain products from a particular supplier?

Should I set up a pilot store?

Should I offer finance to franchisees?

Should I set up an advertising fund?

Is the industry in which I want to operate a franchise governed by any other legislation or industry codes of conduct?

Do I have sufficient finance to set up a franchise operation?

Would I be better off using an agency format rather than a franchise format?  

TERMINATION OF A FRANCHISE

The terms of the franchise agreement will set out how the agreement may be terminated by either party.

The parties must also have regard to the Code which requires a franchisor to provide reasonable written notice of the breach of the agreement to the franchisee and an opportunity to remedy the breach, before it can terminate the agreement. The franchise agreement may permit the franchisor to terminate the agreement at any time for any reason whatsoever on the condition that the franchisor provides the franchisee with reasonable written notice and reasons for the termination.

In some circumstances the franchisor does not have to provide any specific period of notice of termination. These are when the franchisee:

  • no longer holds a licence that the franchisee must hold to carry on the franchised business;
  • becomes bankrupt, insolvent under administration or an externally administered body corporate;
  • voluntarily abandons the franchised business or the franchise relationship;
  • is convicted of a serious offence;
  • operates the franchise business in a way that endangers public health or safety;
  • is fraudulent in connection with the operation of the franchised business; or
  • agrees to termination of the franchise agreement.

SELLING A FRANCHISE

Under the Code a franchisor cannot unreasonably withhold its consent to the assignment or transfer of a franchise by a franchisee to a purchaser. The Code sets out a procedure for assignment and the factors that a franchisor may take into account when deciding to provide its consent or not.

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