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Definition of a franchise

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 Franchise 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 Franchise 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 Franchise 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.

 

A Franchise Agreement is an agreement:

(a)  that takes the form, in whole or part, of any of the following:

(i)      a written agreement;

(ii)     an oral agreement;

(iii)    an implied agreement; and

(b)  in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and

 

(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:

(i)      owner, used or licensed by the franchisor or an associate of the franchisor;

         or

(ii)     specified by the franchisor or an associate or the franchisor; and

(d) under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:

(i)      an initial capital investment fee; or

(ii)     a payment for goods or services; or

(iii)    a fee based on a percentage of gross or net income whether or not called a

        royalty or franchise service fee; or

(iv)    a training  fee or training school fee; but excluding:

(v)     payment for goods and services at or below their usual wholesale price; or

(vi)    repayment by the franchisee of a loan from the franchisor;

(vii)   payment of the usual wholesale price for goods taken on consignment; or

(viii)  payment of market value for purchase or lease of real property, fixtures,

        equipment or supplies needed to start buisness or to continue business

        under the franchise agreement.

 

© McDonnell, McPhee & Associates  2008 - 2009

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