How franchising works

Franchising is a business model that generally involves the owner of a pre-established and proven trading name and system of operating (the franchisor) giving a third party (the franchisee) the right to operate a business, or supply goods or services, under a common name and standardised system for an agreed period of time in return for a fee.

Franchising can provide a franchisor and franchisee with opportunities that may not exist without the existence of, and investment from, the other. However, there are significant commercial risks to consider and strict laws in place to protect the rights of franchisees and franchisors known as the Franchising of Conduct (Franchising Code).

Whilst some products and services delivered “under licence” provide similar commercial rights – eg agencies, dealerships, and distribution and manufacturing arrangements – they may, or may not, fall within the definition of a “franchise” under the Franchising Code.

Accordingly, it is important that anyone looking at franchising (or similar arrangements) have a suitably qualified / experienced lawyer review the arrangement early to ensure their interests are protected and, where necessary, complies with the Franchising Code.

Franchising Code

Franchising is a complex area of law governed by the Franchising Code and touches on a range of interconnecting legal matters including contracting, leasing, licensing and compliance.

The Franchising Code is a mandatory industry code that regulates the conduct of franchising participants. The Franchising Code is regularly updated to deal with the ever changing business environment.

For example, there were a number of significant changes to the Franchising Code rolled out in 2021 to address perceived imbalances between franchisors and franchisees. The key changes included:

•  increased disclosure obligations;
•  limit on capital expenditure;
•  strengthened dispute resolution mechanisms;
•  extended cooling-off periods; and
•  more lenient procedures for terminating franchise agreements.

We discuss these changes, and what they mean for franchisors and franchisees, in more detail here.

Franchising agreement

Under the Franchising Code, a franchise can exist with or without a written agreement and irrespective of whether you call it a franchise or not.  A written agreement should be used to formalise the legal relationship between a franchisor and franchisee to reduce the chances of disputes arising in the future. As with any other business arrangement, the agreement should set out the rights and obligations of each party, including:

•  the franchisee’s obligations in relation to performance, payments, marketing, reporting, training, supply, territory etc.; and
•  the franchisor’s obligations in relation to supply of equipment / products / services, marketing, assistance and support, client leads etc.

There are stringent disclosure requirements a franchisor must comply with before entering into franchise agreement (whether that agreement is written, oral or implied) and considerable fines and penalties for failure to do so…

How we help our clients

Mahoneys have a dedicated team of lawyers with significant experience in franchising. We have experience in acting for both franchisors and franchisees. Our lawyers have acted for various franchisors and numerous franchisees  .

Key services we provide our franchising clients include:

•  establishing new franchises including drafting documents and systems to ensure you comply with the Franchising Code;
•   buying and selling franchised businesses;
•   assessing franchises, franchisors and franchisees;
•   reviewing, negotiating and documenting franchise arrangements;
•   amending, transferring and terminating franchise agreements;
•  advising on the franchisor’s / franchisee’s rights and obligations;
•  advising on compliance with franchise agreement / Franchising Code;
•   resolving disputes between the franchisor and the franchisee; and
•   general franchising advice.