Most of us have probably entertained the idea of starting a business at some stage of our lives, but may have been daunted by the various requirements that a person needs to undertake when launching a business. For those of us who still harbour a desire to run a business, but wish for some sort of security, may have considered starting a franchise as a potential option for starting a business. Anyone who enters into a franchise agreement with a franchisor, will have the ability to use the name of an established entity, and to enjoy all of the associated benefits that may be derived from opening up a franchise, such as a McDonald’s restaurant for example. However, anyone who wants to start their business dreams via a franchise should be aware of the laws, as well as the requirements, and potential risks associated with starting a franchise.
What is a franchise?
A franchise arrangement is when a franchisor grants a franchisee the licence to use, sell, and develop a particular product, service or brand. Most of us will probably have the image that a franchise as the opening of a fast-food restaurant. But franchises may also include manufacturing a soft drink or the running of a petrol station, are another example of a viable franchise option.
Although, a franchise licence allows the franchisee to use any intellectual property owned by the franchisor, it’s still important to note that under most franchise licensing terms, the franchisee must also promise to operate the franchise in any uniform manner that the franchisor mandates, as well as implementing any procedural requirements or processes that the franchisor deems essential.
When the franchisor permits a franchisee a right to the use, or the selling of a brand or product, the licence usually involves a contractual relationship in which the franchisor promises to maintain the franchisee’s business through:
- advertising and marketing
- technical, product, training and support
- providing expertise and knowledge of the nature of the brand or product
Anyone who starts a franchise under the guise of a recognised brand, is able to rely on the advantage that operating a well-known franchise allows the person to utilise the brand awareness, market penetration, advertising, and marketing strength of the franchisor’s brand or product.
However, despite many advantages, a franchisee may find their licence terminated if they don’t meet the standards expected from the franchisor, or that a franchisee may discover that they are locked into a financial agreement that may have unfavourable terms. Additionally, another common issue for a franchisee is that they may be of the belief that just because they are conducting a business under the umbrella of a recognised brand, there must be a minimum level of support exhibited from the franchisor – which sadly, may not always be the case for all franchisees.
The main legislative instruments that govern franchisees are the:
The obligations of the franchisor to the franchisee
Although the Code addresses many requirements that a franchisor must adhere to, the following are perhaps the most important actions that a franchisor must undertake:
- the franchisee must receive from a franchisor a copy of the Code
- the franchisee must receive information on the agreement, and how it is to be executed
- details of the franchisee’s rights and obligations in the use of intellectual property
- whether or not the franchise is located in an exclusive or non-exclusive territory
- any important conditions of financial arrangements between the franchisor which may be offered to the franchisee
- the providing to the franchisee with any necessary disclosure documents, or court proceedings which are being undertaken against the franchisor.
The rights of a franchisee
The general rights provided under the Code for a franchisee, is that they are permitted to form an association, and are further allowed to associate with other franchisees if they choose. Furthermore, franchisees are also permitted to transfer the franchise to another party without the franchisor unreasonably withholding consent.
Finally, the franchisee is also allowed the right to terminate the agreement within seven days, or within seven days of paying any necessary money under the terms of the agreement – whichever action transpires first.
The Code requires that there is a dispute resolution process that must be in place for any problems that may arise between the franchisor and franchisee. Initially, the parties should seek to redress their problems amongst themselves. However, after 21 days, if there is still no resolution in regards to a dispute, then a mediator can be appointed to resolve the outstanding issues.
Readers should be aware, that the moment a party to the dispute requests the intervention of a mediator, the Code makes it mandatory that the parties to the dispute must attend all mediation sessions, and that any failure for a genuine attempt to resolve the dispute by either party, will constitute a breach under the Code.
In the event that mediation cannot resolve the dispute, the mediator can issue a certificate of termination, and legal remedy may be sought after any unsuccessful attempts at mediation.
Starting a franchise can be exciting, and yet, complicated. There are many requirements and obligations that a franchisee must fulfil, and our Accredited Specialist Business Lawyers can assist.