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Whether or not your business is a franchise may seem like a simple question, but the answer is often surprisingly unclear. The distinction lies in whether you are operating as a franchise or under a licence arrangement – both with vastly different regulatory requirements. It’s important to understand that if you are operating under a franchise model you must comply with specific regulation or face serious and expensive consequences.

how to determine if you’re in a licence or a franchise agreement

The Franchising Code of Conduct (Code) has a wide definition of a Franchise Agreement. Many business structures that historically were known or referred to as “sub-contracts”, “licenses”, “agency” or “distribution” agreements may well still nevertheless fall within the ambit of the Franchising Code.

The Code has set key criteria for determining if your business arrangement falls within the definition of a franchise agreement. Significantly, your business may be classified as a franchise, even if you don’t consider yourself to be a franchisor or call the agreement something else.

To determine if you’ve entered into a franchise agreement, ask yourself the following questions:

• Is there a verbal, written or applied agreement between you and the licensee/franchisee?
• Has there been any payment (upfront or ongoing) other than for the provision of goods and services (eg. initial joining fee, royalty, marketing fee or levy)?
• Have you granted the licensee/franchisee permission to carry on a business?
• Is there a system or marketing plan in place that you determine, suggest or control?
• Is the business substantially associated with a specific trademark or symbol?

All of these criteria must be met for an agreement to be classified as a franchise agreement. If you’ve answered yes to all of these questions, you’re most likely operating a franchise system and the Franchising Code of Conduct will apply.

In addition, the Code deems some relationships to be franchises, even if some of the above criteria are not present.  Specifically, a motor vehicle dealership agreement is a franchise.  Motor vehicles include cars, trucks, motor bikes, powered boats, planes, driven ride-on agricultural machinery, construction machinery.

licensors entering franchise territory

Australian courts have also determined there are a few behaviours that push ‘licensors’ into franchise territory, given the system or marketing plan need only be suggested.

Marketing programs:

• providing comprehensive advertising and promotional programs;
• retaining the right to screen and approve promotional materials;
• prohibitions on repackaging of products; and
• requiring mandatory sales training programs.

Operations manuals:

• degree in which the franchisor assumes responsibility of centralised management and uniform standards regarding quality;
• auditing of books;
• inspection of premises; and
• hiring of staff;
• establishing sales quotas and KPIs;
• requiring management training; and
• use of standard forms prescribed by franchisor.

Business plans:

• requiring franchisees to submit a business plan; and
• guiding or requiring details relating to funding and operation of the business to be included in this plan.

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Franchise systems need to be registered on the Franchising Register.  Much more importantly, the Code brings upfront and ongoing disclosure requirements, imposes ongoing conduct obligations and affects some of the terms that can be in the agreement (eg. limited termination, cooling off, transfer rights).

From a potential penalty perspective:

• Failure to appear on the Franchising Register can attract a fine of $133K;
• Non-compliance with the requirements of the Code (eg, not providing a current Disclosure Document) can attract fines of up to $1.1M; and
• Any misrepresentations about whether the Code applies or not can also fall within the general ‘misleading and deceptive conduct’ prohibitions under the Australian Consumer Law (where current fines can be $50M or more).

So, determining if your relationship falls under the Code or not is very important.

If you have any questions about franchise businesses, the Franchising team at Macpherson Kelley are well placed to assist. Please do not hesitate to contact us.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.