Are you a franchise or not?
3 mins reading time
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 has a wide definition of a Franchise Agreement. Many business structures that historically were known or referred to as “sub-contracts”, “licences”, “agency” or “distribution” agreements may well still nevertheless fall within the ambit of the Franchising Code.
The ACCC 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!
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) for the provision of goods and services?
- Have you granted the licensee/franchisee permission to carry on a business?
- Is there a substantial system or marketing plan in place that you determined, suggested or control?
- Is your 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.
licensors entering franchise territory
Australian courts have also determined there are a few behaviours that push ‘licensors’ into franchise territory.
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:
- suggestions for retail prices charged for products;
- 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 the 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.
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.
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Are you a franchise or not?
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 has a wide definition of a Franchise Agreement. Many business structures that historically were known or referred to as “sub-contracts”, “licences”, “agency” or “distribution” agreements may well still nevertheless fall within the ambit of the Franchising Code.
The ACCC 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!
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) for the provision of goods and services?
- Have you granted the licensee/franchisee permission to carry on a business?
- Is there a substantial system or marketing plan in place that you determined, suggested or control?
- Is your 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.
licensors entering franchise territory
Australian courts have also determined there are a few behaviours that push ‘licensors’ into franchise territory.
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:
- suggestions for retail prices charged for products;
- 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 the 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.
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.