The FOUR characteristics of a franchise

Written on the 3rd of October 2009 by Robert Duncan

What is the real definition of a franchise? and
what are the advantages of having a franchise over any other form of business model?

Many people think that a franchise is simply defined by its logo and the system under which it operates. This is a very narrow and dangerous view.
In Australia under the Trade Practices Act 1974 there are 4 points that need to be present for a business to be classified as a franchise.

They are as follows and marked (a) to (d )

A franchise is any 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) owned, 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; or
(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 business or to continue business under the franchise agreement.

The advantages of having a franchise are of paramount importance when it comes to business security. They are;

A franchisor must ;
• before signing up a prospective franchisee provide them with a complete business disclosure document at least 14 days prior to signing or the contract .
• The franchisor must obtain from the prospective franchisee a statement from an independent legal or financial advisor that certifies that the prospective franchise purchaser has been given independent legal advice.
• The franchisor cannot close or resume the franchise territory from the franchisee for any breach of the agreement without advising the franchisee in writing and giving the franchisee reasonable time to rectify the breach.
• The franchisor must not instruct or induce the franchisee not to enter into an association with other franchisees.
• The franchisor must not require or induce the franchisee to waive any liability of the franchisor towards the franchisee.
• If there is a marketing agreement or fund the franchisor must provide audited figures of that fund within four months of the end of the financial year.
• The franchisor must have a dispute resolution (e.g. mediation) in place and attempt to resolve the dispute before expensive litigation is undertaken.

There are many unscrupulous business model owners who advertise their business model as a franchise but then manipulate their contracts in such a way as to avoid their obligations under the Franchise Code of Conduct. Before you enter into a contract to purchase anything that looks like it may be a franchise you should seek legal advice. The relatively low cost to take this precaution could save you hunderds if not thousands of dollars and lots of heart ache in the event of a future dispute.