The term “franchise” can have many meanings, but is usually used to mean the right to run a business under a licence from the owner of a valuable trade mark, including the right to use the business systems of the franchisor, and to use the same suppliers and provide the same products as the franchisor.

Franchises are governed by the Franchising Code of Conduct (the Code) which was enacted under the Competition and Consumer Act 2010 (Cth). Clause 5 of the Code contains a definition of “franchise agreement”. This captures any agreement to carry on business using a system or marketing plan suggested by the franchisor, using a trade mark or logo licensed by the franchisor and involving payment of money to the franchisor. The definition is in very wide terms, designed to defeat any attempts to take an arrangement that would otherwise be a franchise outside the definition.

The definition specifically includes motor vehicle dealerships which might otherwise be outside the definition, as car manufacturers do not always provide the system or marketing plan used by dealers.

The definition in cl 5 of the Code is so wide that it would capture relationships which are not generally considered to be franchises. Accordingly, the Code specifically excludes the following relationships:

• employer/employee relationships;

• landlord/tenant relationships;

• mortgagor/mortgagee relationships; and

• lender/borrower relationships.

While these relationships do not, of themselves, constitute franchise agreements, parties in those relationships may still be franchisors and franchisees. For example, a franchisee may be the tenant of a franchisor.

Often, an international franchisor will enter into an agreement with an Australian company to operate its business in Australia, and grant sub franchises. Those agreements are known as master franchises. If a company grants only one master franchise in Australia, it is not subject to the Code.

The definition of “franchise agreement” under the Code specifically excludes businesses which were already operating, then commenced conducting what would otherwise be a franchised business but which constitutes less than 20 per cent of its turnover. If that turnover subsequently exceeds 20 per cent for 3 consecutive years, then the Code will apply but only when the franchisee so informs the franchisor.

Some franchisors use elaborate structures to try to avoid their business model being caught by the definition of “franchise agreement” in the Code. However, the definition is so comprehensive that these attempts are almost always unsuccessful.

See What is a franchise?

If a business involves a network of branches, it can be built much faster and grow to be much larger than if the franchisor had to provide its own capital, staff and management for each branch. In effect, the franchisees provide the capital, staff and management, at their cost and their risk, to grow the franchisor’s business. In this way, the franchisor receives money from the franchised businesses both as initial franchise fees and ongoing payments, without risking its own capital.

Essential requirements to establish a successful business as a franchisor include:

• a brand or trade mark sufficiently well known to have the power to attract customers;

• a business system which can be used as a template to reproduce substantially identical businesses in different locations, such as a restaurant selling specific types of food under a well-known trade mark. However, service businesses may also be successfully franchised if they have a well-known brand and a system for attracting customers and providing services; and

• the resources to facilitate the establishment and conduct the franchised businesses, and to ensure that they are conducted successfully under the franchisor’s direction. A badly run franchised business can seriously damage the value of the franchisor’s brand.

Running a business as a franchisee is ideal for a person with the capital and enthusiasm to run their own business, but without the experience and knowledge to do so. For example, a person retrenched from their employment with a lump sum, who is too old to find new employment, but too young to retire.

However, there are many unscrupulous companies ready to take franchise fees, but without providing a viable business. A potential franchisee should:

• take a franchise only if associated with a trade mark sufficiently well known to attract business; and

• check carefully that the business will achieve a reasonable return on investment. The figures supplied by the franchisor are a good starting point. However, it is essential also to communicate with existing franchisees, whose details are included in disclosure documents which the franchisor is obliged to provide before a franchise agreement becomes legally binding.

See The franchising business model.