The business of a franchisor involves franchisees investing their own capital, working hard in the franchised businesses and making payments to the franchisor, usually including both initial franchise fees and an ongoing percentage of turnover. Accordingly, the franchisor receives payments for a business in which it has not had to invest, and does not have to run. Many franchisors have become very successful in conducting this business model.

However, establishing and operating a successful business as a franchisor is difficult, and many fail.

See Establishing and managing a franchise system.

A key element in conducting a successful franchised network is for all of the franchised businesses to appear to customers to be part of the network. This enables each franchised businesses to attract business based on the reputation of the network, rather than having to build up their own individual goodwill.

To achieve that, the franchisor must supply each business with its trade mark and branding. This often extends to the colour scheme of the business premises the uniforms of the staff and the appearance on marketing and other documents, such as menus and price lists.

Having a well-known trade mark and branding associated with goods or services for which there is a demand is the basis of a successful franchisor business.

The key documents required to conduct business as a franchisor are the operating procedure manual referred to below, the disclosure document (see Disclosure requirements) and the franchise agreement (see Drafting the franchise agreement and related documents), as well as contracts with key suppliers.

When running a normal business, management gives instructions to the staff as to how they should do their jobs, and how the business should be conducted. However, the franchisor has no way of directing the franchisee and its staff how to do their jobs and operate the business otherwise than through the franchisor’s contractual relationship with the franchisee. Accordingly, franchise agreements almost always contain provisions directing franchisees to comply with the franchisor’s manual.

It is important for franchisors to draft the manual in as much detail as possible, to ensure that each of the franchised businesses is conducted in the same way, and up to the standards required by the franchisor. The manual should cover not only how the business is conducted, but what goods and services are to be acquired from specified suppliers.

No matter how well the franchisor runs their business, and no matter how detailed is the procedure manual, the success of each individual franchised business is dependent on the individual franchisee. A badly conducted franchised business can damage the reputation and value of the whole network. This is even worse if the franchisee goes broke, or takes proceedings against the franchisor.

Accordingly, operating a successful business as a franchisor involves carefully choosing suitable franchisees, rather than simply appointing franchisees for the sake of receiving their initial franchise fees. Choosing the right franchisees involves interviewing them and checking their documentation to establish that they have what is necessary in terms of:

• financial resources;

• physical and intellectual abilities to run the business; and

• background and experience.

The franchise agreement is a very important document, as it governs the close working relationship between the franchisor and franchisee for years into the future.

All of the franchise agreements used by the franchisor should be identical, to facilitate management of the franchise system. For this reason, a fair, balanced document is desirable to avoid the franchisees’ solicitors requiring amendments.

The franchise agreement will be frequently referred to by the franchisor in its dealings with franchisees. Accordingly, it is best to draft the franchise agreement in simple, straightforward terms, avoiding long sentences and legal jargon.

Not too much reliance should be placed on precedents. Rather, the document should be drafted to meet the specific requirements of the franchised business, and the franchisor.

The franchise agreement must be drafted so as to meet the requirements of the Franchising Code of Conduct (Sch 1 , Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth)). This is not difficult, but requires compliance with the Code. Specific provisions of the Code are as follows:

• Good Faith. Clause 6 of the Code provides that a franchise agreement must not contain a clause that limits or excludes the obligation to act in good faith.

• Jurisdiction. Clause 21 of the Code provides that a franchise agreement must not contain a clause that requires a franchisee to litigate or mediate in a different state or overseas.

• Costs. Clause 22 of the Code provides that a franchise agreement must not contain a clause that requires the franchisee to pay to the franchisor costs incurred by the franchisor in relation to settling a dispute under the agreement.

• Cooling off period. Clause 26 of the Code requires a seven-day cooling off period. While the Code does not specifically state that this should appear in the franchise agreement, it is desirable that it should, so that each party clearly knows where they stand.

• Association of franchisees. Clause 33 of the Code prohibits any provision in the franchise agreement preventing franchisees from forming or joining an association of franchisees.

• Release from liability. Clause 20 of the Code bans provisions which give the franchisor a blanket release from liability.

• Marketing and cooperative funds. Clause 31 of the Code has requirements to ensure that marketing funds are not misspent.

• Dispute resolution. Clause 34 of the Code requires the franchise agreement to include a complaint handling procedure. See Dispute resolution.

See Drafting the franchise agreement.