Franchising is a popular path to retail ownership in Australia – brands like Boost Juice, The Coffee Club, Bed Bath N' Table, and thousands of others operate under the Franchising Code of Conduct (Competition and Consumer (Industry Codes – Franchising) Regulation 2014).
However, a franchise agreement is heavily weighted toward the franchisor. This article explains the key terms, your legal rights under the Code, and red flags to watch for before signing.
What Makes Franchising Different from a Standard Retail Lease?
In a franchise, you pay for the right to use the franchisor's brand, systems, and trademarks.
You are not an independent retailer in the same sense – the franchisor controls marketing, suppliers, store layout, and even pricing in some cases.
The franchise agreement sits alongside your lease (usually the franchisor is either the landlord or has approval rights over your lease).
- Initial franchise fee: $30,000–$100,000+ (varies greatly).
- Ongoing royalties: 4–10% of gross sales (not profit).
- Marketing levy: 1–4% of gross sales (may be pooled with other franchisees).
- Term: Typically 5 years, with 1–2 renewal options.
Critical: Most franchise agreements are not negotiable. The franchisor offers a 'take it or leave it' standard form contract. Your leverage is only before paying the initial fee.
Your Rights Under the Franchising Code of Conduct
The Franchising Code (mandatory for all franchise systems operating in Australia) gives you several protections:
- Disclosure document: Must be provided at least 14 days before you sign. Includes financial statements of the franchisor (last 2 years), list of current and former franchisees (with contact details), and details of any litigation against the franchisor.
- Key facts sheet: A concise summary (no more than 4 pages) of the most important terms – costs, termination rights, renewal, and dispute resolution.
- Right to terminate without penalty: Within 7 days of signing (cooling-off period).
- Good faith obligation: Both parties must act in good faith (though Australian courts interpret this narrowly – no duty to put your profit above the franchisor's system).
- Dispute resolution: Mandatory mediation before any court proceedings. Mediator appointed by the Australian Disputes Centre.
Key Clauses to Scrutinise
Site and Lease Control
Many franchisors either own the premises or have a head lease. They then sublease to you.
This gives them enormous power – they can evict you for breaching the franchise agreement, even if you pay rent on time.
Restraint of Trade (Post-Termination)
Most franchise agreements forbid you from opening a similar business within a certain radius (e.g., 5km) for 1–3 years after termination.
This can make your business unsellable. The Code does not prohibit this – but courts may void it if the radius or duration is unreasonable.
Marketing Fund Audits
Franchisors collect marketing levies from all franchisees but are not always transparent about spending.
Under the Code, you have the right to an annual financial statement of the marketing fund.
If you suspect misuse, you can request an independent audit (at your cost initially).
Renewal Conditions
Your franchise agreement probably says renewal is at the franchisor's discretion. To renew, you may be required to undertake a costly 'refresh' or 'refurbishment' (e.g., $100,000 to install new signage, kitchen equipment, or POS system).
Get an estimate of future refurbishment costs before signing.
Red flags: Franchisor refuses to let you speak to existing franchisees; disclosure document shows more than 20% of franchisees exited in the last 3 years; no financial statements provided; or the agreement contains a 'unilateral variation' clause (franchisor can change any term without consent).
Due Diligence Checklist Before Signing
- Speak to at least 5 current franchisees (obtain contact details from disclosure document). Ask: 'Are you profitable after royalties?' 'Does the franchisor provide promised support?' 'Have you had disputes?'
- Speak to 2 former franchisees – why did they leave? Did they make money?
- Obtain legal advice from a solicitor specialising in franchise law (not a general commercial solicitor).
- Obtain financial advice on the cash flow projections – many franchisors present optimistic figures based on 'top performing' stores.
- Check the Franchise Council of Australia (FCA) for accreditation – not mandatory but indicates good practice.
Termination and Exit
If you want to sell your franchise business, the franchisor has the right to approve the new buyer.
They cannot unreasonably withhold approval, but 'reasonable' includes requiring the buyer to meet minimum financial or training requirements.
Also, under the Code, you have a right to 'transfer of franchise' – but the franchisor may charge a transfer fee (capped at reasonable costs).
In summary, franchising can be a successful model, but you are buying a job as much as a business.
Do not let enthusiasm override due diligence. Read the disclosure document cover to cover, talk to existing franchisees, and pay for specialist legal and accounting advice.