What is a franchise?

14 April 2009 Topics: Franchising

A franchise arrangement provides one party with the right to carry on a business in Australia under a marketing plan which is substantially controlled by another party.

Put more simply, a franchise arrangement is a relationship between parties whereby one party supplies the “identity” of a business and the other uses this “identity” to conduct their own business.

The person supplying “identity” of a business is known as the franchisor.  The other party is known as the franchisee.

The “identity” of a business can include registered and unregistered business and trade names, trade marks, logos and service marks, advertising materials, business systems, “know-how” and goodwill.

Well known franchises in Australia are Subway, McDonalds, Dominos and many clothing and accessories stores.

Franchises in Australia are governed by a Code – Franchising Code of Conduct – found in the Trade Practices Act and are highly regulated.  Breaches of the Code carry substantial penalties.

The Code is continually being amended therefore it is imperative for people involved in franchises to be fully informed of the current requirements.

How to spot a franchise

Not all franchise arrangements are called franchises and it is common for parties to have a franchise arrangement in existence and not realise.

It is important to be aware of the sign posts of a franchise to avoid inadvertently breaching the Code.

Some sign posts to spot a franchise are:

  • licensing of goods or services;
  • more than one outlet of a business sustainably or materially associated with similar advertising symbols owned or licensed by another person;
  • payments being made by one party to another in connection with business systems and/or intellectual property.

Consequences for non-compliance

If a person enters into a franchise arrangement with another person without complying with the Code, the person may be the subject of enforcement proceedings by ACCC, have a fine imposed on them, have the agreement terminated and/or be ordered to refund any fees paid to the payee.

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