FranchisingSmall Business

Is Your Business a Licence or a Franchise?

Franchising in Australia is regulated by the Franchising Code of Conduct (“the Code”). In 2015, the Australian Competition and Consumer Commission (“ACCC”) was given greater audit and investigative powers and can now issue infringement notices of $9,000 per infringement, as well as seek orders for penalties of up to $54,000 for non-compliance with the Code.

The ACCC recently said that it would be actively monitoring the franchising industry to ensure compliance with the Code. Therefore, it is more important than ever to ensure that, if applicable, the Code is complied with.

What is a Franchise Agreement?

A franchise agreement is defined under the Code as an agreement:

  1. 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
  2. under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol owned, used or licensed by the franchisor;
  3. under which, before starting 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, an initial fee or royalties.

System or Marketing Plan

The second element of the above definition can be slightly contentious. In the case of Rafferty v Madgwicks, the court considered that the following factors might be indicative of a “system or marketing plan”:

  1. specific requirements for accounting and record keeping;
  2. reservation by the franchisor of a right to audit the books of account and other records;
  3. inability of the franchisee to supply goods or services to customers without the franchisor’s approval;
  4. reservation by the franchisor of the right to approve promotional and advertising material;
  5. provision by the franchisor of bonus structures or equivalent for those selling its goods or services;
  6. provision by the franchisor of training for staff selling its goods or services; stipulation of retail pricing structures, sales structures, sales quotas and the like; creation of marketing and sales territories;
  7. reservation by the franchisor of the right to approve sales staff;
  8. reporting systems in relation to profit or turnover;
  9. restriction on the franchisee selling competing products;
  10. controls on the use of brand and trading names; requirements for signage and merchandising; management structure; and
  11. badging requirements (mandatory use of trading name, uniforms, stationery).

What is a Licence?

A licence is a contractual right granted by one party (the licensor) to another (the licensee).

In order not to be caught by the Code, a licence arrangement must have one of the above four elements missing.

Usually, the key difference between a licence and a franchise is that the licensor does not have much control over the licensee’s business.

The licensee is often free to conduct its own marketing and according to its own business plan.

Whilst some licensors deliberately structure their arrangement so as to avoid being caught by the Code, the results can be detrimental to their overall business. Providing a system and marketing plan is instrumental in growing the brand and ensuring consistency across the network, and the removal of these may stunt the business’ growth. And remember – if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck!

What now?

Whilst franchising is heavily regulated and comes with a number of obligations under the Code, these obligations are not particularly burdensome.

Legalite are specialist franchising lawyers who can advise you on complying with the Code. We also have a network of supporting consultants who are members of the Franchise Council of Australia to assist our clients to ensure the success of their franchise system, which includes accountants, franchise consultants and financial advisors.

If you have any queries regarding the above, contact Legalite now.