International Franchising in Australia
Franchising is an established and sophisticated industry in Australia and foreign Franchisors are now more than ever looking to Australia and New Zealand as potential markets to expand their brand. English speaking with a stable government and economy, Australia is seen by many international brands as the ideal place to expand.
The franchising sector has shown steady growth over the last 10 years in retail food, health and beauty, home help and service industries to name a few, however there is still plenty of opportunity for international franchise systems to establish and grow in Australia.
Wisewould Mahony acts for a number of overseas companies that have successfully established business operations in Australia advising companies on establishing subsidiary entities, registering as a foreign company or granting master franchise rights.
Franchising is highly regulated under a mandatory Franchising Code of Conduct enacted under the Australian Competition and Consumer Act 2011.
The Code covers many licensing and distribution arrangements which may not typically be considered franchise arrangements therefore legal advice is important to establish whether a system offered to the public is caught under the Code.
The Code provides disclosure requirements and regulates conduct in the franchising industry, assisting franchisees to make an informed decision prior to entering into a Franchise Agreement with mandatory dispute resolution via mediation.
The franchisee also has a 7 day “cooling off” period after the date that it enters into the Franchise Agreement to withdraw from the Agreement.
The Code requires franchisors to give a prospective franchisee, a Disclosure Document and proposed Franchise Agreement at least 14 days before entering into, renewing, extending or receiving a non-refundable payment under a Franchise Agreement.
International franchisors must now provide a Disclosure Document to master franchisees and franchisees appointed directly.
The master franchisee (or sub-franchisor) must individually or jointly provide a further Disclosure Document to sub-franchisees in the form set out under the Regulations signed by a Director or executive officer of the franchisor and be updated within 3 months after the end of each financial year, that is by 30 September of each year.
The Disclosure Document requires disclosure of materially relevant facts such as franchisors company and directors details, business experience, any litigation, the number of franchisees, payments to agents, intellectual property, fees payable, royalty and marketing contributions, capital costs, territory details, supply of goods and services, franchisor and franchisee obligations, dispute resolution and termination provisions to comply with the Code.
The Disclosure Document also requires the franchisor to provide its financial statements for the preceding 2 years and set out end of term arrangements.
Changes to the Code, as from 1 July 2010 require all franchisors to update their Franchise Disclosure Documents and Franchise Agreements and provide greater disclosure regarding rebates from suppliers and end of term arrangements.
Wisewould Mahony has assisted international franchisors to ensure their Franchise Agreements and Disclosure Documents are up to date and comply with the Code and can provide broader consulting advice to overseas companies in the area of corporate and tax advice, work place relations, market trends and activity in certain business sectors.
Wisewould Mahony has a network of supporting consultants, accountants and business consultants to assist overseas clients successfully establish business operations in Australia.
Risks of Entering a New Market
- Know your market before you launch!
- Do feasibility research on your market.
- If you don’t have the resources, engage local consultants who can provide you with demographics and market research.
Wisewould Mahony are members of the Franchise Council of Australia (FCA) and can recommend you to reputable FCA members in Australia and New Zealand.
- Do your due diligence on your appointed area developer or master franchisee before they are engaged Wisewould Mahony can assist.
There has been an increase in the number of mobile franchises with low start-up costs setting up throughout Australia including food vans, home cleaning, health and beauty industries, 24 hour gyms and personal training franchises.
Current Issues in Australia
- Funding for Franchisees
Despite Australia’s relatively strong economy, the biggest issue facing Franchisors in Australia at present is attracting franchisees that are competent to operate a business and who also have the financial resources to acquire the franchise and the working capital needed.
The bank environment and reduction in property values has made it more difficult for franchisees to obtain finance, which means many ideal candidates do not have the capital to take up a retail franchise opportunity.
Franchisors are therefore looking to alternate options to bring on suitable franchisees such as franchisor finance, management with “rights to buy” arrangements, or in some cases, joint venture or joint ownership arrangements where the franchisor and franchisee both contribute capital and resources.
A number of prominent franchisors also obtain bank accreditation of their systems which then enables franchisees to obtain funding more easily.
Franchisors are also looking to make entry more affordable and also becoming more involved in assisting franchisees with preparing financial and business plans to ensure franchisees achieve a return (by salary or wages) on their effort that the business model delivers a return on the franchisees investment.
Master Franchising or Area Development Arrangements?
Master franchising has been the most popular way to expand in Australia where the master franchisee takes over the role and responsibility of operating as a franchisor. There has also been an increase in the number of area development arrangements. These are quite distinct business models.
An area development agreement is similar to a contract for the provision of services, usually for a fixed term. The area developer is engaged to develop, recruit, train and support franchisees in an area.
The area developer does not enter into a Franchise Agreement with franchisees. Franchise Agreements are entered into directly between the franchisor and the individual franchisee and the area developer is paid a fee for their services which may be a percentage of the up front fees and ongoing fees paid by the franchisee to the franchisor. In some cases there is also a termination fee equal to or greater than the initial fee.
As this arrangement is not a franchise under the Code, no Disclosure Document is required to be given by the franchisor to an area developer and the termination provisions are therefore not restricted by the franchise Code.
Master Franchise Agreement
A Master Franchise agreement grants rights to a master franchisee to operate a franchise in a territory or area. This requires the provision of Disclosure Documents and the Franchise Agreements by an overseas franchisor to a master franchisee to comply with the Code.
The master franchisee pays a fee or royalty to the franchisor and there are limited rights of termination.
Master franchisees need to have significant capital resources to acquire the rights, establish systems and resources to develop the territory. The master franchisee becomes responsible for recruitment training and support of franchisees. A master franchisee takes on considerable risk and responsibility and any return on their investment can take some years.
Wisewould Mahony is a leading and recognised Firm in the area of Franchise Law. The Franchise, Distribution and Retail Group incorporates lawyers with Accredited Specialisation in Business Law, Employment and Commercial Litigation. Our franchise lawyers have over 30 years of industry knowledge and experience in franchising, licensing and distribution with membership of the International Franchise Lawyers Association (IFLA), Franchise Council of Australia (FCA) and Franchise Association of New Zealand (FANZ).
Robert Toth, Franchise Partner, has published articles on international franchising, master franchising and can assist clients to establish business operations in Australia.