In simple terms, a franchisor must give a prospective franchise buyer all of the information required to make a reasonably informed decision to purchase the franchise business.

In Australia, franchising is governed by the Franchising Code of Conduct. The Code stipulates that franchisors must provide the following documents to any prospective franchisee to effect proper disclosure:

• A current copy of the disclosure document;
• A copy of the franchise agreement in the form it is to be signed;
• A copy of the Code; and
• Any other document pertaining to the franchise business (if applicable).

The above documents must be given to the prospective franchisee at least 14 days before the franchise agreement is signed.

What is a disclosure document?

A disclosure document is essentially a snapshot of the franchise network and is designed to give the prospective franchisee key information about the franchise system and the running of the franchise. The Code sets out the format of the disclosure document and the information that is required, including:

• Details of the directors of the franchisor;
• Details of any legal proceedings against the franchisor or its directors;
• Contact details of current as well as former franchisees;
• The costs to establish and operate the franchised business and any other payments or fees that the franchisee may be required to make;
• Franchisor’s financial statements.

What is a franchise agreement?

The franchise agreement is the agreement that governs the relationship between the franchisor and franchisee. It is the legal document that grants the franchisee the right to operate the franchise business and sets out the rights and responsibilities of each party.

Typically a franchise agreement will deal with fees, territory, site selection, lease arrangements, restrictions in relation to the supply of goods and services, dispute resolution, termination, assignment, renewal and length of the franchise agreement.

Once the franchise agreement has been signed the parties are legally bound by its terms and conditions.

What is the Code?

The Code is a mandatory industry code that applies to all parties to a franchise agreement. The Code is law and is binding on the parties.

The Code was first introduced in 1998 with the purpose of “regulat[ing] the conduct of participants in franchising towards other participants in franchising.” Since that time it has undergone several revisions and the new Code which took effect 1 January 2015 seeks to address some of the perceived imbalances in the relationship between franchisors and franchisees.

Any franchise agreement entered into on or after 1 January 2015 must comply with the new Code.                    

Additional documents a franchisor should provide to a franchise buyer (if applicable)

• Copy of lease and any licence agreement (including details of any incentive or financial benefit that the franchisor, or its related entity, may be entitled to as a result of that agreement);
• Information statement in the form specified by the Code outlining the risks and rewards of franchising;
• A lease or hire purchase agreement for goods;
• An agreement under which the franchisee is authorised to use the franchisor’s intellectual property;
• A security agreement, including a guarantee, mortgage, security deposit, indemnity, loan agreement or obligation to provide a bank guarantee to a third party;
• A confidentiality agreement;
• An agreement not to carry on business within an area or for a time after the franchise agreement is terminated.

The above documents must be provided to the prospective franchisee at least 14 days before signing the franchise agreement or as soon as they become available. A copy of the lease must be given within one month after the lease or agreement to lease is signed by all parties.

While franchising can be very rewarding, it is imperative that prospective franchisees are aware of their rights and obligations under the franchise documents. It is important that prospective franchisees obtain independent legal advice to ensure that the documents that have been provided to them comply with the Code and so that they understand their contractual obligations for the life of the franchised business and when the franchise relationship comes to an end.