A franchise agreement is the cornerstone of any franchise model, setting out the rights and obligations between a franchisor and franchisee. For anyone interested in buying a franchise, or considering whether a licence agreement or a franchise suits their business goals, this article breaks down the complexities. You’ll learn how these agreements work, the role of the ACCC, the impact of key clauses, and the differences in the “agreement vs licence” debate. If you want to operate a business with clarity and confidence, this article is worth reading.
What is a Franchise Agreement?
A franchise agreement is an agreement that defines the legal relationship between a franchisor and franchisee. It sets out the terms under which a prospective franchisee may carry on a business in Australia under a system or marketing plan substantially or materially associated with a trademark, brand, or other commercial symbol owned by the franchisor.
The agreement may cover critical details such as ongoing fees, initial franchise costs, capital expenditure, and rules on the operation of the business. It also governs rights to use the franchisor’s intellectual property and the expectations that both parties act in good faith. Because franchise agreements are regulated in Australia under the franchising code of conduct, they carry significant legal weight and offer both consumer protection and business security.
A franchise agreement is more than a contract, it constitutes a franchise agreement under Australian law when the business arrangement is substantially or materially associated with a trademarkor commercial symbol. That means the business will be substantially tied to the franchisor’s system, brand reputation, and the marketing or advertising efforts specified by the franchisor.
The Role of the Franchising Code of Conduct
In Australia, franchise agreements are regulated by the franchising code of conduct, which falls under the Competition and Consumer Act 2010 (Cth). This Code sets out the obligations of both franchisors and franchisees, ensuring fairness and transparency in the franchise industry.
One of the most important protections is that a disclosure document must be given to every prospective franchisee before they enter into a franchise agreement. The franchisor must give detailed information about the franchise, including fees, obligations, and any significant capital expenditure that may be required. This ensures that agreements are regulated in Australia in a way that promotes consumer protection and avoids hidden surprises.
The Code also makes sure that if a franchisor is required to change material terms, those changes are disclosed in the disclosure document. Franchisors must also maintain a disclosure document and act in good faith when negotiating with franchisees.
Disclosure and the Disclosure Document
Before a franchisee enters into a franchise agreement, a disclosure document must be given. This document provides essential information about the franchise business model, including any ongoing fees, royalties, or obligations to purchase goods or services from approved suppliers.
The disclosure document must set out any breach history, details of dispute resolution processes, and whether there have been any recent court actions involving the franchisor. It also outlines capital expenditure requirements, which could include fitting out premises or purchasing new equipment.
Because the disclosure document must provide transparent information, it allows a prospective franchisee to evaluate whether the agreement meets their needs before the agreement is signed. It is highly recommended to seek independent legal advice when reviewing this document, as the detail can be extensive and a franchisee may miss important clauses without professional guidance.
Understanding the Licence in a Franchise Agreement
A licence in the context of franchising grants the franchisee the right to use the franchisor’s intellectual property, trademark, and system or marketing plan. While this can sound similar to a licence agreement, there are important differences.
A licence agreement may simply give permission to use a brand or intellectual property without imposing strict obligations around how to operate a business. By contrast, a franchise agreement typically includes detailed requirements around operation of the business, marketing, goods and services supplied, and compliance with the franchisor’s established methods.
The Australian Competition and Consumer Commission (ACCC) makes a clear distinction between a simple licence and what constitutes a franchise agreement. If a business arrangement involves carrying on a business that is substantially or materially associated with a trademarkor brand, and it operates under a specified marketing plan, then it falls under the rules of a franchise—even if it is labelled as a “licence agreement”.
Rights and Responsibilities of the Franchisee
Every franchisee must comply with the terms of the franchise agreement, including payment of ongoing fees or royalties, adherence to the marketing plan, and following the operational procedures specified by the franchisor.
The franchisee to pay these costs often includes upfront fees, training costs, and contributions to a marketing or advertising fund. In addition, the agreement may require the franchisee to undertake significant capital expenditure, which must be disclosed in the disclosure document.
At the same time, the franchisee gains the right to use the franchisor’s brand, system, and intellectual property. This business relationship means the franchisee can operate a business with the benefit of a proven franchise system, which can reduce risks compared to starting an independent business.
Key Clauses in a Franchise Agreement
Each clause in a franchise agreement plays a vital role in defining the business arrangement. Some common clauses include:
- Transfer of a franchise agreement – outlining what happens if a franchisee wishes to sell or exit the franchise.
- Dispute resolution – detailing how disagreements between franchisor and franchisee must be handled.
- Capital expenditure – clarifying obligations for significant capital expenditure required during the term.
- Ongoing fees – specifying the royalties or levies a franchisee must pay.
Every agreement may vary, but each clause must comply with the set out in the franchising code of conduct. Since clauses can dramatically affect the operation of the business, it is critical that both parties act in good faith during negotiation.
The Marketing Plan and Franchise System
A marketing plan is a central feature of a franchise agreement. It ensures that all franchisees operate under a consistent system or marketing plan that is materially associated with the franchisor’s brand or trademark.
This consistency helps maintain brand reputation and consumer confidence across all locations. For example, the majority of franchisees in a network may be required to contribute to a marketing or advertising fund, ensuring collective visibility. The franchisor must ensure that the marketing plan specified by the franchisor is reasonable, transparent, and effective.
Because the franchise model is built on brand recognition and standardisation, the system of operations and marketing is one of the main benefits of becoming part of a franchise business.
Cooling-Off Period and Consumer Protection
Australian law gives new franchisees a seven-day cooling-off period after signing a franchise agreement. This seven-day cooling-off period after entering ensures that a franchisee can reconsider their decision and, if necessary, exit the franchise without major financial loss.
During this time, if the agreement is signed, a franchisee may terminate it and recover most of their initial franchise fees, minus some reasonable expenses disclosed in the disclosure document. This rule, set out in the Competition and Consumer Act 2010, reflects the importance of consumer protection in franchising.
This cooling-off period provides peace of mind, particularly for new franchisees who may feel overwhelmed by the legal and financial commitments of entering a franchise system.
Agreement vs Licence: Areas of Law to Consider
One common point of confusion is the distinction between agreement vs licence. While a licence agreement may allow a party to use intellectual property or a brand, it does not necessarily impose the structured system or marketing plan required in franchising.
However, if a licence agreement includes elements such as a marketing plan, obligations to follow operational systems, and requirements that the business will be substantially associated with the franchisor’s brand, it constitutes a franchise agreement under Australian law.
The areas of law surrounding this are critical, as mislabelling a franchise as a simple licence can expose franchisors to penalties by the Australian Competition and Consumer Commission (ACCC). For this reason, franchisors and franchisees should always seek legal advice to ensure compliance with the consumer commission regulations.
Conclusion: Why Understanding a Franchise Agreement Matters
A franchise agreement is an agreement that carries significant legal and financial weight. It defines the business relationship between franchisor and franchisee, regulates how to operate a business, and protects both sides under the franchising code of conduct. From the disclosure document to key clauses, from the marketing plan to the cooling-off period, every detail shapes the rights and obligations of both parties.
For prospective franchisees, understanding what constitutes a franchise agreement is essential before signing. For franchisors, ensuring the agreement meets all obligations under the Australian Competition and Consumer Commission is equally critical.
If you’re considering buying a franchise or preparing to enter into a franchise agreement, don’t navigate it alone.
At TFC, our team provides tailored guidance to ensure your agreement is fair, compliant, and aligned with your goals. Contact TFC today to protect your investment and secure the future of your franchise business.
Get clarity on your disclosure document and understand your rights—contact TFC for expert franchise advice
FAQS
Most franchise agreements in Australia last between five and ten years, depending on the brand and the type of business involved. Some agreements may offer renewal options, but the terms of renewal are usually outlined in the original contract. It’s important to review the duration carefully to ensure it aligns with your long-term business goals.
While many franchise agreements are standardised across the network, certain terms—such as territory, renewal rights, or transfer conditions may sometimes be negotiable. However, franchisors often limit flexibility to ensure consistency across their franchise system. Getting professional advice before signing can help you identify which parts may be open for negotiation.
A breach occurs when either the franchisor or the franchisee fails to meet their obligations under the agreement. For example, a franchisee failing to pay ongoing fees or a franchisor not providing promised support could constitute a breach. The agreement usually sets out remedies, such as notices, time to fix the breach, or, in severe cases, termination.
While it is not legally required, seeking independent legal advice is strongly recommended. Franchise agreements are detailed documents that outline complex obligations, fees, and rights. A lawyer with franchise experience can help you understand your commitments, reduce risks, and ensure the agreement is fair.
Most franchise agreements specify the support a franchisor must provide to help the franchisee operate the business. This may include training, access to marketing campaigns, supply chains, and ongoing operational guidance. The level of support can vary between brands, so it is important to check what is detailed in the agreement.