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Thursday 11th August, 2022

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Franchising Down Under: what to know


Franchising Down Under: what to know

Thinking of entering one of Australia’s most dynamic and progressive business sectors? Wrap your head around Oceanic franchising

Thinking of entering one of Australia’s most dynamic and progressive business sectors? Wrap your head around Oceanic franchising

When you take a deeper look into the world of franchising in Australia, you will recognize a number of brands dominating the industry. Home to almost 25 million people, Australia is no stranger to the scalable and profitable business system that franchising provides.

There are around 1,314 franchised businesses currently operating Down Under, with new franchise brands and networks expected to disrupt the sector and contribute to its annual growth. Many international franchise brands, such as McDonald’s, KFC, and Subway, have all chosen Australia as part of their expansion strategy.

Australian franchising has also been the catalyst for global growth for many of the ‘Australian-made’ franchise brands such as F45 Training, The Coffee Club, and Poolwerx. Franchise systems are found across a range of sectors and the industry has evolved enormously since its inception in the early 1970s when U.S. fast-food giants ventured across the Pacific to set up operations and influence the Aussie locals. Most of those brands can still be seen today, while new players in the market have created a rivalry and competition like no other. The franchising industry is said to provide job opportunities to more than 500,000 people and generates an average of $181.8bn in revenue – a continued, welcome injection for the Australian economy.

Unstoppable success
So what does the opportunity of franchising in Australia present? While the Australian franchising industry has experienced both positive and negative media attention in the past year, there’s also no sign of the industry slowing down. According to the Franchise Council of Australia (FCA), “franchising in Australia may have initially provided a means for Australians to benefit from foreign products and systems, but it is now the chosen format for many Australian entrepreneurs to expand and develop their business. The great majority of franchise systems operating in Australia are homegrown, and an increasing number of Australian franchise systems are successfully taking their concepts overseas.”

With Australia’s growing international franchise presence, it gives other international brands the key to success and opens the door for new brands to take on the current competition. There are a number of different points to consider when thinking about entering into the Australian franchise market.

Is your brand ready to expand in Australia? Consider the following legal pointers, critical to your international expansion understanding and success.

The legal elements of franchising in Australia
Direct franchising from an overseas franchisor to an Australian single-unit franchise hasn’t been a common method of expansion in the past, as the distance and inability to support an individual franchise becomes very costly; primarily because of taxation issues. In most cases, master franchising and area development are the most common vehicles used for the international expansion of a franchise system into Australia.

Master franchise agreement
Under a master franchise agreement, a franchisor grants a master franchisee a territory within which to sub-franchise to third parties. This structure might result in a certain loss of control for a franchisor and an additional party with whom profits and royalties must be shared. However, it is beneficial to a franchisor because the master franchisee can act as a local, self-sufficient party who organizes franchise recruitment, site selection, construction, dealings with procedural matters, and conducting operational support.

Area development agreement
Under an area development agreement, a franchisor grants a franchisee the right to roll out multiple corporate stores but not sub-franchise without the franchisor’s express approval. Many franchisors adopt this model in Australia, as it reduces the management and training time for the franchisor, but allows a rapid rollout of the concept in Australia.

“Australia’s disposable income has supported consumer demand for franchised goods and services”

The difficulty of this arrangement is selecting the right area developer with the capital and infrastructure to achieve the development schedule without resorting to sub-franchising. A further difficulty for the franchisor is ensuring consistency of standards where multiple area developers are appointed within a State or region of Australia, given that Australia has a very large geographical area.

The franchise relationship: the franchising code of conduct
In Australia, the franchise relationship is a contractual one (known as “the Code”) where the agreement between the parties determines their rights and obligations. The Code applies to all franchise agreements operating in Australia; regardless of whether the agreement refers back to the law of the franchisor territory. The legislation dictates what is considered to qualify as a franchise relationship.

Based on the expansive definition of a franchise under the Code, there are likely to be many existing relationships that fall within the definition of a franchise. While dealers, distributors, and various licensees may not consider themselves franchises, under the Code, they may very well be.

Unlike some other countries, the Code does not require registration of the franchisor or the franchise disclosure document. There are, however, significant financial penalties for breaches of the Code, if the disclosure requirements are not met.

Legal definitions for international franchisees
The Code is the regulatory code that governs the operation of franchising in Australia – Competition and Consumer (Industry Codes – Franchising) Regulations 2014. This is a national code.

A master franchise arrangement is one where a franchisor grants a right to a sub-franchisor to grant sub-franchise rights or participate in a sub-franchise. A sub-franchisor is a person who is with a franchisee to a master franchisor, or a franchisor to a sub-franchisee.

Disclosure documents and the franchise agreement
Clause 7 of the Code states that master franchisors do not need to provide separate disclosures to subfranchisees, and Clause 12 of the Code states that master franchisors do not need to comply with the requirement for disclosure to a sub-franchisee of various information such as financial statements.

This means that there is no need for an overseas master franchisor who appoints a sub-franchisor to provide a separate disclosure document in addition to the disclosure document provided by their sub-franchisor to subfranchisees. The master franchisor is still required to fully comply with the Code and provide a disclosure document to its sub-franchisor in the prescribed form.

Master franchisors (both Australian and overseas) must now attach the following financial information to their disclosure documents:

• A statement signed by the director as to the solvency of the company at the end of the last financial year, attaching the last two years’ financial statements

• An auditor’s report, supporting the director’s solvency statement

There are additional obligations of disclosure on master franchisors in relation to:

• End of term arrangements

• Disclosing information relating to rebates and incentives from suppliers

• Disclosing the impact of online sales on individual franchisees

The Code lists several items that must be addressed in a disclosure document. Some of these include:

• Who owns the intellectual property in the business

• Who your business associates are (individuals or other companies related to the franchisor entity)

• What your business experience is • Whether there is any litigation relating to the franchise (including directors of related companies)

• The financial information of the franchisor

• Whether franchisees can sell or promote your goods and services online

• The estimated upfront and ongoing expenses for franchisees

Review period
An international franchisor must also comply with procedural aspects under the Code, including providing a 14-day review period for the sub-franchisor or franchisee to review and consider the franchise documents, and a seven-day cooling-off period after signing.

There are also laws that are specific to Australia, which international franchisors should be aware of. For example: taxation; consumer laws; employment, particularly in light of fair work laws; occupational health and safety; data collection; and privacy.

Additionally, there may be other specific regulations that apply to certain industries, which you should research and review before finalizing your marketing entry strategy. While these issues may not necessarily have to be incorporated into your legal documents, having a general understanding of your responsibilities under these different laws will help guide your operation of the franchise network.

Franchising on the up
IBISWorld also highlighted, in a 2019 report, how consumer trends have directly impacted the franchising industry. The study shows that Australia’s disposable income has supported consumer demand for franchised goods and services, and this increase has enabled consumers to spend more on goods and services provided by franchised operators, such as food, footwear and clothing. Furthermore, solid growth in online shopping and retail shifts has fuelled demand for courier and delivery services that are supplied by franchise businesses and brands. Now is the perfect time to start planning and researching your market entry into Australia, and you could quite possibly find your international franchise influencing Australia sooner than you think!

Rostom Manookian operated his own legal practice for four years, before merging with DC Strategy Lawyers to take advantage of the synergies between the two firms.

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