If you are thinking about buying a franchise, remember that Australia has a national mandatory Franchising Code of Conduct which sets out the information you should receive before you sign any agreement or hand over any non-refundable money.

The franchisor must give you a copy of the Code, a copy of your franchise agreement in its final form, and a current disclosure document which includes: contact details of current franchisees and some former franchisees; details of certain court cases against the franchisor or its directors; whether you will have an exclusive territory – that is, whether other franchisees (or the franchisor) will be allowed to sell in your area; who you can source goods or services from; an indication of the franchisor’s financial health.

The Government amended the Franchising Code on 1 July 2010, following a series of inquiries. As a result of the amendments, franchisors will need to provide you with additional disclosure, which should help you to make a more informed decision about whether to buy a franchise.

What will happen at the end of the agreement?
What many prospective franchisees don’t realise is that franchise agreements run for a set term, usually five or 10 years, and there is no guarantee that they will operate the business beyond that term.

Before you buy a franchise, the franchisor must disclose what will happen at the end of your agreement, including whether you will have an option to renew the agreement or enter into a new one, and whether you have the right to sell the business if you don’t wish to renew.

A franchisor must now notify its franchisees, at least six months before their contract comes to an end, of its decision to renew or not renew their contract or to enter into a new one. Keep in mind that if your agreement is not renewed, you will lose the right to use the franchisor’s brand and operating system. Most franchise agreements will also prevent you setting up a similar business under your own name.

The disclosure document should also tell you whether you will be entitled to an exit payment and, if so, how it will be calculated.

You will most likely be required to buy a range of assets before you get started, including stock and equipment. A franchisor is now required to disclose what will happen to those assets at the end of the agreement, including whether it plans to buy them from you.

Franchisees are sometimes required to spend large sums of money on shop refurbishments or equipment upgrades. A franchisor must now disclose whether it will take these types of expenditure into account when deciding what will happen at the end of the agreement. They must also disclose whether they have considered these types of payments when making similar decisions in the past.

One-sided contract changes
Franchise agreements often allow the franchisor to make changes to the agreement without the franchisee’s permission. For example, the franchisor may be entitled to change your approved suppliers at any time.

These one-sided changes are known as unilateral variations. Franchisors now have to disclose the circumstances in which they might unilaterally vary your franchise agreement in the future, as well as the times that they have unilaterally varied a franchise agreement in the past.

Confidentiality obligations
You may be exposed to certain information that the franchisor does not want you to share with anyone. Under the amendments, a franchisor now needs to disclose whether it will impose a confidentiality obligation on you, and give you details of the types of things covered by that obligation, such as trade secrets (e.g. a secret recipe) and outcomes of mediation.

Payments to third parties
Previously, franchisors were only required to disclose any payments payable by a franchisee to the franchisor (or its associate) or to be collected by the franchisor for someone else.

Now, franchisors must also disclose details of any payments you will need to make to a third party, if those payments are within the franchisor’s knowledge or control, or reasonably foreseeable by the franchisor.

Franchise failure
A disclosure document will now also have to warn you that, like any business, the franchise (or franchisor) could fail, and that this could have consequences for you.

Before you enter into a franchise agreement, you should seek professional advice about your rights and obligations in the event of franchisor failure. You need to have a plan to ensure that your investment is protected.

Dispute resolution
Disputes between franchisors and franchisees are not uncommon. Under the Code, if either party refers a dispute to a mediator, both parties must attend mediation and try to resolve the dispute.

The Code now requires that both parties must try to solve disputes in a reconciliatory manner, including by making their intentions clear at the outset and not damaging the reputation of the franchise system.

A disclosure document must now indicate whether the franchisor will attribute the costs it incurs in dispute resolution (including legal costs) to you.

The ACCC promotes compliance with the Franchising Code and the Trade Practices Act by informing franchisors, franchisees and prospective franchisees of their rights and obligations under the Code and the Act, and enforcing them where necessary.

The ACCC has a number of free publications designed to assist prospective franchisees, including a Franchisee Manual and a Franchisee Start-up Checklist. You should also read the new fact sheet which outlines the recent Franchising Code of Conduct amendments.