Definition of Franchising

Franchising is where one party (Franchisor) grants to another person (Franchisee) the right to operate the business of offering, supplying or distributing goods or services under a system or marketing plan substantially determined, controlled or suggested by the Franchisor, in return for a fee paid by the Franchisee for this service.

In 1988 the Australian Government introduced the Franchising Code of Conduct as a mandatory code prescribed under the Act. setting out a formal set of disclosure requirements and franchise-specific prohibitions that Franchisors must follow in their relationships with their Franchisees. To determine whether or not a business meets the definition of a franchise, under the ‘code’, a business must have the four definitive criteria that are summarized below.

  1. An agreement between the parties, written or oral (Contract)
  2. A payment, either up-front or ongoing for the provision or goods or services, (except at wholesale price).
  3. Provision of a marketing plan substantially determined controlled or suggested by the franchisor (Control).
  4. Use of TradeMarks, Brands or Names owned by the franchisor.

A more complete explanation of these criteria can be seen in the Franchising Code of Conduct, Schedule Part 1, clause 4, Meaning of franchise agreement. If you meet these criteria then the full effect of the ‘Code’ will apply to your activities in business through various sections of the ‘Competition and Consumer Act’.

Armed with this definition it is easy to see that the key components of a franchise agreement are (1) the existence of an agreement, (2) payment of money for goods or services, (3) use of the Brand name and (4) a group business system or marketing created or suggested by the franchisor. These are clearly the main strengths of franchising and the deletion of any one of them will likely effect the success of the group and its’ prospects for growth.

As stated above though, it is possible to create a structure for some businesses that can sit outside the ‘Code of Conduct’ thereby avoiding the issues of compliance and the vagaries of the legislation. The issue though becomes which of the four elements to leave out? Any dilution of the use of a Common Name or Control will dilute the effectiveness of any group structure over time. There will always be a Contract and Money is definitely going to be involved!

If you have a desire or need to sit outside the ‘Code’, then your business may suit this type of derivative structure and some discussion will need to be held to explore the merits of that strategy.

It must be stated however that in the vast majority of cases the long term objectives of a business are seriously compromised when the pure Business Format Franchise model is altered so as to sit outside the ‘Code’.

WARNING: Some companies are franchising and don’t even know it! And there are significant penalties for violators.

Contact us to for more information on franchising.