Franchising Down Under - Franchisor/Franchisee Relationship in Australia

Direct franchising from an overseas franchisor to an Australian single-unit franchise is highly unusual, as the geographic distance and inability to support an individual franchise becomes very costly.

In our experience, master franchising and area development are the most common vehicles used for international expansion of a franchise system into Australia. There are other hybrid variations that are also used and we are able to explore with you these alternative structures, however, for the purposes of this article, we will be considering master franchising and area development.

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, deal with procedural matters and operational support.

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 rapid roll out of the concept in Australia. 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 (the “Code”)

In Australia, 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.

The franchise relationship is a contractual one where the agreement between the parties determines their rights and obligations. In addition, 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. So, 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.

For assistance with expanding your franchise into Australia, contact us on 0416 716 960 or email rostom@manookiansolicitors.com