About Franchising

Franchising, or more specifically 'business format franchising', is a method of commerce where one person (the 'franchisor') allows another (the 'franchisee') to use its system and usually also its name or trademark to carry on business in return for a fee.

Compared to other forms of carrying on business, franchising has many attractions. For a franchisor, it allows the growth of its business system and image without the investment necessary for all of the required infrastructure. It may also offer access to more motivated people to work in the franchisor's business chain. For a franchisee, franchising allows a measure of business independence but with a ready-made system and the benefits that can flow from the pooling of resources.

Successful franchises have become household names around the world. Mention 'McDonald's' to someone and chances are that the image of a golden arch will spring to mind.

Australia has among the highest number in the world of franchises per head of population, three times more than the United States. The Franchising Australia 2004 survey found that there were around 850 franchise systems operating in Australia, giving employment to around 500,000 people.

All the laws that generally apply to commerce, for instance contract and trade practices laws, apply to franchising in Australia, but in addition, since 1998 franchising has been specifically regulated. The Trade Practices (Industry Codes - Franchising) Regulations 1998 came into full effect on 1 October 1998 and introduced a Franchising Code of Conduct that must be followed by franchisors and franchisees across Australia in their dealings with one another.

One of the most important obligations introduced by the Franchising Code of Conduct is for franchisors to prepare a Disclosure Document before they sell a franchised business. The Disclosure Document contains a lot of relevant information about the franchise and must be given to a franchisee before the franchisee goes ahead with the purchase. If the Disclosure Document is not given or contains incorrect information, serious legal consequences can follow.

The preparation of a Disclosure Document can also benefit a franchisor, as it helps the franchisor to focus its mind on some of the crucial issues that need to be addressed when establishing a franchise system.