What Does "Buying a Franchise" Mean?

Franchise ownership is everywhere, from major fast food chains like McDonald's to the local milk tea shop on your corner. The word "franchise" gets thrown around so casually that it can sound like an easy way into business ownership. In reality, buying a franchise involves legal steps that demand real diligence, from complying with legislation to understanding that you are taking a licence to use someone else's brand, systems and intellectual property, with ongoing restrictions.

This article is for prospective franchisees who are new to franchising or considering taking the leap. Having a working knowledge of the legal process is what separates a smooth acquisition from a costly mistake.

Buying a franchise offers a proven business model with an established reputation, a head start independent startups don't get. That goodwill comes at a price: franchise ownership typically costs more over time, because you're paying for a brand and system already expected to generate revenue.

At its core, a franchise is an agreement in which a franchisor grants a franchisee permission to use its business name, goodwill, systems, and intellectual property. It's also an ongoing relationship, so knowing your rights and obligations from the outset is essential, both to protect your investment and to avoid inadvertently breaching the agreement.

Before Buying a Franchise

1. The Franchising Code of Conduct (the core law)

Franchising is a popular business arrangement, so laws and regulations are in place to guide and protect both franchisors and franchisees. The primary piece of regulation is the Franchising Code of Conduct, contained in the Competition and Consumer (Industry Codes – Franchising) Regulations 2024 (Cth), and enacted under the Competition and Consumer Act 2010 (Cth).

This sector undergoes continuous reform, so it's worth staying alert to amendments affecting franchisee and franchisor rights over time. Below are the key elements every prospective franchisee should know.

2. Mandatory disclosure obligations

The Code requires franchisors to disclose certain information to prospective and existing franchisees, both before and after entering a franchise agreement. This disclosure document must cover specific items, including franchisor details, business experience, litigation history, existing and master franchises, intellectual property, site/territory details, supply arrangements, capital expenditure, financing, dispute resolution, and earnings and financial information.

This requirement is set out under Schedule 1 of the Code: Disclosure Document for Franchisee or Prospective Franchisee. Franchisors must also give an information statement, and cannot execute a new agreement (or consent to a transfer) until a 14-day consideration period has run after the required documents are given.

3. The "reasonable opportunity for return" requirement

One of the most significant changes introduced by the 2024 Code is this requirement. Under section 44, franchisors are prohibited from entering into a franchise agreement unless it gives the franchisee a reasonable opportunity to make a return on their required investment during the term of the agreement. This isn't a profit guarantee, but it does raise the bar on what franchisors must demonstrate upfront, offering franchisees an added layer of protection.

4. Due diligence and questions to ask the franchisor

Your own checks start with the disclosure document. It lists business contact details for existing franchisees (in larger systems, those in your area) and shows, for each of the last three financial years, how many franchises were transferred, closed, terminated or not extended. Where the information is available, it also gives contact details for franchisees who left. Speak to both groups. Current franchisees can tell you how the system works day to day, and former franchisees can tell you why they left.

If the franchisor gives earnings information, it must be in the disclosure document or attached to it, and any projection must state the facts and assumptions it is based on. Ask your accountant to test those assumptions against your own budget. The disclosure document also contains a statement of the franchisor's solvency signed by a director, and you can look the franchisor up on the Franchise Disclosure Register, which is free to search online.

Questions to put to the franchisor include:

• Is the training and ongoing support written into the agreement, and what does it cover?

• What will the business cost me in total over the term, once fit-out, refurbishments and supplier purchases are added to the fees?

• How many outlets near my territory have changed hands or closed, and why? What happens at the end of the term if I want to renew?

Do I Need a Lawyer to Buy a Franchise?

Given the complexity of franchise agreements, especially for first-time franchisees, seeking independent legal advice before signing is strongly recommended, particularly to understand your rights and obligations under the agreement.

This is reinforced under section 27 of the Code, which provides that franchisors cannot enter into a new franchise agreement unless they have received signed statements confirming the franchisee has obtained (or knowingly declined) advice from an independent legal adviser, business adviser, and accountant. This provision acts as a procedural safeguard, ensuring the franchisor holds evidence that the franchisee either sought professional advice or made a conscious, informed decision not to.

Section 27 doesn't make legal advice mandatory for franchisees, but it does require written acknowledgement if they choose to go without it. In practice, this functions as a strong incentive to obtain advice from all three advisers, since declining to do so means putting that decision in writing.

Process of Buying a Franchise: Reading the Contract

Once you reach the stage of reviewing a franchise agreement, here are the key terms and conditions to understand before signing.

Franchise Agreement Terms

1. Term Length and Renewal Conditions

The length of time the agreement is contractually binding, along with the conditions

attached to any option to renew, extend, or continue it.

2. Termination and Default Clauses

The rules and process for ending the business relationship, including notice requirements, each party's rights to terminate early, and what constitutes a breach. Pay close attention here; you may remain liable for loans, leases, supplier obligations, and other costs even after termination.

3. Cooling-Off Period

For a new franchise agreement, the franchisee may terminate by written notice within 14 days after entering into the agreement (section 50). If cooling-off is exercised, the franchisor must repay amounts paid in connection with the agreement, less any reasonable expenses set out in the agreement. It is not always a full refund.

4. Transfer/Resale Rights

The clauses that determine your ability to sell the business, exit the franchise system, and recoup your capital investment. This can include transfer fees, franchisor approval rights, and other conditions.

5. Territory and reserved rights

Check whether the territory is exclusive and what the franchisor has reserved. Many systems describe a territory without giving true exclusivity.

6. Premises and Lease

A franchise can involve leased premises, and the commercial lease can tie you in as firmly as the franchise agreement. The lease may be in your name, or the franchisor (or a company associated with it) may hold the head lease and sublease the site to you. In that case, the franchisor must give you a copy of its lease before you sign, or a summary of the commercial terms if it does not have the lease. Check that the lease term lines up with the franchise term, so you are not left paying rent on a site you can no longer trade from under the brand.

7. Restraint of Trade

A franchise agreement may include a restraint of trade, a clause that stops you running or working in a competing business within a set area for a period after the agreement ends. The Code limits a franchisor's ability to rely on a restraint in some situations where it declines to renew an agreement the franchisee had an option to renew (sections 42 and 67), so read the restraint and the renewal clauses together.

Franchise Fees and Financial Obligations

1. Initial Franchise Fee vs. Ongoing Royalties

The initial franchise fee is a one-time entry cost paid at signing, typically covering startup costs and initial training. Ongoing royalties, by contrast, are recurring payments made throughout the term of the agreement to fund continuous network support and brand maintenance.

2. Marketing/Advertising Fund Contributions

Mandatory fees paid to the franchisor and pooled into a collective fund, used to finance system-wide marketing and brand promotion, such as national advertising campaigns.

3. Hidden Costs

Beyond the initial franchise fee and ongoing royalties, franchisees should account for less obvious expenses that can add up over time, such as technology and software fees, audit and compliance costs, and mandatory capital expenditure requirements like store refurbishments or required purchases from approved suppliers.

Frequently Asked Questions

What does buying a franchise involve legally?

Buying a franchise means complying with legislation and understanding that you are taking a licence to use someone else's brand, systems and intellectual property, with ongoing restrictions.

Do I need a lawyer to buy a franchise?

Seeking independent legal advice before signing is strongly recommended. Under section 27 of the Code, franchisors cannot enter into a new franchise agreement unless they have received signed statements confirming the franchisee has obtained (or knowingly declined) advice from an independent legal adviser, business adviser, and accountant.

How long do I have to consider a franchise agreement before signing?

Franchisors cannot execute a new agreement (or consent to a transfer) until a 14-day consideration period has run after the required documents are given.

Is there a cooling-off period when buying a franchise?

Yes. For a new franchise agreement, the franchisee may terminate by written notice within 14 days after entering into the agreement (section 50). The franchisor must repay amounts paid in connection with the agreement, less any reasonable expenses set out in the agreement, so it is not always a full refund.

What fees are involved in buying a franchise?

The initial franchise fee is a one-time entry cost paid at signing, typically covering startup costs and initial training. Ongoing royalties are recurring payments made throughout the term of the agreement. There are also marketing/advertising fund contributions, and less obvious expenses such as technology and software fees, audit and compliance costs, and mandatory capital expenditure requirements.

Conclusion

Franchising offers a genuine shortcut to business ownership: a proven system and an established brand with built-in customer trust. However, a franchise is also a long-term legal commitment, built on clauses that are crucial to understand in order to protect your investment and avoid power imbalances with the franchisor. This relationship is primarily governed by the Franchising Code of Conduct, which exists to guide and protect both parties.

Before you sign, it's worth having the agreement reviewed by a franchise lawyer. Purpose Lawyers can help you understand exactly what you're agreeing to, identify any red flags, and help you enter franchise ownership with your rights and interests protected.

Here at Purpose Lawyers, we offer a complimentary 15-minute advice session. Please contact us on 1800 018 750 or email us at info@purposelawyers.com.au to arrange your complimentary advice session today.

Useful Links

The legislation referenced in this article is available from the official government legislation site:

• Competition and Consumer (Industry Codes – Franchising) Regulations 2024 (Cth), which contain the Franchising Code of Conduct, on the Federal Register of Legislation

• Competition and Consumer Act 2010 (Cth) on the Federal Register of Legislation