Franchising is a popular business start up, acquisition or business growth strategy, but as with any business venture there are risks that need to weighed up.
Tighter consumer protection mechanisms through the new Franchising Code of Conduct will commence on January 1 2015. Some of the Code provisions are also staggered throughout 2015 to allow some time for Franchisors to ensure their franchise agreements and disclosure documents are compliant..
One of the changes include an obligation on Franchisors to provide an information statement (or Risk Statement) to Franchisees early on when initial enquiries are made by prospective Franchisees, which statement provides information on the key risks and rewards that come with this business arrangement.
The other major change that parties will need to be aware of is codifying a good faith obligation on both parties when they deal with each other.
Although this obligation doesn't prevent either signatory from acting in their own interests, it does mean that deliberate actions that have a negative impact on one of the parties will be a breach of this clause.
To support these new requirements, the Code has also introduced new fines for those who violate the legislation. Under the new rules, parties can be fined up to $51,000 for violating the good faith or disclosure obligations that the Code covers.
The Australia Competition and Consumer Commission also has the power to issue infringement notices of up to $8,500.
If you are a franchisor, franchisee or are thinking about becoming one, make sure you discuss this change with a commercial lawyer. They will be able to provide guidance on entering into or updating this important commercial agreement.