Small Business

Common legal issues for franchises and how to avoid them

Purchasing a franchise can be a great way to get into business ownership. You’ll get an established name, marketing, and assistance running your business.

Marsh & Maher lawyer Marianne Marchesi, a franchising law expert, says there are two common legal issues that arise when franchising, and both can be easily avoided.

Misleading and deceptive conduct

The first issue arises when a franchisor (the individual/company granting the franchisee right) does not give earnings projections to prospective franchisees (the individual/company purchasing the right to a franchise).

“Franchisors should ensure that any representations made to franchisees are based on reasonable grounds and that franchisees have the full picture before investing in the franchise,” Marchesi says.

“Franchisors should avoid making earnings projections where possible, but if projections are given, the facts and assumptions on which these are based should be clearly set out.”

Non-compliance with the Franchising Code of Conduct

Franchisors must comply with the Franchising Code of Conduct. This sets out rights and obligations for those buying a franchise in Australia. The Australian Competition and Consumer Commission sponsors free franchise training for prospective franchisees who would like to know more. 

Marchesi says an example of a franchisor obligation set out in the code is the preparation of a disclosure document which must be updated annually.

The disclosure document contains valuable information for prospective franchisees.

“The disclosure document gives prospective franchisees key information about the franchise system to enable them to make an informed decision about entering into the franchise,” Marchesi says.

“Franchisors should ensure they have a good understanding of the Code and its requirements, and speak to a lawyer with expertise in franchising to assist them to maintain compliance.”

 Read more: Business basics - Franchising