Franchising is heavily regulated and anyone entering a franchise arrangement needs to be familiar with all legal issues.

Chris Nikou, a partner at law firm Middletons, says that anyone about to take up

a franchise needs to work through the complex legalities. They should also get top accounting and business advice before signing anything. “Better advised franchisees on the way in make for much happier franchisees during the journey and there is less disputation," Nikou says.

All franchisors, including those based overseas, have to comply with the Franchise Code of Conduct that forms part of the Trade Practices Act, which in turn is supervised by the Australian Competition and Consumer Commission.

Under the code, franchisors are required to give franchisees a copy of the code and a disclosure document that gives the franchisee information to assist in making a reasonably informed decision about renewing or extending.

The disclosure document would contain details of the system and its history, the people behind the franchise system, intellectual property issues, contact details for existing and, often, former franchisees, details of all initial and continuing payments to be made in connection with the operation of the franchise and earnings information, assuming the franchisor chooses to disclose this.

Assumptions underlying that earnings information must be included. But the amount of detail provided depends on the franchisor who may choose not to disclose any earnings information. Franchisees should also obtain a solvency statement from the directors and a copy of the most recent financial statements.

These financial statements do not have to be included if a solvency statement is supported by an independent audit.

Franchisors also need to provide the franchisee with a franchise agreement. They are also required to inform the franchisee of any materially relevant facts about the franchise, such as court proceedings, unfair dismissal proceedings or a change in the majority of ownership or control of the franchisor. This needs to be done within 14 days after the franchisor becomes aware of them.

Other rights for franchisees include permission to terminate a franchise agreement within seven days after entering the agreement as part of a cooling-off arrangement, or paying any non-refundable money, whichever is earlier. If the franchisee chooses to exercise their cooling-off rights, they should get a refund minus any reasonable expenses incurred by the franchisor within 14 days. Also, a franchisor is prohibited from inducing franchisees or prospective franchisees not to form an association or associate with other franchisees or prospective franchisees for a lawful purpose.

The code also has a dispute resolution procedure. The Office of the Franchising Mediation Adviser provides mediators for resolving disputes. It also requires a franchisor to advise a franchisee that they have the right to seek independent legal, accounting and business advice before entering the franchise arrangement.

Also, the franchisor is prohibited from inserting a clause in the agreement that releases the franchisor from having any liability towards the franchisee. If the franchise agreement requires the franchisee to pay money to a marketing or other co-operative fund, the franchisor is required to provide an annual financial statement of the fund detailing all receipts and expenses.

If a franchisee breaches a franchise agreement, the franchisor is required to provide the franchisee with reasonable notice that they plan to terminate the agreement. The franchisor also has to give the franchisee a reasonable time of up to 30 days to remedy the breach. If the breach is remedied in that period, the franchisor cannot terminate the franchise agreement.

But the franchisor is allowed to terminate an agreement without notice in cases in which the franchisee no longer holds a licence to carry on the franchised business, or if they become bankrupt, or voluntarily abandon the franchised business, or if they are convicted of a serious offence, or are fraudulent or operate the business in a way that endangers public health or safety.

Nikou says it is incumbent on all prospective franchisees to undertake a proper due diligence before they enter any agreement. One of the key issues, for example, is that of solvency. A franchisor going bust leaves the franchisee in a vulnerable position.

“We have protections under corporations law but the rights of the franchisees are no different to any other business that collapses,” Nikou says. “The franchisee is relying on an outcome over which they have no direct control.

“For example, it's not unusual for a franchisor to be holding the head lease on a site but behind that sits the franchisee who doesn't want the lease to fall over because it automatically impacts on their business.”

He says this is why prospective franchisees need to seek independent accounting, legal and business advice before they enter any agreement.

“A prudent franchisee would have dialogue with existing franchisees within a network and former franchisees,” Nikou says. “It's not just prudent to talk to existing members who have one point of view but if you talk to former members who have been there and lived through the experience, then you get a 360-degree view.”

Lawyers say franchisees need to ask some key questions before they enter an agreement. What is the franchisor's strategy? What royalties, levies, charge-backs, upgrades and mark-ups have to be paid to the franchisor? What continuing support can the franchisee expect from the franchisor? It is important to remember that while the franchisor might give some verbal guarantees, the franchisor is obliged by law to fulfil only the arrangements stipulated in the agreement.

If the level of support is not in the agreement, the franchisee cannot expect it to be delivered. What is the business background of the franchisor's key people? What protections does the franchisee have in the event of insolvency?

Nikou says franchisees also need to ask questions about the options. The best strategy for franchisees, he says, is to be completely familiar with all issues and to get as much legal, accounting and business advice as possible.