In Short
- Ensure franchise agreements are clear on terms such as fees, territory, and support.
- Understand the legal requirements, including disclosure documents and intellectual property protections.
- Take professional legal advice to minimise risk and avoid disputes down the line.
Tips for Businesses
Before starting a franchise, make sure to get legal advice on the franchise agreement, intellectual property, and compliance with disclosure laws. Properly vet potential franchisees, ensure transparency in your legal documents, and set clear expectations on fees and support to avoid misunderstandings or costly disputes in the future.
The franchise industry is booming, making it a great opportunity for your business. There are no franchise-specific laws in New Zealand, but you still have responsibilities as a franchisor. As a potential or existing franchisor, you need to be aware of your legal responsibilities to your franchisees and others. This helps ensure that you can reduce the risk of future legal issues and have a good relationship with your franchisees. This article will outline the key legal considerations when franchising.
Franchise Association of New Zealand (FANZ)
If you are a member of the FANZ, you must comply with their Code of Practice and Code of Ethics. Even if you are not a part of FANZ, it is still good practice to comply with the Code. The Code of Practice states that:
- all franchise agreements must have a cooling-off period;
- you must provide your franchisees with a disclosure document; and
- franchise agreements must include a dispute resolution clause.
For clarity, a cooling-off period is a timeframe within which a franchisee can withdraw from a franchise agreement after signing it. This period needs to be at least seven days from when your franchisee signed the agreement. However, if the franchisee gains the franchise through an assignment, there is no requirement for a cooling-off period.
Under the Code of Ethics, you are bound to:
- operate your franchise according to the Code of Practice;
- promote the membership of FANZ;
- have high standards of competency and integrity during franchising; and
- act in good faith in all business activities.
Franchise Agreement
Your franchise agreement will govern the relationship between you and your franchisee. Moreover, it outlines you and your franchisee’s rights and obligations relating to the franchise. This gives both parties clarity and reduces the potential for future misunderstandings. Your franchise agreement can include clauses about:
- the cooling-off period (compulsory if you are a part of the FANZ);
- dispute resolution (compulsory if you are a part of the FANZ);
- the granting of rights;
- cartel provisions;
- the term of the agreement;
- your franchisee’s territory;
- franchise fees;
- approved suppliers; and
- training and support.
Franchise Disclosure Document
If you are a member of the FANZ, you must give your franchisee a disclosure document. Regardless, it is good practice to give your franchisee this document even if you do not belong to the FANZ. Your disclosure document will state the key facts about your franchise. Therefore, your document may outline:
- your business experience;
- key financial information for the last two financial years;
- details of any bankruptcies or receiverships;
- intellectual-property rights (IP);
- restrictions relating to your franchisee;
- your obligations;
- termination;
- renewal; and
- franchise system outline.
Protecting Your Intellectual Property
One of your franchise’s key assets is your intellectual property. Consumers identify your franchise through your intellectual property, making it essential to safeguard. To protect your intellectual property, you must first determine what intellectual property your franchise has, such as:
- trade marks, including your business name and logo;
- unique products;
- confidential information;
- copyright materials; and
- trade secrets.
If your franchise thrives on its unique products and innovations, you may wish to apply for a patent or design rights. Copyright also protects any original work. A patent or design right will prevent others from:
- using your products;
- copying your products; or
- profiting from your products.
Meanwhile, to protect your franchise’s confidential information and trade secrets, you can ask your franchisees to sign a non-disclosure agreement (NDA). This agreement prevents your franchisees from leaking your trade secrets to third parties such as competitors. Moreover, the agreement should indicate the process if a franchisee breaches their obligations.
Tax Obligations
As a franchisor, you must keep up with your tax responsibilities. There are different types of tax, such as:
- corporate tax;
- PAYE; and
- GST.
It is best to talk to a tax professional to help determine which taxes are relevant to you and your franchise. Engaging a professional avoids the possibility of a sudden tax bill that you had not accounted for.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Key Takeaways
When expanding your business into a franchise, there are several legal considerations to make. If you are a member of FANZ, you need to comply with their Code of Practice and Code of Ethics. You should also have a franchise agreement and a franchise disclosure document for your franchisees. Furthermore, you should work to protect your intellectual property through trade mark registrations, patents, and an NDA. Lastly, you need to be aware of your tax obligations.
If you need help understanding your legal obligations as a franchisor, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
A franchise agreement outlines you and your franchisee’s rights and obligations. It should contain clauses covering topics such as a cooling-off period, franchise fees, dispute resolution, and approved suppliers.
It is not compulsory to join the FANZ. However, it is a good idea to join. By joining the FANZ, you may attract more franchisees who know you will follow the Code of Practice and Code of Ethics.
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