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Key Legal Obligations When Buying a Franchise

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Buying a franchise is a great alternative to starting an independent business. Purchasing a franchise allows you to operate a business under the brand of an existing, successful business (the franchisor). You normally do this in exchange for an upfront franchise fee and ongoing royalty payments. Notably, you will have more restrictions as a franchisee than other small business owners. As such, you should consider several legal obligations before buying a franchise. This article will take you through key legal obligations to consider before buying a franchise in New Zealand.

1. Contractual 

The first legal obligation to consider is your contractual obligations. Your franchise agreement will outline several contractual obligations. This legally binding document governs the relationship between the franchisee and the franchisor. 

The agreement will include various provisions that impact the franchisee’s rights, including:

  • how the franchisee must operate the business, including what goods or services they can supply;
  • how disputes should be settled;
  • any rights for the franchisee to terminate the agreement early; 
  • under what circumstances the franchisor can terminate the agreement early;
  • what the franchisee must comply with when the agreement ends;
  • rights and restrictions on the use of intellectual property; and
  • fees and payments the franchisee must pay to the franchisor. 

You must comply with the obligations within the franchise agreement or risk being in breach of this contract. Breach of the contract may result in several consequences. For example, you may need to pay the franchisor for any loss they have suffered due to your breach. In extreme cases, the franchise agreement might even be terminated, and you would lose your business.

2. Taxation

Like all businesses, franchises require you to meet your tax obligations. Some taxes that you may need to think about include:

  • company tax;
  • PAYE;
  • GST; and
  • non-resident withholding tax.

Consider hiring an accountant or using a tax advisor to stay on top of your tax obligations.

Failure to know which taxes are relevant to you might harm your business. Therefore, before purchasing a franchise, you should carefully consider your individual circumstances and what purchasing a franchise will mean for you and your taxes.

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3. Employment Laws

Like any other business owner, franchisees must meet their workplace responsibilities and comply with the relevant employment laws

All employees in New Zealand have minimum employment rights that you cannot contract out of. This includes the right to:

  • have a written agreement;
  • be paid at least the minimum wage (for employees aged 16 plus);
  • have minimum rest and meal breaks;
  • annual and sick leave; and
  • earn penalty rates on public holidays. 

You may receive a substantial fine if you do not comply with these minimum standards.

Further, other employment obligations include treating your employees fairly and ensuring your workplace is safe.

Franchisors will often help educate their franchise network on their obligations towards employees. That way, they can minimise risks to the franchise’s reputation. 

4. Consumer Laws

As a franchisee, you will be supplying goods or services to customers. Although you will provide these goods or services in line with the franchisor’s requirements, you will still be subject to New Zealand’s consumer laws, including the:

  • Fair Trading Act (FTA); and
  • Consumer Guarantees Act (CGA).

The FTA aims to promote fair competition and supply accurate information to consumers. Therefore, under the FTA, you cannot mislead or deceive customers about your goods or services. This is important to keep in mind when delivering marketing and advertising materials.

Similarly, the CGA protects consumers as it:

  • allows them to obtain replacements, refunds or repairs if the goods or services supplied to them are faulty; and
  • establishes minimum guarantees for all goods and services.

However, these consumer laws protect franchisees just as much as they protect consumers. It is common for a franchise agreement to specify where franchisees must purchase their goods or services. These designated suppliers might be third parties or the franchisor themselves.

These consumer laws protect franchisees by ensuring the goods or services they must buy meet minimum guarantees. Some of these guarantees relate to:

  • the quality of the goods or services;
  • the price of the goods or services;
  • timelines for the delivery of the goods or services; and
  • minimum warranties. 

5. Intellectual Property

Intellectual property (IP) is the cornerstone of franchising. When you buy a franchise, you largely pay to license IP, which includes access to the business’ operations and branding. 

Importantly, all IP will remain the property of the franchisor. However, it is the responsibility of a franchisee to comply with the terms of IP use within the franchise agreement. The franchise agreement will specify:

  • what IP you have access to;
  • how you can use this IP; and
  • under what circumstances the franchisor can terminate your licence to use this IP. 

In addition, the franchise agreement will outline what happens to your IP access at the end of the franchise term. This will typically include that you must:

  • return all copies of the operations manual;
  • cease use of any IP, including advertising and marketing materials; and
  • maintain confidentiality about the business’ IP. 
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6. Other Applicable Laws

Franchises operate differently and exist across all industries. This means that each franchise will have various laws relevant to its specific business to comply with. For example, consider your franchise sells alcohol. In that case, you should obtain a liquor licence. On the other hand, if your franchise provides a specific trade as a service, you may need to be registered with a professional body. 

Further, your business may operate from leased premises. As such, you must comply with any terms relating to your lease agreement. 

Finally, another type of law you should consider is privacy laws. This is particularly important if you intend to collect personal information about your customers or employees, in which case you need to familiarise yourself with your rights and obligations.

As a business owner, it is important to understand what laws and regulations apply to your business and ensure that you comply with them.

Key Takeaways

There are several legal obligations to remember before buying a franchise, including those relating to contract, taxation, employment laws, consumer laws, intellectual property, and other franchise-specific laws. It is important to obtain suitable legal advice on each to ensure full legal compliance.

If you need help understanding your obligations when buying a franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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