The Structure

Understanding how a franchise is set up can lead to a better understanding of why certain documents are needed for the franchisor /
franchisee relationship.

A common franchise structure is set out above and would normally involve the following documentation:

• franchise agreement;
• disclosure document by the franchisor to the franchisee relating to the franchised business;
• licence agreement to occupy premises (if a direct lease is not made between the landlord of the premises and the franchisee);
• disclosure statement relating to the lease of the premises by the landlord.

If the franchisee is purchasing a business that is franchised from an existing franchisee, the following documents may additionally be required:

• contract of sale of business or business sale agreement;
• statement by a vendor of a small business if the business sale price is $200,000 or less;
• transfer of lease if the franchisee occupies the premises under a lease (not just a licence).

Who is the Franchisee Contracting With? It is important for both the franchisor and the franchisee to understand the role that the master franchisee or sub-franchisor plays in the franchise structure.

The alternatives are:

• The franchisor enters into an agreement directly with the franchisee. The parties' rights and obligations are simple to ascertain as they are set out in the franchise agreement
• A master franchisee or sub-franchisor is appointed by the franchisor to act as an agent for the franchisor in a particular State or Territory, in effect to source franchisees for the franchisor.
• A master franchisor or sub-franchisor is appointed by the franchisor to not only secure the franchisee, but to also take on most of the principal obligations of the franchisor and enter into the franchise agreement wit the franchisee. In the last 2 cases referred to above, the franchisee should be certain that its rights to be a franchisee remain on foot even if the relationship between the franchisor and master franchisee or sub-franchisor is brought to an end, otherwise the franchisee may be left without a franchised business.

Franchisor's Control Over Master Franchisee

The ideal situation from the point of control for the franchisor and from the point of security for the franchisor is a direct agreement between the franchisor and the franchisee.

However, due to cost and time considerations, some franchisors are reluctant to establish offices in, or travel outside their State, and prefer to appoint a master franchisee or sub-franchisor to oversee their obligations in other regions.

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