Franchising is now the most common way for Australian business owners to grow and expand their business. Australia is one of the most franchised countries in the world. If you’re thinking of franchising your business, read on to find out the major considerations before you start.
What is franchising?
Franchising is a way of growing your business to other locations by licensing other operators (known as franchisees) to use your intellectual property and other brand assets to run a business identical to your own. In return, the franchisees pay you (the franchisor) a capital investment followed by royalties and fees, frequently referred to as “franchise fees”.
What are the risks of franchising?
Franchising is a risky business. Fundamental to the process of franchising is sharing your confidential information, trade secrets and valuable intellectual property with other people. By allowing franchisees to affiliate themselves with you and your brand, you’re exposing your brand’s reputation and goodwill to potential misuse. To do so safely, your Franchise Agreement needs to protect you from information leaks and unfair competition and maintain strict compliance with your standards.
If you don’t invest the time and capital in having professionally prepared documents drawn up, you run the risk of penalties, litigation and significant financial impacts.
How do I set up a franchise business?
There must be a relationship of trust between the franchisee and franchisor, backed up by a strong contractual relationship. This contract is known as the “franchise agreement” and it governs the terms on which the franchisee can use the franchisor’s assets to operate the business. It sets out the rights and obligations of the franchisor and the franchisee for the term of the franchise.
A franchisor will prepare an operations manual and train franchisees to make sure that they run the business in substantially the same way as the franchisor and do not negatively impact the franchised business’ reputation and goodwill. Quality control and adherence to standards are key when running a successful franchise.
Who governs franchises?
The federal Franchising Code of Conduct (“the Code”) is the primary piece of legislation covering the franchising area. It imposes strict obligations on franchisors to make sure that franchise agreements are fair. The Code also requires both franchisees and franchisors to act in good faith in all their dealings with one another.
The ACCC is the government body responsible for enforcing the Code. Penalties for failure to comply can be significant.
When can I start franchising?
The Franchise Council of Australia recommend that you do not commence franchising until you’ve been running your business for at least 5 years, and preferably in more than one location.
This gives you the time to set up the systems you’ll need to run a successful franchise and will allow you to show prospective franchisees how your business can survive fluctuating market conditions over time.
How much does it cost to set up a franchise business?
Setting up a franchising system is no get-rich-quick scheme. It takes time, effort and expense to get it right. If you are already running a successful business, you don’t want to cut corners to try to expand only to find your brand reputation ruined by franchisees lacking guidance or operating in an ill-considered system. It’s important to get professional legal, financial and even specialist franchise business advice from the outset.
You need to prepare an information statement in accordance with the Code, and provide it to any prospective franchisees. You also need to give them a disclosure document, franchise agreement and a copy of the Code at last 14 days before they enter into any agreement with you.
You’ll need to have your disclosure documents and franchise agreement prepared by a lawyer to ensure that they meet your obligations under the Code. You’ll also need to seek financial advice prior to establishing a franchise system.
If you’re willing to invest the time, you can put together the operations manual and marketing plan yourself to keep your costs down.
Once the franchise system is set up, there are ongoing costs involved in running the franchise system, including legal and financial advice.
How long does it take to set up a franchise?
The Franchise Council of Australia indicates that it can take up to 3 years to set up a franchising system, and a further 3 to 5 years to see net profits. You need to make sure you have the patience and the capital to stick it out for that long.
Need more information?
Contact Her Lawyer for an obligation-free phone consult to find out more about franchising.