Are you considering buying a franchise or franchising your business

Buying a franchise or franchising your business is a major business decision and, although it is a rapidly expanding means of doing business in Australia, franchising is not a guarantee of success. The commitment in capital and borrowing is often significant and there are many important considerations that should not be overlooked.

Successful franchising combines the skills and experience of the franchisor, the entrepreneurial skills and drive of the franchisee and the goodwill created by the brand. It is an expanding method of marketing, selling and distributing goods and services with the support of a network focused on success. Many Australian entrepreneurs opt to franchise to expand and develop their business and compete against large corporations.

Factors to Consider for Potential Franchisees

Franchising must be planned properly and potential franchisees must:

• consider the financial commitments involved;
• familiarise themselves with the Franchising Code of Conduct (which provides for a number of franchisee protection mechanisms); and
• recognise the associated advantages and disadvantages.

Advantages

Franchisees benefit from the franchisor’s continued involvement and presence in the business. The franchisor provides ongoing assistance and advice in a variety of areas, including but not limited to: training, rights to use business name and reputation (brand image), planning and zoning laws, trading locations, occupation rights, rates of finance, field operational staff, research and development programs, business challenges or problems and access to use of the franchisor’s patents, trade marks, copyrights, trade secrets, and any secret processes or formulae.

Disadvantages

Franchisees’ actions are often limited and controlled by the franchisor in accordance with the Franchise Agreement. Specific standards and demands must be maintained by the franchisee. Restrictions against the sale or transfer of the franchised business, and the control of quality and standards of the service or products provided or sold by the franchisee to the consumer, are regulated by the franchisor. Standardisation, consistency and uniformity are basic prerequisites under Franchise Agreements which can be restrictive in nature and expensive to maintain.

There are other potential disadvantages which the franchisee has no or very little control over, namely: (i) the franchisor may make mistakes in their policies which may affect the franchisee’s profitability; (ii) the good name of the franchised business and its brand image may become less reputable for reasons beyond their own control; (iii) the franchisee is obligated to pay the initial franchise fee and continuing franchise fees.

Franchising Your Business

Franchising your business and entering the franchising network can promote growth and expansion within your business. Franchising provides exposure to wider outlets with the potential for securing and servicing national and international customers. Profits can be earned whilst limiting high capital risks.

The franchise market is highly competitive. It is wise for businesses to conduct due diligence and gauge potential competitors.

The Franchise Relationship

The agreement between franchisor and franchisee is formalised in a Franchise Agreement, which vary (from one to the other) in length and conditions. The legal relationship, which consists of full obligations and responsibilities of both parties, is outlined in the Agreement. The Franchising Code of Conduct will also apply to any Franchise Agreement.

Franchising in Australia is well regulated and consequently the process is not simplistic in nature. While the terms of a Franchise Agreement may seem clear to you, there will be many clauses that require clarification. Prior to entering into a Franchise Agreement, we advise that you seek appropriate legal, financial and accounting advice from firms or individuals with extensive franchising experience. Although Franchise Agreements are often skewed in favour of the franchisor and franchisors are often reluctant to make major changes to the Agreement, obtaining sound advice early will place you in a position to make an informed decision. Turnbull Hill Lawyers can provide you with such advice and assist you with all franchising legal requirements.
See Also:

• Franchise Disclosure Documents: Everything You Need to Know
• 5 things prospective franchisees should consider when reviewing a Franchise Disclosure Document
• Why is due diligence doubly important when buying a franchise?