Advantages & Disadvantages Of Franchising

The Franchise Council of Australia reports that Australia’s franchising sector is worth $146 billion. As a fast-growing sector, franchising is an attractive prospect for many successful business owners.

While franchising is a great way to expand your business, it also comes with a few risks… so what are the pros and cons of franchising your business, and what aspects of franchising law in Australia do you need to be aware of?

What is a franchise?

A franchise is an agreement between two parties (a franchisor and a franchisee). The franchisor agrees to give the franchisee the rights to market a product or service using the franchisor’s operating methods and intellectual property (i.e. logos and trademarks). In return, the franchisee pays a range of associated fees and royalties to the franchisor.

Advantages of franchising

Many business owners decide to franchise their businesses because it’s a great way to expand quickly. Your franchisees pay to buy stores, so you don’t need as much capital to fund growth, and because you’re not investing as much of your own money, franchising also offers a relatively low-risk means of expansion, while still enabling you to earn potentially significant amounts from royalties and sales.

If you want to expand but aren’t keen on all the organisational responsibilities, franchising is a good route to go down because each franchisee will have more control over the store than if you were the direct owner of every single outlet in your business.

Disadvantages of franchising

This does lead us to one of the principal cons of franchising, being that you do not have as much control over each store. Your franchisees are entrepreneurs, not employees. However, if you have robust systems, policies and procedures in place that you communicate effectively to your franchisees, and have a solid franchising agreement that outlines the exact operating procedures you want your franchisees to follow, this will minimise the risks associated with not having as much control over each store.

Franchising does expose you and your business to a variety of legal risks. For example in 2018 single touch payroll was introduced, whereby companies with more than 20 employees will have to report salary, pay as you go (PAYG) withholding and super information directly to the ATO at the same time they pay their employees. The Fair Work Amendment (Protecting Vulnerable Workers) Bill has also made franchisors liable for any franchisee breaches of employment and fair work legislation.

Factors to Consider for Potential Franchisees

The franchise model has it own set of pros and cons for the franchisee and if you’re looking to be come a franchisee there are some thing you needs to consider:

• consider the financial commitments involved;
• familiarise yourself 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.

Are you ready to franchise?

If you are thinking of franchising your business or becoming a franchisee you should seek the assistance of a legal professional to prepare a franchise agreement that covers all the bases, is fair to both parties, and minimises the extra risk that comes with franchising. Contact us to find out how we can help.