If you’re thinking of franchising your business, the likelihood is that you either have a successful business ready to expand, or you might have a great idea that’s suited to being rolled out in multiple locations. Either way, it’s a good idea to seek the right help.
You need to know about franchise laws in Australia, what to consider before franchising, the steps to franchise your business and the necessary franchise documents required.
At Sprintlaw, we have the experience to help you, starting with this complete guide to franchising in Australia.
What Is Franchising?
Franchising is a business model. It’s an agreement between two parties where one party (the franchisor) allows another party (the franchisee) to operate a business under its own brand. The franchisor retains ownership of the business name, branding, business systems and intellectual property but grants the right to the franchisee to sell its goods or services.
It’s a two-way street. The franchisor earns fees by providing support, guidance, training, processes and structures. In return, it gains brand awareness in the market and can achieve rapid growth. The level of goodwill in the relationship is key to the success.
The benefits of franchising your business can be enormous. Look at Harvey Norman, McDonald’s and 7-Eleven! In Australia, over 90 000 franchised businesses contribute over $155 million to the economy. It’s a proven way of up-scaling your business if successful.
There are many factors to consider when looking to franchise your business.
- Before you franchise, know what’s involved.
- Be well-prepared; have the right processes and structures in place.
- Know about the legal requirements.
The following considerations are fundamental to starting on the franchise journey well-prepared and set up for success.
Before You Franchise Your Business…
Assess Your Business Model
Before you even consider franchising, you need to be sure you have a solid business model in place. No franchisee worth their salt will buy into a business that obviously isn’t run well, with a proven track record or at least very reliable owner credentials. Having the structure and processes in place that are clear, logical and transparent is very important.
It may not be that you created the business model; you may have bought the rights to distribute a company’s product or service, for example from overseas, but those credentials must be visible.
Perfect The Product
The product must be saleable. If anything needs tweaking or updating, doing it before you look at franchising goes without saying. It must have value, appeal and purpose.
Franchising a product with proven sales has more likelihood of success than anticipating widespread market appeal. Make sure you’ve researched whether the market you hope to franchise into will have the same demand as previously successful markets too.
Know The Competition
There are few products these days that have no competition at all, so make sure you know who your competitors are and that you can explain your product’s point of difference to potential franchisees. Thorough research is imperative.
Franchises need to be distributed according to market demand, often on a geographic basis. You’ll need to think carefully about how you’re going to map out your network that is both fair on franchisees and optimises potential market coverage.
It may be that you’re starting out small, but you should probably allow for further expansion. You need to think ahead so you don’t have domain issues later on.
Envisage Your Ideal Franchisee Candidates
You know your product and your target market. You should have a good idea of what you need to see in a franchisee. Don’t compromise when it’s the success of your expansion at risk. Make a list of attributes and recruit carefully. It’s your reputation at stake.
Be aware that many franchise owners sell to employees as they already know much of the inner workings of your business. Think about how important experience in the industry is, their list of contacts and whether they have a history of running a business. Do their skills translate to likely success in your franchise? Will they be good brand ambassadors?
Get The Finances Right
You will probably need an accountant’s help with this as it’s important to make sure the figures stack up. There are two types of fees
- The initial buy-in fee
- The ongoing fees to cover the support you provide
The franchisee needs to get value for his money, but you also need to cover your costs, have room for improvements and any surprises, and make a profit. The more successful each franchise is, the higher the chance of enticing further franchisees and growing your network.
Having the fees right from the start will save time, possible dispute and money.
Set Up Support And Training
Your franchise’s success hinges on your franchisee’s success. You need to lay the foundations by offering the best training, guidance and support you can. Creating an operations manual that sets out systems and processes, providing technical infrastructure such as software, supplying promotional materials and even supplying any prerequisite company-wide hardware, like fitouts, are all things to consider to boost your company’s likely success.
Balance this, of course, with cost so that you’re not unnecessarily eating into earnings, and you should have a winning formula.
Start With A Culture Of Goodwill
Franchises are relationships. Getting the tone right from the start is bound to benefit all. It’s important to be both professional and congenial. Going into a franchise arrangement with mutual respect, a supportive attitude and a knowledge that you’re both aiming for the same goal is providing a rich ground for growth.
Knowing the legal requirements of franchising is essential. The following provides a guide but seeking legal advice is highly advised.
Franchise Laws In Australia
Establishing a franchise is a legal process. There are specific legal documents required to franchise your business. You will need to:
- provide a key facts sheet, an information sheet, a disclosure document and a copy of the franchise agreement to prospective franchisees at least 14 days before a franchise agreement is signed or a payment made,
- provide a copy of the Franchise Code of Conduct, and
- comply with Australian Consumer Law, which basically means you can’t be deceptive or misleading in your dealings.
There may be other laws that affect franchising your particular business, relating to that industry. For example, you may be responsible for your franchisees’ conduct in the workplace and subject to the Fair Work Act 2009, or have tax obligations.
Key Facts Sheet
This is a new requirement as of July 2021, that should be given together with other disclosure documents and the franchise agreement. It’s a smart form document that asks you, the franchisor, some key information about any previous franchises, your legal and financial history, the franchise site and competition, suppliers, costs and payments, and also references the disclosure document and franchise agreement.
This is a mandated generic advice sheet that sets out some important considerations for potential franchisees to protect them from entering into a franchise without due diligence.
More specifically, an information statement covers the key risks associated with franchising and some common questions or concerns that prospective franchisees may have. This is an essential step for franchisees before they finalise their decision to enter into a franchise agreement.
This provides greater detail than the Key Facts Sheet about you, the franchisor, your history, financial background and all potential payments and fees. You have to disclose any previous litigation, any franchisees who have left and why, supply arrangement and limitations and other key facts the franchisee should be aware of.
There are serious penalties for not fully disclosing all necessary facts in this document.
This is the main legally binding contract between you and the franchisee. It sets out both parties’ obligations and rights, and specifies the relationship specific to your franchise. No two franchise agreements are the same and therefore need to be carefully crafted with legal expertise.
The Franchise Code of Conduct
This is the legislated industry code that regulates the conduct of franchising participants and details disclosure obligations. It provides a framework for dispute resolution and defines penalties for non-compliance of the code.
Complying With The Law
The Franchising Code states that all parties must act in good faith, citing honesty and cooperation, and sets out dispute resolution pathways. The Australian Competition and Consumer Commission (ACCC) is responsible for compliance and has the power to impose penalties for non-compliance, either financial penalties or injunctions.
However, they look at each situation on a case-by-case basis. If you follow the code and seek advice when unsure, there is a great deal of accessible documentation to support you.
Frequently Asked Questions
What is a franchise?
A franchise is an agreement between a business (franchisor) and another person or business (franchisee) to allow the franchisee to sell goods or services using the franchisor’s name under a license, for a fee.
How do I create a franchise agreement?
It’s best to seek legal advice to create this legally binding document that sets out the rights and obligations of each party to a franchise.
How do I make my business into a franchise?
Do your research, create a business plan and seek legal advice. You’ll need to collate some key financial and background information and provide potential franchisees with some mandatory documentation, such as a disclosure document and a franchise agreement.
Laws around franchising can be quite dense, and it is an area of law that requires expert legal help. We have a number of resources to guide you in various stages of the franchising process, such as:
- Selling A Franchise
- What To Do At The End Of A Franchise
- Legal Documents You Need For Franchising
- Franchise Agreements
- What Fees The Franchisee Has To Pay
- Terminating A Franchise Agreement
- What To Do With A Bad Franchisee
- Franchisees’ Legal Obligations
- What Are Franchising Royalties?
- Franchise Grant Process
It may seem daunting but take it step by step and your dream of franchising is achievable.
It’s very important to seek legal advice before you set up a franchise. Sprintlaw has specialist lawyers who can offer affordable advice.
Don’t hesitate to give our team a call on 1800 730 617 or email us at email@example.com. We are here to help!
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