If you are a business owner considering expanding your business, the franchising model is a good option. It is a fast and efficient way to quickly expand your brand without the risk associated with opening and running every store yourself, whilst still maintaining consistent brand ideals and standards.
It doesn’t require a huge amount of capital, but it increases your brand’s market power through quick and efficient scaling. It also provides a higher resale value if you decide to sell your business later down the line.
However, there are things that need to be known before diving head first into franchising.
What Do I Need To Know Before Franchising?
The Franchising Code of Conduct (FCC) regulates franchising in Australia. The focus of this article will be on the franchising costs and fees, and how they are regulated by the FCC. In particular, the recent changes which took effect on the 1st of July 20201 in regards to legal fees will be examined.
How Much Does It Cost To Franchise A Business?
This question will naturally depend on the type of business you are running. A restaurant franchise may be very different to a retail franchise. In light of this, it is worth speaking to a franchising lawyer to get an idea of what you should be paying.
In general, the fees will be set out in the franchise agreement between you and your franchisee.
What is often not explicitly contained within the franchise agreement is the legal fees you might have to pay. You may potentially have to pay legal fees for breach notices, termination notices, renewal documents and deeds of various kinds.
Previously, as the franchisor, you might have been able to on-charge these charges to the franchisee. But as previously mentioned, the law in this area has changed.
In regards to these documents, s19A(1) of the FCC now prohibits a franchisor entering into a franchising agreement with the effect of “requiring the franchisee to pay all or part of the franchisor’s costs of legal services relating to preparing, negotiating or executing the agreement or documents relating to the agreement”. This carries a penalty of 300 penalty units.
Agreement Or Documentation Fees
The only exception to this prohibition is listed in s19A(2) of the FCC. Within the franchise agreement, there may be certain fees or services that you have to pay or provide to your franchisee as they start up their franchise. These are called agreement or documentation fees, and differ from contract to contract.
The exception seems to allow these fees to be charged to the franchisee. It allows for the franchisor to require the franchisee to make a payment of fixed dollars, before the franchisee business has been started, that “is specified in the agreement, is stated in the agreement as being for the franchisor’s costs of legal services relating to preparing, negotiating or executing the agreement, and is stated in the agreement not to include any amount for the franchisor’s costs of legal services that will or may be provided, after the agreement is entered into, in relation to preparing, negotiating or executing other documents”.
The true meaning of these sections is to essentially prevent franchisors from inserting clauses in their franchise agreements that expose franchisees to future, unquantifiable legal costs.
Renewal Documents Fee
Renewal documents fees refer to the fees incurred during the preparation of a new franchise agreement to be entered upon a ‘renewal clause’ being activated. As these fees will need to be paid after the franchisee has started the franchise business, it appears that the franchisor will be unable to on-charge them to franchisees. This prohibition will also likely extend to the reviewing of things like leases or further negotiations.
What Fees Can I Charge As Franchisor?
This development presents a problem for franchisors. What are they to do if a franchisee continually breaches the agreement? Should you continually produce breach notices using funds out of your own pocket? Such notices can be very expensive. However, there are some solutiations that can be used by franchisors.
Legitimate fees that you can charge a franchisee include things like:
- The initial startup fee
- Documentation fees
- Supervision fees
- Ongoing franchise royalties
- Marketing fees
- Training fees
- Renewable fees
- Transfer fees
Another idea might be to consider a clause that carries a fee triggered by the occurrence of an event. For example, something like a ‘breach fee’. This would help you to solve the problem of the consistent breaching franchisee.
However, given the recent amendments to the FCC, it is crucial this clause be drafted carefully so that it isn’t caught by it. Further, the fee should not be drafted as if it is a penalty, lest it be found unenforceable.
In doing this, having a specialist franchise lawyer look over the potential clause, as well as helping to find other ways in which lost legal costs might be recouped, is a necessity.
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
Franchising your business is a legitimate way of expanding it rapidly, whilst mitigating your risk and raising its overall value. But this process is not an easy one. Recent changes to the FCC have made the way in which you can recoup funds for legal expenses complex and difficult.
Our specialist franchise lawyers at Sprintlaw can help you to navigate this process, whilst ensuring that your interests are adequately protected. If you are thinking about franchising out your business and have some concerns about these recents changes, reach out to our team for a free, no-obligations chat at email@example.com or on 1800 730 61.
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