Understanding the franchise landscape in Australia is essential if you are looking to invest your time, money and efforts into potentially purchasing a franchise yourself. A Franchise Business allows you to run a business with the benefit of an existing reputation, brand, intellectual property and competitive edge in the market. 

Compared to starting a business from scratch, buying into a franchise generally has lower risks and is more cost effective to start up. But what types of franchises are there, and which one is best for you?

In this article, we’ll go through the franchising landscape in Australia and the types of franchises you might find yourself looking at. 

What Is A Franchise Business?

A franchise is a type of business where individuals or an organisation purchase the rights to operate under the name, sell their products and/services and use the Intellectual Property of an already established business. 

Generally, it involves a business with multiple branches of their brand across various locations (the franchisor) and the franchisee (the person operating one of the branches). In a franchise relationship, the franchisor has a lot more bargaining power over the arrangement. 

Furthermore, both the franchisor and franchisee have obligations to comply with which are clearly set out in the Franchising Code of Conduct, so it’s important to familiarise yourself with these rules. 

Franchising can be in systematic, product or processing industries. We discuss this in more detail below. 

Is Buying A Franchise Worth it?

Purchasing a franchise can be a satisfying venture. Instead of starting a business from scratch, you are working with a business that has already established itself and its brand. Therefore, you are aware the business model works and don’t have to go through the trials and tribulations many business owners do. 

It’s also great for the franchisor because they benefit from additional exposure. 

However, just because you’re purchasing a business that is already known to work, it doesn’t necessarily guarantee a smooth sailing ahead. Purchasing a franchise is a complex matter where many different factors need to be taken into account.

Example
Emily is interested in purchasing a pet grooming franchise and running the business from her locality. However, within her proximity, there aren’t many pets or pet owners. 

Therefore, while the pet grooming business has been successful in another location, it does not necessarily mean it will also have the same success in Emily’s area. 

If Emily wants to purchase a franchise, she will either need to run the pet grooming business where there is a demand for pet services or pick another industry to invest her resources in. 

Thus, you cannot rely entirely on the franchise itself when choosing to purchase one. 

Prior to purchasing a franchise, consider: 

  • Does this product or service have a demand where I plan on doing business?
  • How much access do I have to any required products or equipment (i.e ingredients)? 
  • Is there any nearby competition? 
  • If I require staff, is there enough interest in the employment opportunities for this business?  

A wide range of factors need to be considered prior to purchasing a franchise. Overall, you will need to take into account the individual business and your own circumstances in order to assess whether a particular venture is right for you.

How To Buy A Franchise In Australia

Purchasing a franchise in Australia is a process that involves close consideration of the regulating laws and certain documents. Therefore, it’s essential to have a legal expert you can trust with you during the process. 

Once you’ve done your research and looked at potential franchise businesses you may be interested in owning, you will need to approach the owner and express interest. From here, they should provide you with a Key Information Sheet and Disclosure Document which provides all the relevant information about the franchise. This will allow the potential franchisee to make an informed decision.

The franchisor should also give you an Operations Manual (this outlines your rights and responsibilities as a franchisee under the Code) and a Franchise Sale Agreement (this sets out the details around the sale process). 

As a potential franchisee, there are a number of key things you need to know to help the process move smoothly. 

Once you give the green light, you and the franchisor will then enter into a formal and binding Franchise Agreement. This stage is crucial to your arrangement as it will set out the details and responsibilities of each party, so it’s a good idea to get a lawyer to Review Your Franchise Agreement and ensure you have fair rights under the agreement. 

What Are The Different Types Of Franchises?

System Franchise

A system franchise is established when a franchisor gives the franchisee access to their business model, trademarks, structure and processes for the franchisee to run the same business elsewhere, but on their own. 

The franchisor and franchisee will likely have open communication, however, they are usually responsible for running their businesses in their respective locations. 

This is quite common with fast food branches. Usually, the franchisor will set up a specific way of doing things which they then permit the franchisee to adopt and use as part of their branch’s operations. The franchisee then pays certain fees to the franchisor for this support. 

Product Franchise

A product franchise occurs when manufacturers allow distributors to sell their products with their name and logos. The distributor would either pay a fee or price in order to obtain this right. Upon selling the product, the distributor would then earn a profit from it. 

Example
A prominent manufacturer makes board games that many department and children’s stores like to sell. A product franchise agreement allows the department store to purchase the rights to sell the board game from the manufacturer and sell it in their stores for a profit. 

This sounds similar to licensing, but it’s important not to confuse the two. We’ve written more about the difference between franchising and licensing

Manufacturing Franchise 

A manufacturing franchise is somewhat different to a product franchise, though the two can be confused. As opposed to a franchisor selling the product to a distributor such as a retail store, in a manufacturing franchise, the manufacturer creates the product then sells the product directly to the customers. 

A good example is Coca-Cola. The brand provides ingredients or a process to follow for manufacturing the product, and franchisees can produce and sell it under this arrangement. 

What Should I Consider As A Franchisee?

A franchisee will need to assess whether the franchise’ business, their financial capacity and their personal circumstances can go well together to create a successful venture. It will involve thinking over things such as: 

  • The type of franchise you would like to invest into 
  • The location you will be carrying out business from and prospects of success (for example, is there high demand?)
  • Whether the franchisor is someone you would like to enter into a business relationship with
  • The potential success of the franchise
  • The terms of a Franchise Agreement,, including the length of the contract and your own expectations and concerns
  • Franchisee fees that will need to be paid

Although we highly recommend speaking to a business or financial advisor in addition to receiving legal advice, going over these matters with a legal professional at a high-level can help you understand whether you are compliant with both your Franchise Agreement and the Code. 

Remember, each business is different and franchising will not be uniform across all ventures, so talking it out with someone with expertise in franchising in Australia can be very beneficial. 

Key Takeaways

There are a lot of elements to consider when buying into a franchise. With the multitude of possibilities, staying informed can aid in making correct choices. Check out more of our resources about becoming a franchisee here: 

If you would like more information about purchasing a franchise, you can reach our team of legal consultants at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

About Sprintlaw

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