Franchising your business in Australia is a great way to expand your brand with the help of varied branches. As the growth of the business is through the work of the franchisee, this helps you to use your limited time efficiently in looking at the broader brand expansion strategy.
The franchisee’s operation within their exclusive territory allows your brand to get personal interaction with the clients in that area, without needing as much effort or intervention from you.
Before You Start…
Let’s say you want to start a franchise. As the franchisor, there are a number of considerations you need to think about before you dive in.
There are several legal and operational costs in establishing and continuing the franchising relationship. It’s important that you understand these financial responsibilities before finalising any arrangements, and it is up to you to decide whether the benefits outweigh these costs – we’ll talk about these in more detail shortly.
When you franchise your business, you give up some of the control in running that specific branch. While you will still oversee the general systems and processes used, you may not get as much of a say on the day to day running of the franchise.
This is why there are fees charged to the franchisee for getting the rights associated with running this piece of your business and protections available to assist the relationship between you and the franchisee. Further information on the fees you can charge is provided below and it is important to see how they can lighten your burden and offset the control you give away when you franchise.
You should also understand your Franchise Agreement and what clauses are available to assist you. This is the document that binds you and the franchisee with written obligations and protections.
Code Of Conduct And Other Documents
It’s important to be aware of the ACCC’s Franchising Code of Conduct and the protections and obligations that arise from it. For example, you have a duty to act in good faith in your dealings with the franchisee.
There have also been recent changes that you should familiarise yourself with. The most important change is in section 19A(1) of the Code of Conduct. This notes that as the franchisor, you cannot pass all or part of the legal costs associated with the franchising agreement and other documents. One exception to this allows you to charge a fixed amount that is specified in the franchising agreement and associated with the preparation of the agreement.
However, this payment must occur before the franchisee starts business and cannot include franchisor legal costs that may arise after the agreement has been entered into.
Further information on related legal documents can be found here.
Now that you’re aware of the benefits and important points to consider when franchising, you should familiarise yourself with the costs involved that were mentioned above. This will assist you in deciding whether this option for business expansion is right for you.
The following list is not exhaustive and there are many other legal costs associated with running your franchising arrangement. The recent changes to legislation may impact on whether some of these can be passed on to the franchisee or not.
You’ll need to be prepared to cover costs associated with drafting up the franchising agreement. This includes any changes or reviews by your lawyer.
As a franchisor, you may need to provide the following items depending on the situations you face, and each incurs a cost for drafting up and administering it.
- Breach notice – this informs the franchisee that they are in breach of the agreement
- Termination notice – this informs the franchisee that you intend to terminate the agreement
- Renewal documents – these facilitate a renewed term
What Fees Can I Charge As Franchisor?
Please note that the following list is not exhaustive and, depending on the arrangement between you and your franchisor, other fees like license fees for the running of services can be administered.
For example, if the franchise is a restaurant, it may need a license to serve alcohol and if this is administered by you, you can charge the fee to the franchisee.
This is usually a lump sum charged to the franchisee upfront upon signing the contract and establishing the franchising relationship. The franchisee can treat this cost as an intangible asset and put it down as a business asset for accounting purposes.
The legal costs that you incurred when you drafted up the documents for the franchising relationship can be passed onto the franchisee as a documentation fee. However, note that due to recent changes, you need to ensure that this is specified appropriately in the franchising agreement and that this fixed fee is paid before the franchisee begins the business.
Ongoing Franchise Fee
As the franchise uses your business’s trade secrets and systems, you can charge an ongoing fee for this benefit. This ongoing franchise fee or royalty varies for each individual agreement between a franchisee and yourself. It can be charged as a percentage of the annual turnover or a fixed amount for the duration of the contract. Generally, it is paid at regular monthly or weekly periods.
Since this is an ongoing fee, you might benefit from having clauses in your Franchise Agreement specifying available actions in the event that the franchisee cannot pay. Further information on ongoing franchising fees can be found here.
To expand the reach of your business, you will probably undertake marketing activities on behalf of all your franchises. This may include activities such as trade showcases, promotions, social media campaigns, website management and many more. The combined activities spread awareness of your brand which, in turn, draws in business.
Therefore, you can charge this fee to your franchisees as it essentially helps them get customers by giving the brand more exposure. Franchisors might also look at setting up a marketing fund, which collects a certain amount of money from franchisees to contribute to marketing activities.
As the name suggests, this fee is charged for the provision of training to the franchisee in running the business. Whether this is ongoing or upfront is up to you as the franchisor. However, it should be noted that ongoing training fees can be claimed by the franchisee as a business expense and paying them over time in regular intervals might end up being a more suitable arrangement.
This fee can be charged in some circumstances where equipment and branding need setting up. As you will need to supervise the instalment of these items, you can pass on this fee to the franchisee. For example, in the hospitality sector, a kitchen may need to be set up.
The transfer fee relates to situations where the franchisee wishes to pass on the business to a new person through sale. As you will need to complete due diligence and administration, you may be able to charge a fee for this service. This fee can be a predetermined lump sum payment.
However, as this is a fee that occurs after the franchisee has started business and it has an element of legal service costs associated, it is best to speak to a legal professional so you do not breach the new changes in legislation.
A renewal fee involves the renewal of the relationship with the current franchisee. After the term specified in the franchise agreement, there may be options for a renewal term.
Given that this event occurs after the franchisee has started business, under the recent changes in legislation, these may no longer be charged. It is best to get professional legal advice for your specific situation.
Speaking To A Lawyer
The realm of franchising costs and fees is complex and has become even more difficult to navigate due to changes in legislation as of 1 July 2021. To protect yourself against unforeseen costs, it is best to draft up the legal documents appropriately from the get-go.
A specialist lawyer can help you meet your needs and ensure you are able to charge the appropriate fees within the ambit of the laws.
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
There are many costs that arise when running a franchising business. However, you may not need to bear all of them on your own and some can be passed on to the franchisee as fees.
To ensure your franchising agreement is drafted in a manner that best supports you, and the fees you charge the franchisee are within the ambit of the laws, it may help to speak to a legal professional.
If you need help, reach out to our team for a free, no-obligations chat at firstname.lastname@example.org or 1800 730 617.
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