Buying a franchise is exciting news. Yes, it can be an involved and complicated process, but the prospect of having your own show to run while also having the support of the franchisor is an appealing one.
Once the agreement is signed, and the champagne cork popped, what’s next?
The Franchise Background
If everything has been ticked off along the journey so far, then you’ll have a broad understanding of what is involved in running your franchise. Essentially, this should all be laid out in your Franchise Agreement and the operations manual provided by the franchisor.
As no two franchises are the same, you will certainly have gone through the agreement with a fine tooth comb, getting familiar with your legal obligations. However, you may not have had the context to consider the implications of some of the clauses.
Similarly, while you may have had a thorough read of the operations manual, it’s not until you’re actually running your franchise that the details take more shape.
A franchise agreement allows you, the franchisee, to operate your business under the business name, branding, business systems and intellectual property of the franchisor. Understandably, therefore, the franchisor is going to have a very vested interest in you doing well; their business name is at stake. That’s why so much effort is, or should be, put into setting up the right support, training, structures and processes to help you succeed.
Trust and goodwill is key to your business relationship being a strong one that nurtures a growing, successful business. You both need to be on the same page with that goal in mind.
So, you need to fulfill your side of the bargain.
Your Ongoing Obligations
Broadly, you have the following obligations:
- To act in good faith
- To comply with the franchise business model as per the contract documentation
- To meet your financial obligations
- To run your business lawfully
- To follow the dispute resolution process where necessary
Let’s look at those in more detail.
Acting In Good Faith
As mentioned, trust and goodwill are very important components of the franchise relationship. Both you and the franchisor are investing in this commercial venture; you in time, effort and finances, and the franchisor in terms of both the financial investment in the support and systems and in the risk to the reputation of the franchise business as a whole.
It is therefore a statutory obligation, as of 1st January 2015, that you act in good faith. This means you must act honestly, cooperatively, with the commercial interest of the business in mind, and with no hidden agenda.
As with any partnership, a positive, honest and transparent attitude will reap rewards. You need to see yourself as a team, and act with the team’s interest at heart. If you help to promote and protect the business name and its reputation, you will both benefit. Acting in good faith is the best foundation for success.
Compliance With The Business Model
The franchisor has set up the business a certain way for a reason, most likely because research and experience has proven or suggested that this set-up will provide the greatest chance of success. It is highly likely that time and money has been spent on the business set-up, for example on legal fees, accountants, and infrastructure.
It is possible that you have ideas of your own to improve the business, but, while it is possible that these might be helpful and taken on board, there can be a disparity between what seems best for your franchise, and the interests of the franchise business as a whole.
For example, it may be that economies of scale (bulk discounts) are realised when the franchisor dictates that one supplier is used, even though you may prefer a different one. This is why you must keep in mind that the franchisor had to set these out upfront, in writing, so that you had the chance to weigh up the pros and cons of buying into the franchise.
The franchise agreement sets out the main obligations that you, as franchisee, must comply with. It should clearly guide you in your responsibilities with regard to how you operate the business, with detailed information on, for example:
- What products or services you may supply
- Where to source your supplies
- How to market your business
- What fees you have to pay the franchisor
- Your ongoing reporting requirements
- Consent or notice requirements for certain activities
- Maintenance of any equipment or premises
Any queries you have, or concerns about violating your agreement, should be addressed as soon as possible so that they can be answered or remedied before they escalate.
An operations manual is often provided by the franchisor and may, in fact, be referred to in your franchise agreement in which case it becomes part of your legally binding contract. It is often more specific and deals with the daily operations of the business.
It sets out the standards and procedures for the operation of the business and might detail:
- The specifics of the goods or services
- Particular suppliers to be used
- Specific advertising strategies
- The software or programs to be used
- Procedures that need to be followed
You should have had a chance to read and clarify these before signing your franchise agreement but any queries or issues need to be raised as soon as possible.
Meeting Your Financial Obligations
The chances are that the reason a franchise model appealed to you is the support provided by an existing umbrella business and it’s this you ‘bought’ into. You pay for the benefits associated with the existing set-up: the processes and procedures, the training, the logo, the name and any whole-franchise marketing, and often the infrastructure.
Hence, the fees might include:
- The upfront buy-in or purchase price
- A royalty or on-going fee, usually as a percentage of sales
- A contribution to a marketing fund or a set amount to be spent on marketing
- Maintenance or upgrade of the premises or any equipment supplied
- A possible renewal fee at the beginning of a renewed contract period
- Any costs of required training
While it is in the franchisor’s best interests that you succeed financially, it is usually up to you to actually manage the financial side of your business. You need to manage your own budget and maintain your own financial records, and be on top of any audit and reporting requirements. You may well benefit from the services of an accountant or bookkeeper.
It is also worth noting that, while you are obligated to contribute to particular funds, you don’t usually get a say in how those funds are spent. This is often a cause of dispute.
The franchisor has their whole franchise’s interests to think of, not just your business, so you may not always agree with the allocation of funds. However, you are still obligated to pay your contracted contributions.
It’s worth reading more into your financial obligations to your franchisor.
Running Your Business Lawfully
Each franchise is different and, depending on the goods or services they trade in, may be subjected to different laws that you must be aware of and comply with.
Some examples include:
- If you employ staff to work in your business, you must comply with the Fair Work Act 2009 (Cth). This sets out your obligations in relation to salaries, hours, leave and other entitlements.
- Work Health and Safety laws set out a host of requirements to ensure that your employees work in a safe environment and that you are actively protecting their health and welfare.
- If your business operates in the food industry you need to be aware of food health and safety laws that strictly regulate food standards.
- Licencing laws may impact your business. For example, you need a licence to sell alcohol or medications. You need to comply with these.
- If you collect any personal information about your customers or employees you will need to check if you are subject to privacy laws.
- Accounting and taxation laws also need to be complied with.
- If you have taken on the lease of a premises yourself, you need to make sure you comply with the terms of your lease.
To make sure you are running your business lawfully, you may well need legal and accounting advice. It is always worth making sure you operate above board as it will save you money in the long run.
Following The Dispute Resolution Process
If you enter into your franchise with the right intentions and act in good faith, comply with your contractual and financial obligations and run your business lawfully, you will have laid solid foundations for a great franchise relationship and a successful business that will be a credit to both you and the franchisor.
But sometimes things just don’t go as easily as that. There are many reasons the franchisor-franchisee relationship encounters difficulties.
You can mitigate this by educating yourself about your obligations, being aware that it’s not all about you (the franchisor needs to be profitable too) and by being open and disclosing any information that may adversely affect the franchise in some way so that action can be taken to remedy the situation.
However, if a dispute arises, the Franchise Code sets out how to go about mediation. While the franchisor can terminate the agreement in certain circumstances (such as if they go bankrupt, lose a required licence or are convicted of an offence), generally you will both want to try and resolve the dispute.
If the franchisor believes you are not compliant with the franchise agreement, they can issue you a written notice of the breach, explaining what you’ve done and how to rectify it. If you fail to do that within the specified time, they have the right to terminate the agreement.
If you believe the franchisor is not fulfilling their contractual obligations, you can issue them with written notice in a specified format, outlining the breach, what you require them to do and the time frame. If this fails, after three weeks you can take the dispute to mediation by the Australian Competition and Consumer Commission (ACCC) who have the power to apply penalties such as fines or injunctions.
It’s important to read into how you can terminate your 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
- What Are Franchising Royalties?
- Franchise Grant Process
If you’re embarking on an exciting new venture running a franchise business, then you’ll want to make sure you are fully aware of your ongoing obligations. It may seem a bit daunting but we’re here to help.
Reach out to our team for a free, no-obligations chat at firstname.lastname@example.org or 1800 730 61.
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