Franchising is an option to consider if you want to expand your business’ reach. For a fee, the business owner or franchisor authorises a franchisee to sell their goods and services for a specific period of time. You benefit as a franchisee from the goodwill established with the name and normally there is assistance or training to help you start and market your business.
In Australia, the Franchising Code of Conduct (the Code) regulates the conduct of both franchisors and franchisees towards one another. The Code regulates various provisions but includes provisions for:
(a) disclosure requirements before entering into a franchise agreement;
(b) franchise agreements;
(c) dispute resolution mechanisms;
(d) procedures for ending a franchise agreement; and
(e) new vehicle dealership agreements.
What are the franchise business models?
There are generally four franchise types that are generally used in Australia:
In this model, the franchisee or retailer can sell the franchisor’s product directly to the public. The retailer has the licence to use the name and intellectual property of a manufacturer. This is common in vehicle dealerships and apparel businesses.
This model lets the franchisee manufacture and distribute the franchisor’s product (e.g. bottling or repacking arrangements).
In this model, the retailer buys the products from a wholesaling franchisor then sells them. Hardware stores are examples of wholesaler-retailer businesses.
This is the typical franchise model wherein the franchisor distributes its products and/or services through a network of franchisees. The franchisees pay for the license and are required to follow the brand’s standard processes (e.g. fast food chains).
How to structure a franchise
When choosing what kind of franchise you want to set up, you need to consider your short-term or long-term plans. Some questions you might want to ask are:
- who will make the important decisions
- when do you intend to start franchising outlets
- how you will divide profits and losses
- how you will own shares
- how long you will keep the franchise and what are your exit strategies
- do you intend to licence the intellectual property through a different entity
There isn’t a one-size-fits-all approach to structuring your franchise. You need to carefully consider your options. Speak to our team and an accountant to find out more.
What documents are needed to open a franchise
When investing in a franchise, there are certain legal documents that you need to draw up and
present to the prospective franchisee. The two most important documents are as follows:
(a) Franchise agreement – While typically containing all the critical elements of a business contract, a franchise agreement also outlines the responsibilities and expectations between a franchisor and a franchisee.
(b) Disclosure document – Franchisors are required to present a disclosure document to a franchisee no more than 14 days before entering into a franchise agreement. The purpose of a disclosure document is to give a prospective franchisee key information about the franchise system.
Information you are required to disclose includes:
- details of certain types of legal proceedings against the franchisor
- the franchisee’s costs to start operating the franchised business and other payments or fees they may be required to make
- what happens when the franchise agreement comes to an end
Other legal documents you may need to provide
If the agreement requires a franchisor to enter into another kind of agreement, the franchisor must provide a copy of the following documents:
(a) lease agreement (for premises or goods) or hire purchase agreement;
(b) other licence agreements e.g. over intellectual property;
(c) security agreement which includes guarantees, mortgages, general security agreement, loan agreement etc.
(d) confidentiality agreement
SEE HOW WE CAN HELP YOU
We don’t do things we think will work; we do things we know will work.
Arrange a free, no-commitment initial consultation with us.
What are the typical franchise fees
When starting a franchise, the franchisee must agree to pay a specific amount which can include any of the following:
- initial franchise fees
- setup costs and fit-out fees
- training and installation
- marketing materials and system support
Other fees a franchisee may need to pay are:
- marketing and advertising fees
- incentives or financial benefit that the franchisor is entitled to as a result of a lease agreement
- fees for transferring or terminating a franchise
Frequently Asked Questions
1. Is a franchise a sole trader?
It can be. You can also consider more complex business structures such as a partnership, company, or trust when setting up or buying a franchise/before entering into a franchise agreement
2. Does a franchise own the business?
Yes, the franchisee generally owns and operates the business outlet. They just need to pay royalties, which are generally in the form of a percentage of the outlet’s gross or net income, to the franchisor for the use of their intellectual property, brand, and goodwill.
3. How much are franchise fees?
This is a difficult question to answer as it will depend on the franchise (and quality of the franchise). Fees could range anywhere from $5,000 to millions.
Why Choose a Franchise Business
There are many reasons why a franchise is an appealing choice especially for starting entrepreneurs.
- you are your own boss;
- training and support is readily available;
- the business system is already tried and tested for growth and success;
- you’re buying into the pre-existing goodwill and intellectual property–it is difficult to generate goodwill in a business (particularly at a national or international level) and the intellectual property (know-how, trade marks, workflow etc.)
Nevertheless, nothing is certain in business. Success is neither guaranteed nor does it happen overnight. A franchise, like any other commercial venture, requires hard work to get good results over time.
Invest in Franchising With the Help of TNS Lawyers
Investing or starting a new franchise model in any business has risks; opening a franchise or starting a franchise model is no different. Whether you’re considering opening your own franchise or buying an existing one, we can apply our expertise to assist you. Our experience includes preparation of a sound franchise agreement as well as advising both franchisors and franchisees about the legal obligations and risks that come with a franchising venture.
When working with clients, we don’t just take a legal approach; we also consider your commercial requirements and business goals. For support and advice on all aspects of franchising in Australia as and when you need it, give us a call on 03 9052 3214; alternatively, you can also send in your enquiries via the contact form below.