Franchising is an attractive business pathway for both franchisors and franchisees and comes with a range of advantages, limitations and obligations for both parties. Here, we look at some key things to consider when considering entering into a Franchise Agreement.
Easy Setup – buying a franchise is an attractive pathway to quickly and easily setting up and running your own business, as all of the creativity and B2B work is done for you.
Recognised Brand – franchisees stand to reap the benefits of having an established brand with a popular product or service and a well-known reputation.
Set Guidelines – as a franchisee you are provided with access to support with advertising and marketing, operation manuals, procedures and product lines to streamline the way you run the business. This makes it much easier to execute your day-to-day operations.
Consumer Expectation – As a recognised franchise, consumers can expect and receive quality products and serviced required to be provided by all franchisees under their Franchise Agreement.
Less Control –Franchising gives you much less control of how, where and for how long you run your business. If you dream of the flexibility of being your own boss, franchising may not be for you. The franchisor controls many aspects of a franchisee’s business to ensure uniformity across the brand, and this does not suit all business owners.
Initial Costs – Initial franchise setup fees and ongoing royalties can be expensive and could mean it takes a year or two for you to start turning a profit.
Reduced Creativity – Franchisees do not have creative control over process, product or system changes to suit themselves or their market area.
Restrictive – Having to comply with the Franchise Agreement may restrict growth and the ability to work with other businesses.
It is a smart move to request the financial history and information about the franchise and franchise system you are considering buying into. Examine that information carefully, and take the information and all franchise documents and agreements to an independent advisor such as a franchise lawyer and accountant.
Franchising can be a great way to expand your brand and grow your business if it’s planned and executed correctly. Famous franchises such as Starbucks, McDonald’s and Subway all started off as single-entity businesses before becoming a well-recognised brand the world over.
Rapid Expansion – Businesses often look to franchising as an easy means of expansion. Successful franchising models will ensure a steady growth of franchises, increasing your brand recognition, and in turn, attracting more customers.
Economies of Scale – Franchising your business means an increase in purchasing volumes, which will translates to you having stronger negotiating powers with your suppliers. This leads to better pricing and economies of scale to benefit both the franchisor and franchisees.
Passive Revenue Streams – A lot of franchise agreements will provide you with ongoing revenue streams in the form of monthly fees or royalties, depending on your franchise model.
Increased Capital Franchisees will usually pay you an initial franchise fee to acquire the franchise, providing you with extra capital to help your business grow and minimise the need for you to obtain finance.
Franchising your business also comes with its own limitations and risks. These can be mitigated by drawing up a solid Franchise Agreement and Disclosure Document by engaging a franchise lawyer.
Initial Capital Cost – While less expensive than growing the business yourself, as a franchisor you still take on risk with the initial investment of setting up a franchise model to attract franchisees. To set up a franchise model you’ll need to design and implement an operational manuals, marketing strategies and recruitment and training plans; as well as set up a legal structure for your franchise model through consultation with a franchise lawyer.
Less Control – Your franchisees retain control over the day-to-day processes and operation. This means you have less visibility as an owner, which increases the risk of franchisees not complying with the franchise system processes and procedures, taking shortcuts or failing to meet operational standards, which in turn could threaten the reputation of your brand.
Legal Obligations – There are a number of legal requirements you need to be aware of when setting up your franchisor business, which are required by the Franchising Code of Conduct, including the requirement to issue a franchisee with a Franchise Agreement and Disclosure Document. Your franchise lawyer can guide and assist you in complying with these requirements.
The Franchising Code of Conduct requires and/or governs, amongst other things:
A good faith obligation
A dispute resolution mechanism
A cooling-off period
Procedures for ending a Franchise Agreement
As a franchisor, you’ll need to stay informed and perform due diligence by working with an experienced franchise lawyer to ensure compliance and avoid disputes.
Before you enter into a franchise agreement as a franchisee, or whether you wish to create your own franchise system, seek advice from an experienced franchise lawyer. While this may be an upfront cost it will likely save you a lot of money down the track. Proper legal advice will inform you so you have a deep understanding of your agreement.
Hiring a franchising lawyer to go over your franchise agreement and disclosure document is essential to ensure you know your rights and obligations. This will help you run your business smoothly by understanding the benefits and costs associated with the franchise.
If you need expert advice on drafting, entering into or disputing a Franchise Agreement, PCL Lawyers have you covered. Get in touch with one of our expert franchise lawyers here, or by phoning 1300 907 335.
Please note: The above is not intended to be legal advice. Every circumstance is different. Always seek legal advice in relation to your individual situation.
© PCL Lawyers 2021
Chris is an Accredited Commercial Law Specialist and has extensive experience in dealing with a wide range of complex commercial,...