Franchising your business can seem like a daunting task. The process between deciding to franchise and entering into a franchising agreement is varied and involves a number of steps. This article will provide a general guide to franchising in 4 steps;
- Run a feasibility study
- Create a franchise development plan
- Go through the Franchising Code of Conduct
- Prepare franchise documents (including an information statement and Franchise Agreement)
1. Run a feasibility study
While franchising may seem like an exciting next step for your business, it is important to consider whether your business is suitable for franchising. Determine whether your business is suitable for franchising can involve considering
- Capital: Do you have the capital to set up the franchising system and cover associated legal fees? It is estimated that the cost of franchising a business can range from $55,000 – $200,000.
- Business Success: Does your business have a strong commercial/market presence?
- Profitability: Will the business and business model be attractive to potential franchisees?
If you find yourself answering yes to the above questions, this is an indication that your business may be suitable for franchising. Before proceeding and undertaking the costs associated with the following steps, you should be relatively confident at this stage that your franchise will be viable and profitable. For some more insight into why franchises often fail, an article can be found here (https://openlegal.com.au/5-things-that-can-make-a-franchise-fail/).
Instead of franchising your business, you may prefer to take an alternative routine of entering into a licensing agreement. For a distinction between franchising and licensing, more information can be found here (https://openlegal.com.au/franchise-agreements-and-licence-agreements/).
2. Create a franchise development plan
The franchise development plan serves as a sort of road map or guide to refer back to throughout the franchising process. By engaging the services of lawyers, accountants and business specialists, you should be able to set out
- Franchisees: The fee you will charge franchisees (and who your franchisees will be)
- Marketing and Logos: this can involve trademarking or granting licenses for the use of such materials in order to protect your intellectual property rights
- Logistics: This can include a number of considerations. For example will the franchisee lease the premises themselves? Or will the franchisor license the premises? Will the franchisee have free reign to organise the store fit-out themselves?
- An operations manual: This will set out the details for the day-today running of the business such as practices, rules, how to reproduce the product
3. Go through the Franchising Code of Conduct
The Franchising Code of Conduct (the Code) regulates the relationship between and conduct of franchisors and franchisees. More details about the Code can be found here (https://openlegal.com.au/what-is-the-franchising-code-of-conduct/). The Code sets out certain documents which the franchisor must provide to potential franchisees. Providing such documentation is incredibly important, as it enables the prospective franchise to make an informed decision regarding entering into a franchising agreement. A franchisor must provide the following documents at least 14 days before entering into, renewing or extending the agreement:
- A copy of the franchising code
- A copy of the disclosure document
- The franchise agreement
- Additional information may also be requested and required under the Code
More information about complying with the Code can be found here (https://openlegal.com.au/what-is-involved-in-complying-with-the-franchising-code/).
4. Prepare franchise documents
A number of documents must be prepared to be provided to prospective franchisees:
- Franchise Agreement: The Franchise agreement is a formal legal document that binds the parties by setting out their rights and obligations to one another.
- Franchise Code of Conduct: A copy of the franchising code must be provided to prospective franchisees.
- Disclosure Agreement: The disclosure agreement must contain information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise; and give the prospective franchisee current information that is material to the running of the franchised business.
- An information statement: Providing an information statement to prospective franchisees is mandatory according to the Code. An information statement is a statement that clearly puts forward the risks and rewards of franchising
- A business summary: This will assist the prospective franchisee to determine whether they are a good fit to run the type of business you are franchising. Information regarding business activity and history will assist on this front.
Because these documents are legally binding, it is important that they are accurate. Engaging the services of a lawyer is therefore important at this stage.
Franchising your business is a big decision, and you should follow a number of steps before undertaking such an expansion. First, running a feasibility study can help you determine the likely success of your franchise. On account of the high costs associated with franchising a business, it is important to be sure that you have sufficient capital and a strong likelihood of success before endeavouring on this process. Next, you should create a franchise development plan that will act as a point of reference and will help you to more effectively address all aspects of franchising. You should then go through the Franchising Code of Conduct, and prepare franchise documents in line with the requirements set out in the Code. It would be beneficial to engage the services of a lawyer at this stage.