A franchise is a type of business model which has recently become a popular way for many individuals to own and operate their own business. Franchising in Australia consists of varying legal and financial obligations, so it is recommended that you familiarise yourself with these requirements prior to starting or entering a franchise.
What does Franchising involve?
Franchising is a business relationship which involves a business owner (The Franchisor) assigning an independent third party (The Franchisee) the right to use their business name, to market, sell and distribute the nominated goods or service for an agreed period of time.
Key aspects of a franchise:
- Franchisor – The business owner who allows another business to use their brand and model to sell something.
- Franchisee – The business that buys the Franchise and is allowed to use the franchisor’s brand and model to sell something.
- Franchise agreement – A legal contract that the Franchisee enters with the Franchisor, and this agreement outlines the obligations and requirements of each party. This agreement needs to be signed in writing, and usually specifies the period of time that the Franchisee can operate the Franchise.
Entering a Franchise – What do I need to know?
Prior to signing the Franchise agreement, it is important that you familiarise yourself with information provided by the Franchisor. Generally, try to understand all the obligations required of you as a Franchisee, and decide whether it is viable for you. Most importantly, the Franchisor must provide you with the following documents:
- Franchising Agreement
- Franchise Disclosure Document
- The Franchising Code of Conduct
- A business summary
- An information statement
Other important things you must consider prior to entering a franchise includes ensuring that the information provided is not false or misleading. You should also ensure that you take your time in understanding the information provided prior to signing the franchise documents. Given the large amount of information provided by a Franchisor, it is highly recommended that you seek legal advice prior to entering the Franchise agreement or signing any documents.
If you require further information on the documents required in entering a Franchise, check out our article on the Franchise Disclosure document.
What if I change my mind after signing the Franchise agreement?
Generally, you can only successfully terminate a Franchise agreement if it is within seven days of signing or paying money under the agreement. This is known as your right to ‘cool off,’ which is an automatic right provided to Franchisees under the Franchise Code of Conduct.
After termination, the Franchisor must arrange for a refund of any payments that you have made under the Franchise Agreement within 14 days. However, you should be aware of certain circumstances allowing for the Franchisor to keep all or some of your money.
The Franchising Code of Conduct gives Franchisors the right to retain certain costs which have been reasonably incurred. For example, if the Franchisor provides training about the franchisor, you may not be able to recover the money used for training. Other circumstances include, the payments made towards a franchisor’s legal fees or expenses.
For more information about your rights under the Franchise Code of Conduct.
Starting a Franchise – What do I need to know?
If you have a successful business and wish to franchise it, then it may be worth considering whether your business is suitable for franchising.
General tips for starting your own franchise include:
- Checking whether you have enough capital or money to begin the franchise business
- Assess whether your business has a strong potential for business success
- Researching your competitors and having a strong understanding of the market
- Considering whether your business will be attract franchisees and generate large profit margins
- Developing a strategy for recruiting and assessing potential franchisees
It is essential that you have enough capital to finance your franchise because franchising requires providing on-going training and support to franchisees and covering varying costs and expenses for running this type of business model.
If you believe that your business has the potential to be franchised and wish to know what steps to take in franchising that business, you can view our article on starting a franchise here.
What responsibilities do Franchisors have?
Unlike Franchisees, Franchisors have a lot more responsibilities under the Franchising Code of Conduct that they must fulfil. It is therefore important that you have a clear understanding of these obligations prior to starting your franchise.
Some of these obligations include:
- A duty to act in good faith
- Providing on-going support and training
- Preparing the franchise documents and disclosing important information
- Providing a marketing plan
If you wish to further understand the obligations of a Franchisor please see our article here.
Starting and buying a Franchise is not easy. It is crucial that you have a strong understanding of your obligations under the Franchising Code. Most importantly, if you wish to buy a franchise you should always seek legal advice prior to signing any document. It is essential that the franchise you wish to enter is a good deal and not misleading.
As such, if you have a successful business and wish to start a franchise, you must ensure that you have enough capital, knowledge of your competitors and the current market to implement a feasible franchise business. Franchisors have stringent obligations and you should familiarise yourself with the Franchise Code of Conduct prior to planning and operating for a franchise.