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Franchises in Australia

Franchises

What's a franchise?

A franchise is a business arrangement which allows a business to operate under the name of an established brand, like Macdonald's.

The franchisor (the company who owns the established brand name) grants the franchisee (the person who wants to set up business) the right to sell or produce the brand name product. For example, an independent bottling company can produce a brand name soft drink in return for a fee or royalty.

Pros and cons

Some of the advantages of franchises are:

  • the product name is already established;
  • there is an immediate entry into the market;
  • sharing the advertising/marketing expenses among a large number of fanchisees;
  • often a lesser initial capital investment;
  • readily available knowledge and market research about the product;
  • an ability to compete with large companies;
  • a potentially good alternative for entrepreneurs who want continuing guidance from experienced operators;
  • operators are often highly motivated;
  • innovative marketing techniques thrive in a franchise environment;
  • combined purchasing powers.

Some of the disadvantages are:

  • reliance on the expertise and assurances of the franchisor;
  • complicated agreements to be understood before signing;
  • some franchisors take a more serious position in relation to their ongoing responsibilities to franchisees than others.

Checklist

Before signing a franchise agreement you will need professional advice. Make sure you check:

  • the franchisor's financial position;
  • whether the franchise is expert in the business or whether its main business is selling franchises;
  • the company records of directors' interests etc;
  • whether the franchisors are approachable and will continue to be so after you sign the agreement, and whether you will be happy to be in a long term relationship;
  • whether established franchisees are happy with their franchise and the activities of the franchisor;
  • the strength of the major competition in the market;
  • whether the market is already saturated (look at the recent history of the oversupply of service stations for an example of this);
  • who has the legal responsibility for problems with the product;
  • what the total investment will be, and whether there are hidden costs;
  • whether some items (like equipment) and the product itself must be purchased from the franchisor;
  • the exact nature of any royalty rate that must be paid to the franchisor, and exactly how it is calculated;
  • whether projected profits and costs are validated by independent means;
  • the franchise agreement thoroughly, preferably with a legal expert, and the rights of the franchisor to end the agreement;
  • whether you are sharing regions with other franchisees, the distance between them, and any guarantee you have against the franchisor if they sell another franchise in your territory;
  • whether any market survey used to identify a new territory is compiled by a reputable organisation.

The Franchising Code of Conduct

This Code applies to most franchises made, renewed, transferred or assigned after 1 October 1998.

Disclosure requirements

Before a franchise agreement is signed, a franchisor must, a franchisor must provide a "Disclosure Document" to a prospective franchisee.

Disclosure Document

There are two types of disclosure document:

  • The Standard Disclosure Document - this is in Annexure 1 of the Code.
  • The Short Form Disclose Document - this is in Annexure 2 of the Code.

Make sure you talk to a lawyer about which document applies in your circumstances.

Some of the issues covered by these disclosure documents include:

  • details about litigation;
  • details of the exclusivity or non-exclusivity of territories;
  • details of marketing and other combined funds, and their administration;
  • establishment costs;
  • a summary of the obligations of franchisee and franchisor etc.

Compulsory franchise conditions

The Code also lists various compulsory conditions. These cover:

  • leases;
  • franchisee associations;
  • cooling off period;
  • provision of Disclosure Documents;
  • consent to transfer the franchised business;
  • termination etc.

Disputes

Under the Code all franchise agreements entered into after 1 October 1998 must include the dispute resolution procedures set out in the Code, which states that:

  • the complainant writes to the "respondent" (the person that you are disagreeing with) explaining the nature of the dispute, your desired outcome and how this can be achieved;
  • if you still can't solve the dispute within a period of time, either party can refer the dispute to a mediator;
  • if you can't agree on a suitable mediator, you can ask the Office of the Mediation Adviser to arrange this;
  • both parties share the costs of the mediation;
  • despite this procedure, either of you can also take legal action if you want to.

Where can I get help?

There are many complicated issues related to franchising. Make sure you get advice from a qualified accountant and solicitor. Note, the Franchising Code of Conduct, makes it compulsory for a franchisee to get proper professional advice before signing the agreement.

 

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