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 (this may be required anyway). This is only a guide (get professional
advice) but 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 franchises made, renewed, transferred
or assigned after October 1998. For an agreement to be classified as a "franchise
agreement" it must contain all of the following:
- an agreement (this can be
written, oral or implied);
- an existing "system" or a suggested
marketing plan that is controlled by the franchisor or an associate;
- The business must be operating
and be associated with a symbol or trade mark; and
- A fee has been paid, or has
been agreed to be paid, to the franchisor.
It does not apply to:
- an overseas franchisor who uses
only one franchise or master franchise in Australia;
- franchise agreements governed
by other mandatory industry codes;
- franchisees who operate
substantially the same business for at least two years before entering into the
franchise agreement, and whose sales are less than 20% of the franchisee's
total turnover for that type of goods or services in the first year of trading
as a franchisee.
Disclosure requirements
Before a franchise agreement is signed, a franchisor must:
- provide a "Disclosure
Document" and the a copy of the Code to a prospective franchisee at least
14 days before the agreement is made or renewed;
- update the Disclosure Document
annually;
- receive from the franchisee a
signed statement that they have received advice about the proposed agreement
from an independent legal or business adviser or independent accountant. Even
if it's possible to choose not to receive advice, this is not recommended. Get
advice.
Disclosure Document
The standard Disclosure Document includes:
- the franchisor's qualifications
and the last ten years' business experience, including anyone likely to have
management responsibilities;
- any litigation that is pending,
and details of serious convictions and civil judgements for certain company
officers;
- details of all company owned
and franchised operations, and any franchises that have ceased to operate,
transferred or otherwise terminated;
- details of the exclusivity or
non-exclusivity of territories;
- terms and conditions upon which
the franchisee is required to purchase or supply goods and services, and
details of stock requirements;
- how the franchisor chooses
sites for new franchises;
- details of marketing and other
combined funds, and their administration;
- all establishment costs;
- a summary of the obligations of
franchisee and franchisor;
- a statement of the franchisor's
solvency (ability to pay debts);
- a summary of the relevant terms
of the franchise agreement;
- a summary of any related
agreements that the franchisee or its directors must sign, such as leases and
equipment leases;
- in some circumstances, a profit
and loss statement for the franchisor's last two years of operation.
Disclosure to purchasers
If you are a franchisee (i.e. you own a franchise) and want
to sell it, then you have to give the prospective purchaser a different type of
Disclosure Document. Some of the issues that this document must cover are:
- the appropriately required business
experience of the franchise and its directors;
- a copy of the existing
franchise agreement and any property lease;
- details of the assets of the
business to be transferred;
- profit and loss statement for
the last two years;
- a summary of obligations the
franchisee has with the franchisor;
- details of the employees and
their pay.
Compulsory franchise conditions
These conditions are compulsory, even if they are not
written in the agreement:
- if the premises are leased from
the franchisor, a copy of the lease must be provided to the franchisee;
- if the franchisee has to
contribute to a marketing co-operative fund, the franchisor must supply a
financial statement of the funds activities;
- the franchisor cannot stop the
franchisee from joining or forming a franchisee association;
- the franchisee can end the
agreement within seven days of signing;
- the franchisor must provide a
current Disclosure;
- the franchisor cannot
unreasonably consent to transfer the franchised business, except in certain
circumstances;
- in most cases the franchisor
must give reasonable notice of an intention to end the franchise agreement, and
allow the franchisee a reasonable time to fix any alleged breach.
Reasonable opportunity
A franchisor is not
permitted to enter into, renew or extend a franchise unless it has received a
written statement from you that you have received and had a reasonable
opportunity to understand the Code and the disclosure document.
Independent advice
A franchisor is not permitted to enter into a franchise agreement with
you unless it has received a signed statement that you have been offered
independent advice. by:
- an independent legal adviser;
- business adviser; or
- accountant.
Check with your professional adviser if it is sufficient to be merely
told that you should seek this advice.
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 three weeks, either party can refer the dispute to a mediator;
- if you can't agree on a
suitable mediator, you may refer the matter to mediation or ask the Franchising
Code Mediation Adviser to appoint a mediator. You must pay your own costs. You
can contact the Mediation Adviser by phoning 1800 150 667;
- 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.
Read this: This
fact sheet is intended to be general information about the law in Australia.
It is not a substitute for legal or other professional advice. Franchise Documents Online does not accept responsibility
for loss to any person, who either acts or does not act because of this fact
sheet.
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